Is Starbucks jumping the shark?

Dubious short-term stunts could quash the java giant's long- term growth.

By Motley Fool Pick of the Day Mar 18, 2011 3:03PM

By Alyce Lomax


Starbucks' (SBUX) latest moves have investors buzzing -- but with the coffee colossus's former glory potentially gone for good, perhaps they should be mourning instead.


Investors cheered Starbucks' deal to provide K-Cups for Green Mountain Coffee Roasters' (GMCR) Keurig single-cup brewer, and they're salivating over rumors that Starbucks might acquire coffee rival Peet's (PEET) . The upswing is all the more welcome given the turbulent times the java king has weathered.


A recent New York Times article portrayed CEO Howard Schultz as a changed man, humbled by the company's tough years. In 2006, Starbucks stopped reporting monthly same-store sales figures -- right around the time those numbers stopped consistently thrilling and amazing investors. It also began facing very real competitive challenges from McDonald's (MCD) value-priced coffee offerings. And where once its stores all but choked the urban and suburban landscape, Starbucks actually had to close some of its outlets during the recession, and rethink its claustrophobic approach to building them in the first place.


This formerly high-flying growth stock is now a steady dividend payer. Its yield of 1.5% is nothing for long-term shareholders to complain about, but the dividends often compensate for its inability to deliver yesterday's youthful growth.


Starbucks' K-Cup deal with Green Mountain sounds like good news for both companies, but it might just be lukewarm for Starbucks. Green Mountain has the at-home, single-serve coffee market in the bag, and it arguably feels like Starbucks is joining the K-Cup crowd only because it can't beat it.


I also worry about any company that relies on acquisitions alone to fuel its growth. Sometimes, that method technically works -- but it can also signal that innovation is failing, and that a company regards buying up rivals as its easiest path to short-term prosperity.


Granted, Starbucks can still boast of several impressive successes, including its Via instant coffee, and it has a good deal of international expansion left up its sleeve. However, there's no doubt that the coffee giant's at a crossroads; once you strap on the water skis and jump the shark, mediocrity is your destiny. I doubt it's time to sell Starbucks, but it might be time to revise your expectations for its future organic growth.


Do you think Starbucks' best years still lie ahead? Would you buy, sell, or hold? Add Starbucks to your watchlist, and sound off on the company's future in the comment box below.


Alyce Lomax owns shares of Starbucks. Peet's is a Motley Fool Big Short short-sale selection. Green Mountain is a Motley Fool Rule Breakers pick. Starbucks is a Motley Fool Stock Advisor choice. McDonald's is a Motley Fool Income Investor selection. Motley Fool Alpha LLC has opened a short position on Green Mountain. Motley Fool Options has recommended a lurking gator position on Green Mountain. (No, really!) The Fool owns shares of Starbucks, and has a disclosure policy.



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