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Starbucks’ instant coffee launch invites skepticism from analysts

Starbucks’ instant coffee launch invites skepticism from analysts

Editor’s note: Analyze This is a quarterly look at a publicly traded restaurant company that has sparked discussion, for better or worse, among securities analysts. The comments do not necessarily reflect the views of Nation’s Restaurant News nor should any statement be construed as a recommendation to buy or sell any stock.

SEATTLE Starbucks is set to introduce its instant coffee, Via, in select U.S. markets this week. —Continuing its new-product blitz,

The newest Starbucks promotion, following the introduction of morning “breakfast pairings” for less than $4, will be sold in Starbucks stores and in Target and Costco locations. It is poised to tap into the $17 billion global market for instant coffee and the 25 billion domestic cups of at-home brewed coffee, sources said. Via will be available in Seattle and Chicago first, followed by London, and a systemwide domestic launch is expected in the fall of this year. —Continuing its new-product blitz,

“This is a big move for us,” said Starbucks Corp. chairman and chief executive Howard Schultz. “The opportunity to reinvent a category, create new rituals and grow our customer base is substantial.” —Continuing its new-product blitz,

Some securities analysts that follow the coffeehouse operator are not so sure. Turnaround efforts for the troubled 16,000-unit chain—which has reported drops in same-store sales and profits and millions of dollars in charges for store closures and corporate layoffs—should focus on driving store traffic, reducing costs and holding back on growth, analysts contend. An instant-coffee product may pay dividends in the long run, some said, but Via is not Starbucks’ needed sales catalyst. —Continuing its new-product blitz,

Nicole Miller Regan Piper Jaffray & Co. —Continuing its new-product blitz,

Miller Regan said Via could provide Starbucks a long-term incremental sales lift of $1.7 billion per year, and assuming a 95-percent flow-through and a 33-percent tax rate, a 7-cents-per-share earnings lift. Still, she said, Via and its potential does not hide the troubles Starbucks still faces. —Continuing its new-product blitz,

“The progress—or lack thereof—of the turnaround process overshadows any longer-term perceived benefits of product innovation,” she said. “While we sincerely applaud management’s commitment to its coffee core, this launch does not reflect ‘the’ inflection point.” —Continuing its new-product blitz,

Miller Regan did not change any fiscal 2009 projections for Starbucks and maintained her Neutral rating on the company’s stock. —Continuing its new-product blitz,

Joe Buckley Banc of America Securities–Merrill Lynch —Continuing its new-product blitz,

Buckley said an instant-coffee product should be viewed as a long-term brand strategy and one that may be more relevant to Starbucks’ overseas operations. In addition, he said, cost analysis of Via would be imperative to gauge the product’s effectiveness going forward. Costs associated with the introduction probably won’t be seen until Starbucks’ fiscal 2010, which begins in October. —Continuing its new-product blitz,

“We think a ‘wait and see’ approach with respect to the potential of Starbucks Via is appropriate,” he said. —Continuing its new-product blitz,

Buckley did not change any fiscal 2009 targets and maintained a Neutral rating on the company’s stock. —Continuing its new-product blitz,

“The opportunity sounds more significant internationally, where instant coffee seems to be more readily accepted,” he said. “We think U.S. consumer perceptions of instant coffee and the Starbucks brand are currently incompatible.” —Continuing its new-product blitz,

Jeff Farmer Jefferies & Co. Inc. —Continuing its new-product blitz,

Starbucks’ instant coffee, while no doubt the highest-quality offering in the segment, does nothing to address the chain’s main problem of falling retail store traffic, Farmer said. —Continuing its new-product blitz,

“Starbucks is aggressively pursuing every revenue opportunity it has and, in our view, should be applauded for its actions,” he said. “Unfortunately, Starbucks is first and foremost a retail store business—84 percent of revenues [are] from company-owned retail stores—and therefore must see a stabilization of retail traffic for the stock to mount a recovery.” —Continuing its new-product blitz,

In addition, Farmer questioned the motives of a product introduction today, after it had spent 20 years developing Via. —Continuing its new-product blitz,

“Starbucks claims that after almost 20 years of experimenting with instant coffee, it has only recently ‘cracked the code,’” Farmer said. “We believe that a more likely explanation for the timing of the introduction is that Starbucks has never had a need to pull this lever.” —Continuing its new-product blitz,

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