Black Financial Advice – Dr. Boyce Watkins: What we can learn from the Starbucks Woes

2 Jul

I just did an appearance on Al Jazeera International network about the state of the US economy.  While there were many issues discussed, one of them involved Starbucks.

Starbucks is the coffee brand that has addicted most of America, and it’s just damn good stuff.  In fact, right after the interview, I went and got a cup of Starbucks coffee to get me through the rest of the day. 

But Starbucks may as well be called “Starwars” because their expansion goals were out of this world.  Store locations were being put on nearly every corner in America and all over the world.  They seemed to be suffering from what I call the “Krispy Kreme Effect”, which makes a firm feel they can do no wrong because their product is so popular.

Well, the Starwars mentality caught up with Starbucks.  Over-expansion, along with a sagging economy, caused the stores to be less profitable than expected.  Now, Starbucks is scaling back their operations, closing 600 stores and laying off 12,000 employees. 

What are the black money lessons we can learn from this? I will put the lessons within the context of small business, since I believe that every black child and adult in America should learn something about owning their own business.

1) Most small businesses in America that fail end up getting buried due to a lack of cash flow.  Weakened cash flow tends to come from expanding too far, too fast.  A growing company drains resources, the same way a growing child eats more food.  Starbucks was, in some ways, becoming a victim of its own success.

2) Wall Street doesn’t care a whole lot about whether you dominate the market and it doesn’t always care how much money you make.  Sure these things matter on some level, but more importantly, Wall Street pays attention to how fast your profits grow and how well that growth matches expectations.  Starbucks has become a firm with huge growth expectations, leading to an incredibly and deservedly high stock price.  So, people became confused when the firm was earning money hand over fist, yet seeing a 50% reduction in stock price.  The reason for this drop in stock price was that while a great deal of money was being made, it was still less than expectations.

To give you an example, imagine Michael Jordan scoring 21 points when he was expected to score 35.  There were a lot of points scored, but not what the world expected.   Also imagine Jordan hitting only 30% of his shots, when he usually hits 50% of them.  In this case, he not only scores fewer points than expected, he is also less efficient.

Wall Street is run by expectations and profitability.  It is also focused on the firm’s ability to expand in an efficient manner.  Starbucks was failing these Wall Street tests on all counts, which is what led to its demise.

Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lovemaking 101: Merging Assets with Your Partner in Ways that Feel Good”. For more information, please visit www.BoyceWatkins.net.

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