Mike, could you please generate a graph for SBUX?Starbux is just about a year off from having 16 years of data on yahoo.I'd like to see the graph as I have a feeling this could be a similar type of play that McDonalds was about 3-4 years ago...Thanks,Talyor
http://invest.kleinnet.com/bmw1/special/SBUX.htmlDec 11, 2007 = 22.62, now 19.44, down another 14%.Denny Schlesinger
Updated SBUX chart:http://invest.kleinnet.com/bmw1/special/SBUX.htmlBut as far as comparing it to McDonald's.... I don't think so. It does not have nearly the moat nor the history.-Mike
Mike,Dare I ask what power law distribution is?Mike
Mike:Most financial models including the Black-Scholes option pricing model assume that prices have a normal or bell shaped distribution. This is not so, prices exhibit a power law distribution which means that the outliers, the tails of the bell curve, are a lot fatter than in a normal distribution. Nicholas Taleb Nissim discussed this under the concept of "Black Swans"http://www.amazon.com/Black-Swan-Impact-Highly-Improbable/dp/1400063515http://en.wikipedia.org/wiki/Black_swan_theoryand Benoit Mandelbrot talks about it in The Misbehavior of Markets:http://www.amazon.com/Misbehavior-Markets-Benoit-Mandelbrot/dp/0465043550Earthquakes, avalanches and many other natural phenomena follow the power law distribution: a few big ones, more middling ones and lots of small ones.http://en.wikipedia.org/wiki/Power_lawA sandpile is a good model of the power law, as you add grains of sand, you get various sizes of avalanches.Denny Schlesinger
DennyBelieve it or not I just finished reading that book. Guess I should read it again. Funny thing about Black-Scholes, I kind of figured out it did not help with in vivo long before I read Taleb's book. I just could not tell you why. So how does this power law help your assessment? I read the definition at wikipedia, a little above my grade level I am afraid. I did spend quite a bit of time trying to understand Black-Scholes several years ago only to be disappointed in that it took a great deal of effort to understand something that turned out to be of little use in practice. While I like understanding these things I am finding it burdensome to chase down so many concepts that bear little fruit. Is this worth trying to understand?ThanksMike
While I like understanding these things I am finding it burdensome to chase down so many concepts that bear little fruit. Is this worth trying to understand?Mike One of the most disappointing aspects of Taleb's books (and many others) is that it is long on philosophy and short on practical advice. Here is how I started my book review:Nissim Nicholas Taleb has written two books about black swans for the lay investor. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets and more recently The Black Swan: The Impact of the Highly Improbable. They are full of erudition from Karl Popper to frequency distributions. But, is any of that relevant to "YOUR" investment portfolio?To find out how Taleb used this knowledge I had to track down an interview: a New Yorker article by Malcolm Gladwell, Blowing Up, that finally explained what Taleb does. With this came the realization that the black swans he is talking about are mostly irrelevant to my portfolio.http://www.gladwell.com/2002/2002_04_29_a_blowingup.htmBut the exercise was not entirely fruitless. Thinking about what Taleb and Niederhoffer used to do, I tried to create an option trading strategy based on LEAPS. It worked quite well during the first half of 2007 but it blew up when the market tanked. But it is not yet a total loss because by using LEAPS I have the opportunity to come back until Jan 2009 and Jan 2010. In two years time the current crisis must well be over (yesterday one of the LEAPS advanced 165% and now it is only 33% underwater). Here is the link to my Black Swan review:http://softwaretimes.com/files/are%20black%20swans%20relevant%20t.htmlDenny Schlesinger
Denny,Thanks, I agree with your conclusion in your review. I would say that Taleb's writings were of benefit to me personally because they helped me with perspective. I don't think I could ever adopt his option trading approach though. I rarely trade options anymore, which has proved to increase my success rate with them. Did a synthetic long on NFLX when it was down @ $17 and sold at $27 so I could use the money for another investment. I don't look for them but if the trade is already there on one of the companies I am following I might add it. I like to sell a put and buy a long position if the situation is right (which is rare). Gives me a short obligation with an expiration date that is not to far off in exchange for a long position in the stock with no expiration date. Out of the 5 trades I did last year, two lost. But the profit I made on the 3 winners well exceeded the losers so I guess I did ok. At this time I would have a hard time justifying just buying a leap. If I was to buy a leap that was 10% OTM for a premium that represented 20% of the current stock price I would have to make 30% return just to break even and lose 100% if the stock did not advance more than 10% prior to the expiration date. Plus there is that nasty expiration date thing to deal with. Were I to use the same proceeds to just purchase the underlying the company would have to go under for me to lose 100% and all the advancement would be profit regardless of the amount. And no expiration date. That is the price you pay for leverage I guess. I suppose you could do some ITM stuff but most of the premiums I see are prohibitive.Thanks again for the feed back, I will continue to follow your BMW method on the side. Still working on my HG stuff and trying to understand valuation and what not.Mike
While I like understanding these things I am finding it burdensome to chase down so many concepts that bear little fruit. Is this worth trying to understand?I don't think that trying to look for a lot of meaning in the power law chart for SBUX has much value if it's a lot of effort. There are generally two useful things I'd want to get from the chart:1) whether the stock's price movements seem to follow a power law in the first place (it does, judging from whether the blue crosses more or less follow the red line, especially in the upper half or 2/3 of the chart)2) whether the latest "big" stock movement is unusual over the history of stock movements (it looks pretty typical, judging from the fact that the red 'X' is close to the red line)Thanks to Denny for the excellent (and short!) explanation.-Mike
Mike, I agree it obviously doesnt have the history of McDonalds, but how are you defining moat? McDonalds has to compete directly with Burger King, Wendy's, In and Out, Hardees/Carl Jr, Backyard Burgers, Whattaburger, etc, etc and then all the Mom and Pop burger joints and then all the other restaurants. Yet they still have loyal customers.Same type of deal with Starbux, but again, many loyal customers. I think good growth opportunities still exist for Starbux internationally, they just got into some trouble by overexanpanding and going after lower income consumers. They can't be everything to everyone.But in no way do I see any long term going out of business or going to a new business type of company for StarBux. At its core they will still be selling pricey coffee to people. I think Howard Schultz will get things right again, and temporary business concerns and a weak economy are going to provide a very attractive buy in.This company still have very high ROE, and is trading at about 1.5 price to sales, whereas MCD is at about 3 times sales.I'm pretty sure 5 years from now a starbux graph will look more like McDonalds over the past 5 years then Krispy Kreme Donuts.Mike, in what areas do you see Starbux lacking? Can you expand on the moat and any other problems you see with Starbux?Thanks,Taylor
Mike, in what areas do you see Starbux lacking? Can you expand on the moat and any other problems you see with Starbux?Well, by no means have I done any depth of analysis, but I am highly skeptical of the durability of a moat that relies on expensive discretionary items like Starbucks coffee and other high-margin items that, to me, seem more a fad than a basic need. McDonald's does not serve great food but it is cheap and decent and serves a basic need: you gotta eat, and the breadth of their menu means there are many more degrees of freedom for McDonald's to innovate (and they have and continue to).I don't see Starbucks being able to maintain the high prices, especially as it expands outside the US where just about every coffee drinker is used to much better coffee than what people in the US are used to. But you never know, Paris has lots of McDonald's now too.To me, Starbucks' only real current moat is the number of stores. Obviously this is a business with currently attractive economics which of course attracts other competitors over time. I think the market will fragment into multiple dimensions, such as higher quality (Peet's for example) or lower prices (see McDonald's entering the market for an excellent example). You drew some good analogies with McDonald's and KKD; I think Starbucks is somewhere between the two in terms of future business prospects. I think growth will slow and margins will come down.-Mike
Mike, I think your thumbnail analysis is right on track. After spending quite a bit of time in Europe I quickly came to see Starbucks as McDonald's-quality coffee being sold at Ruth's Chris prices. I see Starbucks as a gateway drug to finer things. As people begin to realize there is much, much better coffee out there they'll either flock to small boutique shops (http://www.espressovivace.com/archives.html) or get disgusted and simply go through the Mickey D's drive-thru.However, with a 6-store-a-day expansion rate (until recently) Starbucks has a lot of momentum.Time for my latte.J
Coffee is a cultural thing. The US didn't really have a coffee culture until Starbux made an appearance and they created the American coffee culture and that, to me, is a very strong moat. I'm not saying the coffee they serve is any good, I thing it stinks, but then, I belong to the Venezuela coffee culture and we roast, brew and serve it differently. By the same token, I see foreign expansion as difficult, they would have to find markets without a coffee culture where they can create one. Suppose they tried to come to Vzla, we have a coffee shop or two on every corner serving high quality coffee. I just don't see their investment paying off. MacDonald's and several other burger joint have made a base here but OutBack Steakhouse is struggling, it just can't compete with our beef. I think Starbux would have the same issues. Thinking about it, there was no local "hamburger" for MacDonald's to compete against.Denny Schlesinger
My American (well, Texan) experience is that "Starbucks" is a valuable brand. I know a lot of people who will only drink Starbucks coffee. They won't stop at Peet's, or Scooter's, or Seattle's Best. They don't consider what McDonald's serves to be coffee. It's Starbuck's or nothing. They only drink Starbuck's when out in the world. They only brew Starbuck's at home. I live on the outskirts of a medium-sized American city (Austin). Not exactly the middle of nowhere. And yet my house is miles from the nearest Starbuck's store. The closest installation is in the local grocery store. (Really!) There is still plenty of room for domestic expansion.I have been told by foreign-born friends that American brands have cache overseas. People want to eat, drink, wear, and listen to what is popular in the US. I've heard this repeatedly from a number of countries (Mexico, India, China, Taiwan, Brazil, Russia, to name a few I can mentally verify right now). There may be sample bias in that these opinions came from people who chose to relocate to the US. (Perhaps Denny and "whatsmyoption" can correct this?) I have to wonder if there may be a niche for "American coffee" along side the local coffee culture? Maybe not on every street corner.I doubt SBUX will continue to grow at the blistering pace of the past. But I think the recent sell-off may represent an opportunity. I need to dig in to the fundamentals and decide whether to swing at this particular pitch.Regards,- HCF
I have been told by foreign-born friends that American brands have cache overseas. People want to eat, drink, wear, and listen to what is popular in the US. I've heard this repeatedly from a number of countries (Mexico, India, China, Taiwan, Brazil, Russia, to name a few I can mentally verify right now). There may be sample bias in that these opinions came from people who chose to relocate to the US. (Perhaps Denny and "whatsmyoption" can correct this?) I have to wonder if there may be a niche for "American coffee" along side the local coffee culture? Maybe not on every street corner.HaltCatchFire Yes, this is correct provided it does not clash with the local culture, in case of a clash it's because the gringos are clueless about this particular thing. :-))For this reason Coke, and hamburgers and Nike and many other things catch on really well but others, like Budweiser, don't. I have serious doubts that Starbux would catch on in Vzla but it might in other places that don't have a strong coffee culture of their own. I don't think it makes sense to go head on against a popular local product, it seems like a better strategy to look for voids to fill.Denny Schlesinger
"...I have serious doubts that Starbux would catch on in Vzla but it might in other places that don't have a strong coffee culture of their own. I don't think it makes sense to go head on against a popular local product, it seems like a better strategy to look for voids to fill..."The same exact thing is said every single time SBUX enters a new foreign market...all foreign markets have their own "strong coffee culture" that SBUX supposedly won't be able to penetrate, yet they do and all indications are to date that its being done successfully. And then forget coffee for a second, how about going into an entrenched tea culture like Japan and succeeding like SBUX has done in that country, and now China?Take care,J&K
I don't think it makes sense to go head on against a popular local product, it seems like a better strategy to look for voids to fill.Hi,this is maybe generally true, but SBUX is for me full of surprises. The following is certainly no DD and it proves nothing, it is simply a personal observation. This observation may be representative (which I hope it is - I own SBUX shares) ... it may not, you decide.First of all I have to explain that I live on the Greek Island of Crete but I am from Hamburg, Germany. When I first heard that Starbucks wants to open shops in Hamburg I was very sceptical. Sceptical because Hamburg is a traditional "coffee-town" with coffee roasters and countless high quality coffee shops. Moreover Hamburg is since years full of "Starbucks-like" coffee shops, like the coffeehouse-chain "Balzac" and others. How should an American company be able to compete here? This was the reasoning of many.Now Crete. Greece has "the" coffee shop culture (or at least one of "them"). There are these famous "kafenions" on every corner, no... several an each corner. In the cities you have areas that look just like one gigantic coffee shop. Packed with customers. People spend a lot of time there and since a few years often not only the famous Greek Coffee and Frape is served, but also latte macchiato, fredo and all the rest.Now last fall had those surprises for me, that I have mentioned. I have travelled to Hamburg to visit old friends and family. And I found that six Starbucks had opened there recently. I went into two of them, both were obviously running very well and were generally accepted. Not only this, the pre-christmas bookshop presentations were full of "Die Erfolgsstory Starbucks", which is the German translation of Howard Schulz book about his success story.And finally, coming back to Crete, I found 3 Starbucks in the main town of the island, Heraklion, well frequented by mainly young people. Hamburg... yes, I was foreseeing this more or less. And Greece? ... yes: Athens, Thessaloniki. But the god forlorn Island of Crete? Never! But last month they even had a Jazz concert at Starbucks in Heraklion... a rare and highly appreciated event in Crete.How is such a success possible in a seemingly saturated market? To me this is a demonstration of the power of branding and superior management in full action. The thinking is not "do people need another coffehouse here?". It is rather "Do they need a Starbucks here?". And globally I suppose this has only just begun.GreetingsStefan
Hi Stefan,This is really interesting information - who would have thought that Starbucks would appear at Crete?Thanks!
The US didn't really have a coffee culture until Starbux made an appearance and they created the American coffee culture and that, to me, is a very strong moat.Well, that depends.Starbucks is the most successful of about 20 coffee companies that started in Seattle in a short period... now we probably have a couple hundred... but the word has gone out in the coffee world that a pleasant, well-run shop with decent coffee can have no greater joy than to see Starbucks move in next door.
>>Moreover Hamburg is since years full of "Starbucks-like" coffee shops, like the coffeehouse-chain "Balzac" and others.<<-"since years" Das ist aber ein komisches Englisch!So uebersetzt man nicht "seit Jahren".Vielleicht: For many years, moreover, Hamburg has been full of "Starbucks-like" coffee shops, such as the coffeehouse-chain "Balzac" and others.(Now you owe me ten bucks for this English lesson. :) --)
Thanks for the insight Stefan. I must confess that the whole Starbucks success is a mystery to me, since I personally don't care to waste a lot of time drinking second rate coffee at first rate prices. But the overseas opportunities may be better than many expect. Maybe hanging out a local coffee house isn't an event for younger affluent customers, but doing the same thing at Starbooks is cool. The big question about this outside US expansion is whether it is just an expansion, or whether these new non US shops are making money. It would appear that the market doesn't think much of the 0verseaes opportunities for SBUX, just as experts once downplayed Mc Donalds chances in places known for the quality of their local cooking.
Stefan,Interesting that you should mention Starbux in Greece.I was in Greece in October 2006.I met one of our fellow Fools there in Athens.The first place we went to was a Starbux as he was showing me around.His reason was that it was the "Only" place in Greece that was Smoke Free and it seems that a high percentage of Greeks smoke.I'm not sure if this is true throughout Europe and elsewhere or not.He considered it to be a major plus.Personally, I liked the coffee and atmosphere elsewhere.Hope this helps.Z
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