The Cannibal Investors

• Posted by Zach Lane
• On July 02, 2008


• Interests: Social Investment

The New York Times reports that Starbucks finally decided to do something about its Venti sized cash hemorrhage, and the company has chosen to close 600 stores nationwide to try to return to glory.  What does this mean to the average consumer?  You will no longer have a Starbucks located in your local elementary school, fire station, or any public restrooms that you use.  Otherwise, business will continue as usual.  Investors, however, would be wise to take something away from the Starbucks experience.

Starbucks is just the latest iteration of a well-established pattern.  Gigantic companies trade sound strategy for unsustainable growth and kill themselves in the process.   The troubling issue is not so much the collapse of Starbucks in and of itself, but rather that the market never seems to take anything away from the experience.   Why do investor growth expectations hinge so heavily on the easy signs, and why can’t we learn to be patient and wait for growth when the right opportunities arise?  Wall Street has failed to build a sophisticated yet user friendly mechanism for understanding what it means to have healthy growth, and many investors routinely rely on the sheer volume of expansion rather than the strategy and form that the expansion takes to determine value.  Not a good strategy.

A company, just like a person, can experience good kinds of growth and bad kinds of growth.  Natural, profitable growth indicates good health and helps the company to compete for resources in the world.  Unnatural, forced growth (like your head growing to twice its ordinary size because of a chemical stimulus), is not healthy.  This lesson is not hard to understand, but it has been historically difficult to implement when it comes to maintaining investor confidence.  How can we build a nuanced understanding of growth strategy into the coarse filter that often guides how the average investor views a company?  We can’t, at least until investors start paying more attention to growth strategy and place less emphasis on raw figures.

In this month’s issue of Inc., the magazine interviewed Richard Thalheimer to hear his thoughts on the retail world.  Thalheimer was the founder of The Sharper Image, a now bankrupt one stop shop for everything from ultra expensive, non-functional Star Wars robot replicas to ultra expensive, non-useful outer space pens.  Thalheimer recalls woes that are similar to the problems Starbucks experienced: economic downturns pinched consumer spending on luxury goods, and growth obsessed investors simultaneously demanded new locations.  The combo killed the company.  Myopic, growth-focused thinking on the part of investors will take a company to a point where 12,000 jobs are suddenly slashed, and that hurts everyone.  Major investors need to take it upon themselves to examine shareholder recommendations from a strategic perspective, not just a numerical one.  It’s a crucial tool in preventing this type of crisis.

In the end, the 600 store closure is a drop in the bucket for such a massive franchise, and it might help to heal the wounds wrought by hyper-growth.  It also might be a blessing for those of us who suffered through Stanley Fish’s article “Getting Coffee is Hard to Do” last August by taking Starbucks off of Fish’s radar.  The question everyone should be asking is whether or not investors are ever going to learn to stop pressuring growth and start getting smart about strategy.  My bet is that they won’t, and that it is part of the same syndrome that inhibits our ability to build an environmentally sustainable economy.

• Tags: starbucks, stock market, coffee, investors, closures, chain

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