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I was convinced that SBUX was going to continue down the road of innovating the coffee category by forging a more progressive “single serve” coffee machine that produces Starbucks coffee under the Starbucks name.  To me, it was all about the last mile (to steal a phrase from the telecom sector).  Why would Howard Schultz trust and enrich another coffee manufacture with the Starbucks brand?  He followed that path with Kraft and look how that partnership has turned out.


Looking at Howard Schultz’s February 17th memo again, following this morning’s announcement, a few of Mr. Schultz’s comments just don’t make sense.  Below, I am republishing the memo complete with Hedgeye’s views as published on the 17th of February and my thoughts from today in red:



Dear Partners,


For 40 years, Starbucks has been the world’s leading purveyor of premium coffee and premium coffee innovation. But at no point in our history has our innovation pipeline produced and introduced more successful, breakthrough products for multiple coffee occasions and in multiple form factors than it has during the past few years. Today, Starbucks provides the world’s finest coffee in virtually every format, including single-serve, to more than 50 million visitors to our stores and to millions more through nearly every retail and consumer channel in 54 counties around the world--every week.


Hedgeye - SBUX is sending a very clear message to Green Mountain “you are not in our league.”  The company is completely capable of developing its own innovative products to dominate every segment of the coffee market.


On Tuesday we announced that starting this fall we will also be bringing premium Starbucks Coffee offerings in a single-portion format to guests in 500,000 luxury and premium hotel rooms across the U.S. as part of a new partnership with Courtesy Products, the acknowledged leader in hotel room amenities. But because of the speculation swirling in the marketplace around Starbucks larger plans for single-serve in the U.S. and internationally, I wanted to take a moment to let you know what our intentions for single-serve are...because they are very bold.


Hedgeye - There are many channels of distribution and Starbucks will align itself with the partner that brings it the most economic value.


At the outset, let me share that while it is currently a $4 billion segment growing faster than any other segment of the global coffee industry, the single-serve coffee category in the U.S., and in much of the world for that matter, is in its very early stages of development.


Hedgeye – GMCR’s market cap of $5.7 billion accounts for more than 100% of its current addressable market.  There is still plenty of room within the single-serve coffee category for new market players and for product innovation.


And at this nascent stage there are numerous contenders but no demonstrated, long-term winners related to any format, geography or machine. 


Today’s thoughts: Why align yourself with GMCR’s Keurig then if it is not a long-term winning machine?


Let me give you a few examples to illustrate this point: In Germany, where single-serve coffee has been around for some time and almost 40% of households own a single-serve brewer (compared to only 6% in the U.S.) the long-time industry leader is an open system (meaning any coffee roaster can have access to the platform) that has virtually zero presence in the U.S., the largest consumer market in the world. On the other hand, the U.S. industry leader, the Keurig K-cup, is a closed system with U.S. patents set to expire next year--and virtually no presence anywhere in the world outside of the U.S. and Canada. This global market dynamic will change. 


Today’s thoughts: Hinting that SBUX will give the Keurig a presence outside of the U.S.?


Hedgeye - Starbucks is one of the strongest brands in the coffee segment and will shape the single-serve segment globally.  None of the single-serve brewing systems currently available to the market are good enough to be tied to the Starbucks name.


Now consider that approximately 80% of Starbucks customers do not yet own a single-serve coffee machine in their homes. This fact alone suggests that we are, again, at the very early stage of adoption and that Starbucks has a fantastic opportunity to introduce and deliver new single-serve coffee innovations to our customers. 


Today’s thoughts: How is this partnership innovative?


Hedgeye – Starbucks wants to own the category and will work to revolutionize the single-serve coffee brewing platform.  Below I outline my prediction of what the new Starbucks machine will be like (if not at first, then with later versions: 2.0, 3.0 etc.).  While some of these attributes seem fanciful, they all have founding in both Starbucks’ quest for control and the overall direction of the category (possibly run using Android):

  • The design of the machine will evoke the design and feel of the Starbucks store and experience.  I would think black and green, as well as the Siren logo. (experiences)
  • The name will also likely evoke the store.  “My Barista”, “The Siren”, or other names along those lines are likely.  (experiences)
  • The experience will be customizable, perhaps a touch screen or another user interface that allows the user to provide the machine with specific instructions as to the composition of the coffee they would like. (customization)
  • A “menu” (like a playlist in iTunes), where one can save a recipe or style of coffee for repetitive use and save it with a name like, “Jim – morning coffee”. (customization)
  • Connection to the internet via home computer system to allow the sharing of “menus” and reception of coffee ideas from Starbucks and fellow machine-owners.  This also allows a direct tap into social networking for the new machine.  (community)

We began our journey into the single-serve market with Starbucks VIA, introducing consumers to a delicious cup of coffee in an instant, soluble format. With Starbucks VIA, we also introduced them to a brand platform designed and built to facilitate an ever-evolving pipeline of new products. And Starbucks VIA’s success is undeniable: more than $180 million in system-wide sales in its first year.  This remarkable achievement for a new product was due not just to the premium quality and taste of Starbucks VIA.


It was also due to the successful implementation of a new business model where we bring the assets of the Starbucks brand--our coffee knowledge, our broad retail footprint, the passion of our store partners and our ability to reach and personally connect with millions of people--to create trial, sampling and awareness on a scale that very few, if any, retail companies can accomplish.  With Starbucks VIA, we showed how we can now migrate products through our growing presence in grocery, drug, mass, club and online channels to drive the expansion and globalization of the single-serve segment of the coffee industry.


Hedgeye - VIA was a good start, but Starbucks still needs and plans to take it to the next level.  VIA proves that the company can develop its own product and successfully market it globally.


There are many single-serve systems and solutions and even more in late-stage development. We are committed to supporting and participating in those that enable us to better and more conveniently serve our global customers, wherever they are and however and whenever they want our coffee. 


Finally, let me touch on a subject we are increasingly asked about: Green Mountain Coffee’s Keurig K-cup system. With specialty distribution arrangements and some aspects of its cartridge technology protected by patents for the next 18 months or so, Green Mountain has done a very fine job introducing single-serve brewer technology to the U.S. market.  And as a result it has emerged as an early leader. But as I have said, these are very early days, and history has demonstrated time and again that patents alone do not determine market winners--deep customer engagement, best-in-class experiences and quality do.  


Today’ thoughts: Why highlight the fact that the patents will expire soon?  What edge will SBUX have by partnering with GMCR after that point?  I feel like Mr. Schultz was purposely trying to throw people off with these comments…maybe he didn’t want to deal with increased GMCR speculation prior to today’s announcement.


Hedgeye - This was the sucker punch.  CEO Howard Schultz typically uses colorful adjectives to describe the success of the Starbucks business (e.g. exceptional, unequivocal, solid).  The fact that he said GMCR has done a “fine job” was a clear signal to me that he is not a handshake away from partnering with the company.  The GMCR storytelling is getting out of hand.  GMCR’s announcement on its last conference call that it has a double secret new machine was purely a defensive move because they are desperate to work with SBUX.


The single-serve segment of the coffee industry is poised for a sea change of innovation. We will win by delivering quality in the cup, every time, and by capturing the hearts and minds of millions of loyal customers, in the U.S. and throughout the world.


Hedgeye - Take it from someone who knows firsthand - don’t bet against Howard Schultz!


Thank you for defining and delivering our Starbucks Experience to our customers, every day. I have no doubt that we will continue to reinvent this category and provide customers with yet another premium coffee experience.


Hedgeye - Our 2010 coffee strategy continues to be positive on SBUX and PEET and cautious on GMCR.


Today’ thoughts: Given today’s announcement, it feels like the whole point of this memo was to say that Starbucks can market anything globally through “deep customer engagement, best-in-class experiences and quality” and that is what the company plans to do with the Keurig to make it a better product.

I still don’t see how this new partnership is innovative or how SBUX is revolutionizing single-serve this way…unless there is more to come.


Howard Penney

Managing Director



March 10, 2011






  • JCP began testing price increases almost a year ago on women’s private label apparel and to a lesser degree on men’s.  Management found that customer response to raising pricing on opening or sharp price point goods was met negatively.  On more aspirational product there a was a bit more forgiveness in the consumer’s acceptance.  While just a small test, the results are certainly telling for those that sell deep-value opening price point goods.
  • Macy’s noted that March trends have started off well, following a similar trend to February. Recall that the Easter shift has yet to occur which will ultimately lead to negative sales trends in March and disproportionately better trends in April.  Management also noted that early and sporadic efforts to increase prices in certain areas have been met with little resistance and in some cases are actually helping to raise overall AUR’s.
  • With strength in the sporting goods channel across just about every category (including golf), the industry is becoming increasingly focused on the latest ‘untapped’ opportunity – the youth consumer.  At recent presentations, DKS management addressed this reality highlighting a strategy that includes efforts from both UA and NKE. The reality here is that while the youth consumer has not evolved overnight, but the industry is seeing increasing demand from the 8-12 year-old customer.



Kate Spade's Web Site Amps Up Edit - Kate Spade unveiled a redesigned Web site Wednesday, adding greater editorial content to its previously e-commerce-focused site. The new katespade.com will fuse a 50-50 ratio of shopping and editorial, according to digital marketing manager Cecilia Liu. Previously editorial content occupied just 15 percent. Now, when users arrive at the homepage, they are welcomed with a split screen that gives them the option to “shop” or “play.” The latter takes them to an image-driven, behind-the-scenes world of the brand. Consumers will also be able to engage in content such as company projects, partnerships, events and ad campaigns. <WWD>

Hedgeye Retail’s Take: Brand created content remains a key and growing aspect of a differentiated customer experience.  And, if done well the consumer will not even realize they are being seduced/induced to make a purchase! 


Asics Launches 33 Lightweight Running ShoeAsics introduced a lightweight, minimalist running shoe collection that encourages natural foot movement in its new 33 by Asics collection. Inspired by the fact that 33 joints in the foot allow it to move efficiently, 33 by ASICS styles features the GEL-Blur33 to debut in April 2011 and the Rush33 available in June 2011, both in select stores. "We're excited to introduce this new collection for the consumer looking for a lightweight, minimalist style," says Brice Newton, Running Footwear Manager. "We have been encouraging natural foot movement with our Impact Guidance System (I.G.S.) for years, and this is an opportunity to showcase out latest adaptation with 33 by ASICS." <SportsOneSource>

Hedgeye Retail’s Take:  For those who thought lightweight running was coming to an end, think again.  Asics, New Balance, and Nike have all released new and innovative product in the last week. 


City Sports to Launch New Private Label - City Sports is launching a premium collection of private label running and training apparel, called CS Designed by City Sports, according to The Boston Herald.  Prices range from $15 to $45 with offerings extending from shirts, shorts and sweatshirts to bras. City Sports, which has 18 stores on the East Coast, originally launched its CS private-label line five years ago, but began an overhaul of the line last year. "We felt like we weren't serving (customers) well enough," Chrissy Durden, head of design, told the Herald. The slogan for the collection is, 'Love It For Life.' <SportsOneSource>

Hedgeye Retail’s Take:  With just 18 stores there’s no reason to believe that any retailer can’t be in the private label business.  


U.S Retailers Look to Europe - There’s a renaissance under way among U.S. web retailers targeting Europe for e-commerce growth, according to data and analysis contained in Internet Retailer’s newly published Top 300 Europe research guide. Some U.S. web merchants such as eBags.com have tried selling online in Europe in recent years, but pulled back because of problems with unexpectedly high operating costs, language barriers, international payments processing and other issues. But today U.S. web retailing companies that are selling successfully in Europe—or have ambitious plans to create a viable European e-commerce business over time—aren’t doing it just from the U.S. And they aren’t doing it on a shoestring budget. <InternetRetailer>

Hedgeye Retail’s Take:  Clearly the easiest and fastest way to go global, e-commerce has also become a way for domestic brands to test the waters on a brand’s acceptance in international markets.  This goes beyond sales and actually helps to define broader market opportunities.  


Marketers Move Toward Engagement on Social Media - Companies and marketers are more comfortable on social networks and have started to engage more authentically and build communities with other users on the sites. PR firm Burson-Marsteller analyzed the social media presence of the Fortune Global 100 for its “Global Social Media Check-Up 2011” and found that 25% of companies worldwide are using all four major social media platforms: Facebook, Twitter, YouTube and blogs. Eighty-four percent are on at least one platform. Twitter, specifically, saw major growth compared to 2010, as 77% of companies around the world have Twitter accounts, up from 65% last year. As companies get beyond the idea that they “just have to be on” social media platforms, they are becoming more active on these sites. <eMarketer>

Hedgeye Retail’s Take:   Still much to do here with social media, marketing, and ultimately conversion.  Most exciting is the idea that  “fans” or “Twitterers” actually opt-in to their brand affiliations, adding a layer of responsiveness not seen with traditional media.


R3: JCP, M, DKS, LIZ - R3 3 10 11





Initial Claims

The headline initial claims number rose 29k to 397k (26k after a 3k upward revision to last week’s data).  Rolling claims rose 3k to 392.25k. On a non-seasonally-adjusted basis, reported claims rose 55k WoW.  This is only the second WoW increase in NSA claims in 2011.  While seasonally adjusted claims have been volatile, the NSA series, until this week, was steadily falling. 


We have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down.  If this level is held, we expect to see unemployment improve.  That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 8.9%, it's 10.9%. So when we say that claims of 375-400k will bring down the unemployment rate, we are actually referring to the 10.9% actual rate as opposed to the 8.9% reported rate.








One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis.




Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 42 bps wider than 4Q.  The current level of 278 bps is unchanged vs last week.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 






Joshua Steiner, CFA


Allison Kaptur

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Galaxy Macau’s opening in mid-May should force the sell side to raise Q2 estimates. Oh, and they're low for Q1 as well. 



The sell side models are still projecting an April opening for Galaxy Macau (GM).  In fact, one sell side research team put out a report yesterday that mentioned late March as a possibility.  Galaxy announced last night a May 15 opening date for GM, which is an auspicious date in the Chinese calendar.  This is a positive for MPEL as it relates to the sell side models.  It is consensus among the sell siders that MPEL's City of Dreams will be hit the hardest by Galaxy Macau. 


We are already way above the Street for 1Q and 2Q, approximately 16% higher for EBITDA in both quarters.


The Macau Metro Monitor, March 10, 2011



Galaxy Entertainment Group Ltd said Galaxy Macau will open May 15, 2011 with 450 tables, 2,200 hotel rooms and +50 F&B outlets.  Chairman Francis Lui said Galaxy will apply to the government to host more gaming tables (room for 150 more) beyond its initial 450 "if and when necessary."  It expects Galaxy Macau to be the only new resort to open in the Chinese gambling territory until "at least the end of 2011."



Chinese banks extended less than $600 billion yuan in new loans in February.  In January, Chinese banks loaned just over $1 trillion yuan.



The daily opening hours of the Gongbei‐Macau border is expected to extend by 2 to 3 hours by the end of the year or early next year.  The first meeting between Guangdong and Macau will be held next month, and both sides have already agreed to put the extension of immigration checkpoint’s opening hours and regulations for cars with Macau registration plates to be driven in Hengqin Island on this year’s agenda. The Macau government has indicated the ultimate aim to operate a 24‐hour border checkpoint.


The Macau government also plans to establish a joint venture with Henguin for developing the business zone. The construction of the Henguin initiative is expected to be kicked off by the end of next month. The government intends to support some high potential emerging industries and may introduce new measures to encourage gaming enterprises to develop non‐gaming businesses.



According to the Public Security Police, Macau authorities yesterday found 23 illegal workers during a raid on the Galaxy Macau construction site.

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