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Why behavioral economics misses the point...

Behavioral economics has a number of unexamined assumptions but certainly one of the most obvious is the assumption that rationality is identifiable and distinguishable from irrationality. But what is rationality?
Can it be deconstructed into a series of rational decisions and choices or perhaps it emerges complete and seamlessly integrated as the rational individual? Are there levels of rationality? Do we give the individual a pass if they are children or from a different culture. Is Sherlock Holmes rational (perhaps hyper-rational?) in his ability to extract information out of what are to the reader (and Dr. Watson) unconnected observations?

Is rationality only defined after we have indexed an individual's beliefs and mental habits?

Before the analysis that precedes a decision can be done, the individual must make some distinctions as to what information to use and what information to ignore. Much of what passes for behavioral economics asserts that there is an irrational element to this selection process. Leaving aside the issue of how filtering data can be characterized as irrational, behavioral economists often assert that individuals don't use the correct time frame, overuse easily accessible and understandable data, and combine data from irreconcilable data sources. In summary, they don't act like academic economists. But wait, do theoretical physicists pooh-pooh adults who don't understand the logic of string theory. No, they recognize that they have acquired specialized set of beliefs that are not relevant to life outside of the sub-atomic. So why do economists, having studied academic models for decades then deride non-economists for being overly affected by information from their immediate environment; for not being sceptical enough about their information sources; for being impulsive in their decision making; and short-sighted in estimating the future.
Oddly enough, behavioral economists borrow heavily from both mathematicians and psychologists to come up with a set of ideas that only make sense to those whose motives are generally self-serving, e.g. I need justification for exploitation (let me manage your money for a fee and you will still be better off) institutional power( you are short-sighted and childish and need to be protected from yourself). . Read more!

WIFI at Starbucks

WiFi at Starbucks requires sharing wireless access among customers spending time at the cafe.
Once customers sit down at a table, they access one of the channels on the router which must use some algorithm for deciding how to allocate capacity. In the new model what will this be?

from Starbucks news release on Feb. 11, 2008 — AT&T and Starbucks today announced plans to deliver AT&T Wi-Fi service at more than 7,000 company-operated Starbucks locations across the United States... Starbucks and AT&T will offer a mix of free and paid Wi-Fi offerings at Starbucks stores to meet the needs of both frequent and occasional Starbucks Wi-Fi customers...Beginning this spring, Starbucks Card holders can enjoy up to two hours of free Wi-Fi service per day at Starbucks locations offering Wi-Fi access, while more than 12 million qualifying AT&T broadband and AT&T Internet customers will have unlimited free access to the Wi-Fi service. In addition, more than 5 million of AT&T’s remote access services business customers will be able to access Wi-Fi service at Starbucks locations... Read more!

Total Starbucks Revenue

Starbucks is the world leading retailer and roaster for brand coffee and the company’s revenue continues to grow as well as the world-wide total number of stores. Its strategy of blanketing metro areas with stores may have reached a point of declining returns in some areas but there is still a lot of room to grow, particularly as a broader range of customers frequent the stores. (perhaps 30+ million each week).

Possible contribution of a Starbucks Customer over 20 years:

Average expenditure/visit $5.00
Visits/week 4
Yearly Total $1000
Profit Margin 20%
Total Profits over 20 years $4000 (non-discounted)

With 10 million customers total revenue would = $40 bil..

This suggests Starbucks should provide infinite service to keep the visit frequency as high as possible.
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Cafe Times Blog

www.cafetimes.blogspot.com Read more!

some starbucks numbers

Starbucks must be the biggest coffee retailer with roughly 15,000 stores in over 35 countries (70% in the U.S. and 57% company operated.) On top of the coffee they also sell beans, ice cream, etc. at Costco and other such venues in the U.S. (abroad via joint ventures) as well as coffee to food service operators (Barnes & Noble?). Starbucks is also involved in the production and distribution of music although its not clear if they are making any money. They might be making money on their coffee trading however as they buy, roast, and distribute lots of coffee beans from all over the planet. In FY06, Starbucks' revenue was about $7.8 billion with about 10% of earnings coming from international business (need more of this). Companies such as Macdonald’s. Dunkin Doughnuts, and Burger King are focusing on more specialty coffee sales which may affect Starbucks. Also Peets (which sells tea as well as coffee), and Caribou are competing in some markets.Here is the beginning of my post. And here is the rest of it.

Stock prices:
52 Week Range $36.80-$18.00 with a 3-Month ADTV (Average Daily Trading Volume) of 13.5 million shares. (roughly 25,000 shares a minute) Market Cap is about $14 billion. Shares Outstanding 730.4 million Float % 97% 5-Year CAGR 24% (compound annual growth rate)
Earnings:
Sep 2007A 2008E 2009E
1Q $0.26 $0.28 —
2Q $0.19 $0.23 —
3Q $0.21 $0.26 —
4Q $0.21 $0.25 —
FY $0.87 $1.02 $1.19
P/E 23.0x 19.6x 16.8x

FY 2007A 2008E 2009E
Revenue $9,411.0 $10,962 $12,578

$ in Millions
ROE 29.8% 28.9% 26.2% Return on Equity. A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage. It is used as a general indication of the company's efficiency.

ROA 13.8% 13.2% 13.1% Return on Assets. A measure of a company's profitability, equal to a fiscal year's earnings divided by its total assets, expressed as a percentage.

ROIC 14.0% 13.4% 13.6% ROIC. A measure of how effectively a company uses the money (borrowed or owned) invested in its operations. Calculated by: net income after taxes / (total assets less excess cash minus non-interest-bearing liabilities).

EPS Growth 19% 16% 18% Read more!

Update: Name Policy

Odd. I've been to other Starbucks locations, and there is no definite name policy. I have now limited this 'policy change' to one barista at one location.

I guess it was a false alarm. Read more!

Name Policy Continued...

I guess I'm too honest or something. See StarbucksGossip

Here's a list of how Starbucks can respond to McD's encroachment into the coffee market. nothing in here on a name policy...Businomics Read more!

Review: Name-on-the-Cup Policy

This morning I ordered my tall nonfat green tea latte, and the barista asked me for my name, adding, "we're supposed to put names on the cups now". I have seen this before in other Starbucks stores, so I wasn't too surprised. But this particular store had never asked for my name before, so I suspected that this was part of the 5:30-9 training session yesterday.

I admit that I have mixed feelings about the name-on-the-cup policy. I suspect that Starbucks is encouraging baristas to provide that that je ne sais quoi of a personal touch that McDonalds and Dunkin Donuts cannot provide.

Here are my thoughts: I'm pretty close to my baristas anyway, so the name policy seems like overkill. They know who I am. Plus, that former bond created by the game of barista-customer privacy where the barista pretended not to know my name, drink and food preferences, study habits etc., etc., is now squandered when my name is shouted out to the whole store. Additionally, I kind of like at least a little bit of anonymity at Starbucks since I often sit and study for a while, so I would rather things didn't get too personal. And here's a another thing: the name policy does not end at the door of Starbucks. The cup is now a name tag you carry with you throughout the day. This hardly seems fair especially since even the baristas themselves don't have to wear name tags...

Okay, yes, Starbucks is trying to out-do McDonalds and Dunkin Donuts. But why the insecurity? The whole Starbucks environment is so much more friendly than any of its so-called competitors that it's hard to believe that a name policy would actually matter. The name policy suggests that customers would find Starbucks insufficiently personal without the name policy, and sufficiently personal with the name policy. To people that actually believe this: I dare you to sit in a McDonalds or Dunkin Donuts for 3 hours. Even the thought of this freaks me out. Starbucks wins the friendliness award hands down.

But, you never know what people nationally and globally are thinking, and I don't want to bite the hand that feeds me caffeine, so....I will try to be reasonable.

Thus, I will concede that the name policy has the advantage of reducing confusion during peak hours. Sometimes there can be rapid-fire latte orders and cranky, tired, early-morning customers can just start chugging the first drink that kind of sounds like theirs. One time I saw someone take a sip right after she grabbed it and then made a sour face as she realized it wasn't even close to what she'd ordered. She put it back down with a big lipstick stain on the rim and tentatively admitted that she had mistaken the drink for her own. The baristas resolved everything for the people involved, but the whole ordeal slowed things down for everyone else behind them in line.

So, here's a recommendation that is a nice compromise:

Will the Starbucks baristas at least write my name in the middle of the cup (next to the logo), so that after I grab my drink I can cover my name up with a coffee sleeve?


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Review: New Baked Goods

Mini Vanilla Scones
Initial reaction: okay. I like the size. It's kind of like eating a tea cookie. The flavor seemed more pronounced than in most scones. The whole scone is covered in frosting, and combined with the miniature size, there is a very high frosting-to-dough ratio.

I must say that I liked the flavor, though not every bite was recognizable as 'vanilla'. One bite almost tasted like anise. (however, the fact that I was drinking an Orange Spice Tazo tea could have contributed to this)

I did overhear one of the workers tell a customer that they were "very sweet". The worker's tone suggested that they were too sweet. But I thought it was fine.

Whole Wheat Multiberry Muffins (not non-fat)
Are these new? I like. They're much much better than the nonfat ones, which were almost inedibly rubbery. Read more!

Starbucks Training

Training across the country is taking place for Starbucks-establishment-retail-employees. (As I understand, Starbucks-coffee-servers in non-Starbucks establishments, like Barnes and Noble, are not part of the training; and I presume the corporate administrators are not required to update their barista skills). I guess this means that we will be able to test the effectiveness of the training by ordering drinks from both trained and untrained Starbucks coffee servers.

Personally, I'm hoping for a good 2 hour seminar of foam. I gave up on their cappuccinos a long time ago. Read more!

Panera slowly sinks into the sunset...

Long Starbucks's short Panera

Barron's on Panera: "...we aren't surprised to see the stock treading water today in the high-30s, about half its '06 peak...Panera could head for 30 in the next 12 months, based on the company's troubling outlook for 2008. In a Feb. 13 earnings conference call, management acknowledged it faces "a difficult year." The company reported lower fourth-quarter earnings, and a full-year drop in net profits due to losses on a flat-bread pizza line it is discontinuing, and other charges. It pared its '08 profit forecast to growth of 12% to 18% growth, or $2 to $2.11 per share; expressed concern about "rapidly escalating wheat costs" which are hurting profit margins; and noted that average weekly sales slipped at bakeries and cafés.

Panera also said new store growth would slow to 8% this year versus 23 in 2007... Read more!

Starbucks rival Panera stumbles along...

Panera Bread, the "next Starbucks", reported on Feb.12 (Reuters) that its fourth quarter earnings fell to $18 million ($.56 cents/share) compared to the previous year's net of $18.9 million ($.59/share). The company apparently continues to be squeezed between higher costs, lower traffic, and governance issues. All of this keeps the managers of two Shamrock Activist Value funds (notably Roy Disney and Disney lawyer Stanley Gold) not happy with company management as their over 5% stake in the company has been in a state of steady decline for the last several months. Shamrock has called for a number of changes in Panera, including: splitting the chairman and CEO positions; adding new board members; converting class B shares into class A shares, with one-for-one voting rights to diminish founder Ron Schaich's 16.3% voting right at Panera through his control of more than 90% of the class B shares.

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Upcoming announcement

http://www.businessweek.com/print/innovate/content/feb2008/id20080220_372003.htm

Matt Vella writing in Business Week says that CEO Schultz will make public on March 19th his detailed plan for recentering Starbucks (which has, I must say, been blown a bit off course in the market winds of the last few years.) The article mentions a number of suggestions including the use of social networking tools to foster communities and facilitate social interaction at individual stores and creating microstores devoted solely to making coffee. Read more!

Starbucks is an iconic brand and most of its customers are in the habit of going to Starbucks. I suspect if consumer spending drops that Starbucks margins will hold up nicely. A dollar of fixed assets generates sales of about $3.50 whereas McDonald’s FA turnover is 1.0x and Panera Bread’s about 2.4x.

Market Cap: 13+ Billion spread over about 700 million shares with 12-16 million shares changing hands each day...given earnings of about $.90/share the key fact is that revenue is still growing at 15-20% annually and with a few tweaks per store earnings should be +20%. Currently revenue/share is about $13.20 with a price/sales ratio of about 1.3 and a forward P/E of about 16. Read more!

some Starbucks competitors:

caribou coffee (CBOU)
panera bread (PNRA)
mcdonalds (MCD)
dunkin donuts (Dunkin’ Brands, Inc. is purchased in 2006 by Bain Capital LLC, The Carlyle Group, and Thomas H. Lee Partners, L.P.)

Starbucks Corp. 18.10 -0.19
	(-1.04%) 02/20/2008
	52wk high:	33.14
	52wk low:	17.66
	EPS:	0.89
	PE:	20.30
	Dividend:	N/A
	Yield:	N/A
	Market Cap:	13.12 b
	Exchange:

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Some needed Starbucks upgrades:

1. outlets at every table (some locations have attempted to resolve outlet-shortage problems with extension cords. if all starbucks had extension cords and power strips, there would only be a minimal change in order to prevent outlet-shortage.)
2. free or very inexpensive wifi. panera bread has free wifi. some mcdonalds locations have wifi (not sure if it is free)
3. better baked-goods / pastries
4. a better range of non-caffeinated beverages.

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