Ouch: Deutsche Bank downgrades Starbucks over loyalty changes

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By: RickFerguson |

Posted on April 18, 2016

Our weekly update on the Starbucks saga continues as Business Insider reports that Deutsche Bank is hitting the coffee retailer where it hurts - downgrading its stock in part because of changes to the retailer's loyalty programme. Will Starbucks have the last laugh? Stay tuned.

Here's the money quote from author Akin Oyedele's article:

"[Deutsche Bank research analyst Brett] Levy noted that Starbucks' US same-store sales � at locations open for at least one year � rose a solid 9% in the fourth quarter. But with same-store sales driving much of the stock's rise, he said, there's a risk that both metrics decline with as the loyalty programme changes. He said it's possible that loyal Starbucks drinkers spend more there to earn more points, but it could take a while for this extra spending to show up in the sales numbers."

As a result of this analysis, Deutsche Bank lowered its rating on Starbucks to "hold" from "buy," and dropped its stock price target to $64 from $70 per share.

The Bullet Point: Levy's analysis might well prove true - sales could take a modest hit as rivals like Dunkin Donuts work overtime to poach away disgruntled latte drinkers. But the analysis is equally short-sighted. The programme changes, which reward big-spending customers over more frequent but lower-value ones, will enable the programme to work harder and deliver greater programme ROI.

The pending launch of the prepaid Starbucks Rewards Visa Card, co-branded with JPMorgan Chase, meanwhile, will allow Starbucks loyalists to earn Stars everywhere they shop - potentially driving more traffic back into the stores as cardholders redeem all of those extra Stars. "We�re bringing customers to the world of stars everywhere," Starbucks COO Kevin Johnson said at a recent company annual meeting.

Far from derailing the programme, Starbucks is instead investing in and expanding its reach. This evolution will pay dividends: to its best customers, to the company, and to its shareholders. I'm not a financial adviser, so don't take my word for it - but if I were one, and Starbucks stock does take a short-term hit, then I'd advise you to buy low.

- Rick Ferguson

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