A Fiscal Fork in the Road
Welcome to this week’s edition of "Money, Power & Tech," where we hit the high notes on financial fluctuations, legal labyrinths, and technological tremolos. Grab your coffee, settle in, and let's decode the latest symphonies and cacophonies in the world of business and technology. From the frothy frappes of Starbucks' stock struggles to the Supreme Court's tax code concerto, and finally, to Spotify's layoff lyrics, we've got the score on what's shaping the market melodies.
Money
A Bitter Brew for Starbucks' Stocks
Starbucks, the global coffee behemoth, is facing a peculiarly bitter season. As we sip our morning lattes, let's ponder this: Starbucks' stock has been on a downward spiral, marking its longest losing streak since its public debut in 1992. Yes, you read that right! The company's market value has shrunk by nearly $12 billion, a 9.4% plunge that is as hard to swallow as a burnt espresso shot.
But what's causing this steep decline? For starters, the annual Red Cup Day, a festive event known for its free reusable red cups and bustling stores, saw foot traffic increase by a mere 31.7% this year, compared to a robust 81% in 2022. Turns out, this was less than half of the traffic boosts recorded in the previous three years. Maybe the allure of a free red cup isn't what it used to be, or perhaps customers are getting their caffeine fixes elsewhere.
In the face of these challenges, Starbucks isn't just crying over spilled milk. The company is leveraging its digital connections with over 75 million customers. They're banking on their Starbucks Rewards program, which has seen a record engagement in the U.S., to pull them through. With 33 million active members in the States (that's 10% of the U.S. population for those playing the home game), Starbucks is hoping that loyalty and a lot of lattes can help them weather this storm.
Analysts are stirring the pot with their insights. JPMorgan Chase & Co. analyst John Ivankoe noted a "material slowing" in sales, reducing the first-quarter U.S. sales growth estimate to 4%, down from the initially expected 6%. Meanwhile, Wedbush Securities' Nick Setyan highlighted investor nervousness, citing a slowdown in credit card data and labeling Starbucks as particularly sensitive to consumer sentiment. Expensive coffee tends to be somewhat of an elastic good for most consumers during economic downturns.? When household budgets get tight, that $6.95 PSL turns into a cup of pot-brewed Folgers from your own kitchen real quick.?
Adding to the mix, the snack and coffee industry as a whole is experiencing a deceleration, with Starbucks' sales trends contributing significantly to this slowdown. Labor strikes and boycotts, including a major walkout on Red Cup Day, have certainly not helped. In the bigger picture, Starbucks' shares have dipped by 1.6% this year, in stark contrast to the 11% gain of the S&P 1500 Composite Restaurants Index.
Starbucks, once the darling of the stock market, is now grappling with a jolt of reality. Will their digital strategy and loyalty program be their saving grace, or will this be a prolonged season of stock market winter? Only time (and perhaps a few more lattes) will tell.?
Power
The Taxing Question at the Supreme Court
The Supreme Court is sifting through a constitutional challenge to a provision of the 2017 corporate tax reform law. This law, part of a tax overhaul , introduced a mandatory repatriation tax, aiming to rake in about $300 billion over 10 years. The case hinges on the Moores, a couple who faced a $15,000 tax increase due to this law, challenging its constitutionality. This isn't just about their tax bill; it's a debate that could affect the government's revenue stream by hundreds of billions of dollars.
Here's the crux: the Moores argue that this tax violates the Constitution's apportionment clause. They claim it unfairly taxed their shares in a foreign corporation, KisanKraft, as personal property rather than income. Lower courts have upheld the tax, emphasizing that a tax's constitutionality doesn't rely on income being realized. But if the Moores win, it could redefine how income is taxed, potentially challenging the constitutionality of numerous tax provisions.
The federal government, defending the tax, points to the 16th Amendment's history. Adopted in 1913 , this amendment allowed taxing undistributed corporate earnings, suggesting that income need not be realized to be taxed. They also argue that the repatriation tax is an excise tax, justifying its legality. If the court sides with the Moores, it could open a Pandora's box of tax litigation and potentially destabilize the current tax system (and not in a good way).
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“Friend of the court” briefs supporting the Moores warn of profound implications. They fear that upholding the tax could pave the way for a wealth tax, impacting everything from retirement accounts to family businesses. On the flip side , the government dismisses these fears as implausible, highlighting the administrative challenges of implementing a wealth tax. They argue that a wealth tax would focus on property at a fixed time, while an income tax targets economic gains over time. I have an idea, why doesn’t the government focus on closing all corporate tax loopholes and not worrying about who Venmoed who for $600?
As the Supreme Court brews over this case, we're left to ponder: Will this decision lead to a radical change in tax laws, or will it uphold the status quo, keeping the financial wheels turning as usual? This case could be a game-changer in how wealth is taxed, or it could be a storm in a tax teacup.
Tech
Spotify's Layoff Tune - A Symphony or a Solo? In a dramatic chord change, Spotify, the maestro of music streaming, announced a 17% reduction in its workforce. This cut translates to about 1,500 jobs, striking a chord in an industry already resonating with similar tunes. CEO Daniel Ek's memo stressed the need to "rightsize" financials after a hiring crescendo in 2020 and 2021 when capital was more like easy listening than a tight budget track.
This isn't Spotify's first refrain in layoffs. Earlier this year, they muted 6% of their workforce in January and another 2% in June. Despite these measures, Spotify managed to hit a high note with $34 million in operating income in its third quarter, marking its first quarterly profit since 2021.
The company has been busy remixing its portfolio, venturing into podcasts and audiobooks. However, this diversification came with high-profile headaches and has yet to turn a profit. In fact, the June layoffs specifically targeted the podcast division, perhaps a sign that Spotify is re-tuning its strategy. Let’s look at some spending figures :
This is just a fraction of the $1B+ Spotify has spent on podcasting with most of its shows in the red.
Spotify's move reflects a broader trend in the tech industry, where layoffs have become the latest hit. Over 250,000 tech workers have faced the music and been laid off since the start of the year. This massive number shows that the pandemic-era boom is now more of a quiet outro than a rousing chorus.
On a somewhat harmonious note, Spotify is offering departing employees five months of severance pay, healthcare coverage, vacation pay, immigration support, and career-search assistance. This package, while not quite a standing ovation, at least provides some cushioning for the landing. We give credit where credit is due: at least they are trying to do the right thing and not compounding a mistake with an even worse one.
As Spotify shuffles its workforce, it's a reminder that even the biggest players in tech are not immune to economic crescendos and diminuendos. The question now is whether Spotify's layoffs will lead to a more streamlined and profitable future or if this is just the prelude to a more complex composition in the tech industry.?
Conclusion
As we wrap up this edition of "Money, Power & Tech," it's clear that the business world continues to play an intricate composition of challenges and transformations. Whether it's Starbucks grappling with a bittersweet market reality, the Supreme Court orchestrating a pivotal tax law performance, or Spotify tuning its workforce to a new rhythm, each story highlights the ever-evolving dance of business dynamics. These narratives remind us that in the grand opera of business, the only constant is change. Until our next edition, keep your ears tuned to the ground and your eyes on the horizon for the next wave of developments in this enthralling world of Money, Power, and Tech.