A Retirement Journal: Starbucks has lost its identity; will Southwest follow?

Two public companies with iconic brands are in trouble.

One, Starbucks, had been lost in the wilderness for a while in my and most folks’ opinion. A coffee chain that once represented a third place, other than work or home, a place to enjoy a good, albeit expensive coffee is now not that. Instead, Starbucks seems to have become a counter service outfit where you can mobile order your extremely expensive, customized morning latte. Even worse, you can go into the store on your way to work and wait interminably long for the expensive customized drink to come out at the pick-up counter even as you watch mobile order customers come in, look for their drink(s), pick up their order and leave-in and out. As the financial performance quarter over quarter shows declining overall and year over year same store sales, activist investor Elliott Management has swooped in like a vulture capitalist. ?CNN recently captured how the original Starbucks is not recognizable anymore.

The other, Southwest Airlines, is just entering the wilderness in my opinion. The same Elliott Management is not just agitating on the sidelines. In this instance, they are actively lobbying for a new strategy as well as new management via a presentation and website Elliott calls Stronger Southwest. The company has been known since its inception as a fun to fly, low-cost airline. It’s business model of only one type of aircraft, a point-to-point route system (versus hub and spoke), open seating, no food on board, and fun flight attendants catapulted Southwest to become the leading U.S. air carrier by passengers. I believe in response to Elliott’s pressure Southwest recently announced they are going away from open seating. This has been one of their unique distinctives since inception 50 years ago. Right after this announcement, as someone enrolled in Southwest’s frequent flyer program, I received a form e-mail from CEO Bob Jordan explaining that 80% of current customers and 86% of prospective customers wanted assigned seating. Somehow, I don’t believe the accuracy of that research, at least not for regular Southwest flyers. Rather, I believe Southwest saw a way to partially placate Elliott, try and raise revenues, and if the move doesn’t work say, “See, I told you so.” Southwest is just entering the wilderness where Starbucks has been wandering for a while.

I have written in these blogs about both Starbucks and Southwest before. I wrote about the former to bemoan the closing of my local Starbucks store that coincided with the passing of my old friend and neighbor Vishin Jotwani, a frequenter of that same Starbucks. Now I only go to Starbucks as a café stop during my bike rides. And that too in the middle of the day, and that too not for coffee but something to eat. ?I wrote about Southwest more recently urging them to resist the pressure from vultures like Elliott Management. I am not a professional analyst with any influence. Instead, I am a retiree with 2 million lifetime miles on United, but someone warming up to Southwest’s consistent, friendly experience. I find myself enjoying the open seating and love the sane, organized boarding procedure. Now I fear Southwest could become just another airline. I do not have 2 million miles of frequent flyer golden handcuffs keeping me ?if and when Southwest becomes just one more airline. Both companies have lost, or are in danger of losing their identity.

Identity, certainly for individuals, but also for companies is important. For individuals, the current political scene proves my point. Donald Trump tries to give a conflicted identity to Kamala Harris. Is she Indian or is she Black? Harris as a former prosecutor meanwhile claims she knows Trump’s type or identity- a criminal! Moving quickly away from politics (!), companies too have identities. And, when that identity is unique, marketing professionals refer to it as brand strength. The brand is what frequently, though not always, propels a startup usually in the consumer space to stratospheric heights. Starbucks and Southwest are examples of two companies that at one time had superb brand reputations. Most successful, fast-growing startups go public. And then eventually the growth starts to level off just like an aircraft reaching cruising altitude. The pressures for continued revenue growth, EPS growth, and market share growth afflict public companies particularly hard. This I believe is where brand versus continued growth becomes an issue. This I believe is where activist investors like Elliott Management and Private Equity (PE) firms thrive.

I have never been a finance professional. Rather, I consider myself a business operator or mechanic if you will. That said, I have less sympathy for the activist investors of this world. All they seem to want to do is manipulate stock price and make a killing. While PE has its detractors, at least these types of financial firms have in my opinion skin in the game. They get in with the intent of really fixing a company as opposed to lobbing over PowerPoint decks like Elliott has done in the case of Southwest. In any case, identity or brand is a casualty of a public company’s pressure to grow. When the growth stops, brand promise is sacrificed for financial returns.

What do YOU think of my analysis of Starbucks and Southwest vis a vis identity? What do YOU think of my bias toward PE as opposed to activist investor? How about pinning an identity on candidates in the political arena???!!

Jake