Seeing Two Sea Changes in Retail

 | Jan 07, 2014 | 11:32 AM EST  | Comments
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Leave it to Starbucks (SBUX) CEO Howard Schultz to figure out the new behavior patterns for shoppers that he thinks are here to stay. Last night, Schultz (who is on my Bankable 21 CEOs list in Get Rich Carefully) released a partnership note that addressed two new trends: A "significant" downturn in traditional consumer/pedestrian traffic malls vs. online shopping and new gift choice presents -- specifically, Starbucks physical and digital cards.

"First, 2013 was the first holiday that many traditional retailers saw in-store foot traffic give way to online shopping in a big way," Schultz noted. "Customers watched, waited, compared prices and then bought the brands and products they wanted online -- frequently using a mobile device to do so."

Schultz said this change will skew the national data and show that increased in holiday online shopping "far" outpaced increases in traditional in-store shopping. In some words that some will regard as negative for Starbucks, Schultz said the company was "not immune" from the mall downturn, but he implied that the offset of recognition ahead of the issue ahead of time, namely through initiating "world-class digital and mobile payment expertise," that dovetailed with the changes, allowed the company to handle more than $1.3 billion in total Starbucks cards in the U.S. and Canada. He says this was "significantly," above last year and, perhaps, most importantly, the current plan.

The second trend, the gift choice option, will also cause people to wonder about what happened to sales. Customers embraced the convenience and choice afforded by physical and digital cards, "Schultz noted, "instead of gifting a particular item."

The impact? Starbucks set records for new cards, including approximately 2.4 million Starbucks card activations on Dec. 19 (a single day record). The company also had several huge days before Christmas, and racked up more than $610 million in new card activations, much more than last year. Subsequently, we should see a spike in the first quarter of the calendar year as the vast majority of the revenue will be booked in the first quarter as the company capitalizes on new sales.

While certainly positive for Starbucks, these two trends may not be so fabulous for many mainstream retailers. We know that first, the book stores suffered from Amazon (AMZN) online competition and then the home entertainment companies -- only Game Stop (GME) and Best Buy (BBY) rode out the on-line competition on a national scale. Stores that sell commodity products are going to be dinged by this trend and that's going to be tough for all of the "me-toos" out there.

The gift card phenomenon doesn't help most retailers either because you need have a significant, at-the-ready presence at the register to pull this off. Unlike Starbucks, most retailers aren't set up for that.

While Starbucks has been able to play both offense and defense with its initiatives, obviously, Amazon is the huge winner in the shift. Amazon's a gigantic reason why the holiday season seemed weak by the traditional sales checks, but clearly wasn't given the shift that Schultz notes. We got an inkling of this when I spoke to the terrific CEO of Alliance Data Systems (ADS), Ed Heffernan, who backs the affinity cards for so many players in the business. He confirmed that it was an especially robust season. The downgrade of the stock by Goldman Sachs this morning runs afoul of what I heard and I am going with my ears.

I think we should view retail through the twin prisms that Schultz traced out in this remarkable letter. Online comparisons and digital and physical gifting of choice may be the two sea changes that must be incorporated into our thinking. And, of course, we should recognize that even though Schultz said his company was not immune by the in-store decline, the company's online efforts and gift card program could very well spike the first quarter for Starbucks.

Schultz, once again, has proven his worth -- even as he gives credit to others within his organization, including Curt Garner and Adam Brotman, two executives worth watching as the company builds its bench for future master of the Starbucks universe.

Columnist Conversations

Just some resistance to be aware of. Not saying it will cap the market, just that it is there for a decision....
Shares of Amazon (AMZN) are trading down below the 50% retracement level of their 2014 range in the after-hour...
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Kass:
On the weaker than expected #s. From $143 to $106.

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