Is it prudent to risk the economic interest of all the shareholders on something that affects the private life of a very small number of employees? Howard Schultz, CEO of Starbucks, coffee guru and Forbes 2010 Businessman of the Year, answered my simple question related to Starbucks’ decision to publicly support same sex marriage in Washington state by saying he did believe it was prudent. To much applause at the Starbucks annual meeting, he explained he wanted people to “feel good about where they work.” Mr. Schultz pointed to the stock price as an indicator that the market endorsed his decision.
He had a point. The price of Starbucks was near new highs and would go on to even greater heights in the weeks following the meeting. What he failed to acknowledge was Starbucks had been a tremendously successful company long before they announced their support for same sex marriage. The word was just getting out on this most recent position. Indeed, it wasn’t until after the annual meeting that the National Organization for Marriage called for a boycott of the Starbucks brand.
Unfortunately for Starbucks and their shareholders, in the first full three month reporting period since the annual meeting, Starbucks’ earnings, while strongly positive, came in below analysts’ estimates and even below Starbucks’ own guidance. This last point being perhaps the most concerning factor – it suggested Starbucks was unaware of the problem. The stock declined over 10% after the announcement, giving Starbucks its worst one-day loss in over a decade.
The problem, according to Starbucks, was domestic sales. What caused this? The boycott? According to YouGov BrandIndex, Starbucks had a positive BUZZ at the start of the year, which was very similar among both Democrats and Republicans (15.7 blue vs. 14.6 red). After Starbucks’ marriage announcement in January, the study indicated the BUZZ among Democrats increased (19.3) while it declined among Republicans (10.7).
While most people won’t formally boycott a brand, a little negative news can cause more than a few people to pass on a higher priced cup of coffee. Even a small drop in projected sales can translate into unpleasant earnings surprises. This is what appears to have happened here. With the stock down over 15% since the announcement and over 25% from its highs, shareholders are no longer applauding.
What may be more worrisome is how Starbucks’ public position on marriage might affect sales in parts of the world where gay marriage isn’t just an issue, it is unthinkable. In the Mideast, Africa, India and especially China, where Starbucks sees its highest growth potential, the impact on earnings could be even greater than in the States. While these countries don’t have Republicans and Democrats, people’s tastes are clearly more red than blue.
Is this the end of the world for Starbucks? Hardly. They are likely to grow, but shareholders did lose over six billion dollars in market value since the earnings announcement and over twelve billion from its high. This all occurred while the overall stock market was relatively stable. Clearly, Starbucks is losing some of its “mojo” as a growth company.
Howard Schultz is a smart guy, but he can’t easily extricate himself from this now. Interestingly, the company is emphasizing in public releases that they did not fund any organizations involved in changing marriage laws in Washington. Somewhat curiously, they begged off a would-be “Starbucks Appreciation Day” promulgated by a gay and lesbian rights group. It was to be a counterpoint to the “Chick-fil-A Appreciation Day,” which resulted in record sales for Chick-fil-A. Chick-fil-A’s owner, Dan Cathy, expressed his personal support for traditional marriage. Unlike Starbucks, Chick-fil-A is a private company. In light of Starbucks recent earnings release, they would presumably love a potential record sales day. It is quite possible some shareholders might sue Starbucks for their missteps and misleading guidance. Trying to make perhaps one percent of the employees happy in their private lives may have cost the company billions of dollars in market value and tarnished their growth company image.
Was it prudent? Starbucks does have a fiduciary responsibility to act in the best interests of the shareholders and to act as a prudent person would act. They must use common sense. Harming shareholders by taking sides on one of the most controversial issues of the day may or may not be illegal. Perhaps it is, to quote Talleyrand, “worse than wrong, it is stupid.” Maybe Mr. Schultz should sit down, have a barista serve up a five-dollar caffeinated concoction, and remember what it was that put him in this position: selling coffee, not re-defining marriage.