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By Ann Gilpin | 06-29-2009 12:54 PM

Are There Grounds for Starbucks' Demise?

Equity Analysts Ann Gilpin and R.J. Hottovy debate the future of Starbucks including if the firm over expanded, if it can fend off increased competition from McDonald's and if consumers are still willing to pay up for a premium coffee experience.

Ann Gilpin: Hi, I'm Ann Gilpin. I'm an equity analyst at Morningstar on the consumer team and I'm here today with RJ Hottovy, our Starbucks analyst, to talk about the pros and cons of Starbucks. Thanks for joining me, RJ.

R.J. Hottovy: Thanks for having me.

Gilpin: RJ, Starbucks has been a controversial name. It's been in the news a lot and a lot of people have a very negative view about it. Starbucks has changed a lot over the years, and I think the way it looks right now is it's essentially a fad stock. You've had a lot of growth and that has really halted. There's a lot of competition in the space right now, especially with the recession. Consumers are looking to make their coffee at home. Folgers's sales have been really good, and also you've seen some competitors like McDonald's ramping up their McCafe selection.

Can you talk about what's going on with Starbucks right now and why is it having so many problems?

Hottovy: I think a lot of your concerns are overblown. Honestly, I think Starbucks is a name that's still going to be around 10 years from now, 20 years from now. I think it's got a lot of compelling growth prospects. It's probably not going to reach the growth rates that it had over the past decade. I think that is pretty unrealistic. But I think the company can establish a more modest but still solid growth trend over the next couple year. What I focus on is it has still got a strong brand name, structural advantages in the form of excellent real estate, and just generally a product that people want to pay up for.

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