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Five Stories of Spending in the Market

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five. It's "spending money" week on the Friday Five this week: five stories of open wallets and their impact.

Here with me with the Friday Five is Morningstar's Market's Editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: You are welcome, Jason.

Stipp: So what do you have for the Friday Five this week?

Glaser: Well, we're going to look at five examples where the cash is free flowing: at Starbucks; from consumers during Black Friday; from Pepsi; from Verizon; and finally from Google to buy Groupon.

Stipp: So, Jeremy, Starbucks is doing some activity in China. Is that going to brew up something good for them or are they going to face some headwinds there?

Glaser: At the very least it's going to be expensive for Starbucks. I think one of the things that the company has been struggling to find for years now is how to grow profitably. They grew a lot in the United States, had to cutback on some of those stores, and that's returned them to profitability, has created a lot of good returns for shareholders over the last year.

But now, they are looking again for growth, and they think that China is the place where they're really going to find it. They obviously have a lot of presence in the some of the larger cities, but they want to make a bigger push into secondary and tertiary cities and try to get people to make having coffee as part of their morning routine instead of just a place to go after work to maybe meet some friends and to have a quick cup of coffee.

So, this is going to be something that's expensive for them. It involves opening a lot of new stores; it involves a lot of marketing, a lot of branding campaigns, and they're going to have to be willing to put a lot of cash flow in there for a long time in order to get a return from it. Is it possible? I think absolutely; China is a market that's growing very quickly. I think consumer tastes are changing very rapidly, but it's something that is really going to be a big drain on cash flow.

Stipp: So, back here in the States, we're celebrating the one-week anniversary of Black Friday here. The numbers are starting to come in about how sales were over the last week and for Black Friday. What do they look like?

Glaser: They looked pretty good. It seems like people are willing to trample over each other to get to Target at 4 in the morning to make sure that they could get the hottest toy, they could get the hottest deal this year. People are excited about Christmas again. People are excited about doing their holiday shopping by getting out there and getting gifts for everyone. They love getting gifts for their friends and family.

So, I think that this is something that bodes well for retail for the month. I think it bodes well for consumer sentiment. I think it shows that, as we've discussed before and we've seen for a while that people are not in this terrified mode any more; they're willing to be out there. I think the Black Friday sales and Cyber Monday sales on Monday show that this is real. People are actually out there. So, before, we just hoped that they would, and now we're actually seeing those numbers come in.

Stipp: In corporate news, Pepsi, the last time they did some spending they were buying up some bottlers, but they also made another acquisition late in the week. What's the story behind that?

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Glaser: Pepsi is going to make a big push into Russia. They bought a large milk and juice distributor, and they hope to be able to leverage that network to put out more of their snack products, to put out more of their drinks, and it shows the push into a market that is growing pretty rapidly and that they see a lot of opportunity in. But I think what this really shows, is that Pepsi is willing to spend a lot of money, and is continually trying to differentiate itself from its archrival Coke. They were the first to do the bottler acquisition, which Coke, obviously, subsequently followed their lead.

Now, they are out there moving into emerging markets, trying to find new ways to get their products distributed. It's showing that they are not content to play second fiddle on the beverage market and that they are really ... aggressively trying to differentiate themselves. I think it's an interesting turn in the cola wars and one that we've seen for a while and one that they are going to be spending a lot of money in their future to see if it can continue to happen.

Stipp: In telecom, Verizon is spending some money on 4G network. Is that going to payoff for them?

Glaser: I think it will. Now, obviously, building out a huge new cellular network is not cheap, and I think we can look at Clearwire to see how expensive it is. This is a startup company that had funding from a lot of different companies including, Sprint and Comcast. The idea was that they were going to build this WiMAX alternative technology 4G network distributed across the country, to be able to resell all that data to cell companies, to cable companies to anyone else who wants to give people a mobile broadband connection.

But they're finding it incredibly difficult to do this without actual cash flow from paying customers that are there right now. Clearwire this week is looking for another $1.1 billion to fund it, and Verizon on the other hand, was able to use the cash flow from their existing business to launch a huge footprint, their 4G footprint is going to be about as big as Clear's immediately at launch, while still having all those customers there, having a much better distribution network.

I think it shows how important that moat is, how important those competitive advantages are. They were able to spend this money I think in an intelligent way. Everyone's going to have to do it. AT&T is going to roll it out, T-Mobile is rolling it out, but certainly you could see how Verizon is spending their money wisely and being, I think, first out of the gate among the legacy carriers could be a leg up for them.

Stipp: Lastly, Jeremy, a lot of folks save a lot of money using Groupon at local restaurants and stores, but the price tag on Groupon itself not such a great deal, is it?

Glaser: Well, Google have to see if it is. There has been a lot of rumors this week that Google is going to pick up Groupon for $5.3 billion, with the possibility of a $700 million performance payout over time. Google might want to check out Groupon for Groupon, if they want to have a chance to get this for a better deal.

The valuation for Groupon is certainly not cheap. Google is paying a pretty penny to get into the growth of this business, it seems, with one of the fastest-growing Internet startups of all time. And I think it just shows that there is a general willingness, especially among private companies, to invest a lot of money in these startups. We hear a lot of rumors all the time from people like Google and Microsoft and Yahoo and even AOL out there looking for--some of them are much smaller--but they're still at very high valuations. They don't want to miss out on the next big trend; they don't want to miss out on the next big thing.

I think they're afraid of becoming dinosaurs or becoming calcified. They're making a lot of these moves. Will it payoff in the long run? Will they get a good return on this cash? I don't know for sure. I think if you pay too much it's always hard to get that kind of return. But certainly, if you get one that really hits it out of the park, maybe it can make up for a lot of other bad bets.

Stipp: Sure. Well, Jeremy, my own personal shopping still has yet to be done for the holidays. But we'll have to report on that at another Friday Five. Thanks for joining me this week.

Glaser: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.