Is the Middle Class a Dying Breed?

10.02.12 | BofAgini indexAmazonViacomHourglass theoryDr. Farhoud KafiLouis VuittonChinaIndia

There are tents in Harvard Square in front of designer stores and they are not protesting the 1% or Goldman. They are people camping out, probably because the cops patrol Cambridge Commons and only so many will fit under the canopy of the BofA (ironic huh?). I found myself feeling guilty for checking out window displays after passing by folks huddling for warmth after possibly getting their daily dose at the meth clinic one subway stop away in Central Square.

Maybe there aren’t more homeless but just a shift in their patterns. Brattle Street is less obvious than JFK by The Pit or the park, where a handful still spend the night in sleeping bags. Homeless are nothing new but it struck me to see the locals in their new regular spot after a day when the stock markets soared on economic news and tech news/rumors, from Amazon and Viacom, to Google’s impending cloud and streaming ventures. Because my fear is that the economists are right — the middle class in America is a dying breed and it’s not a slow death.

Countless writers and economists have tackled the concept that America might be losing its crown and will soon no longer be viewed as king of the “free world.” Along with the crown will go a healthy middle class. The West and the Rest or the Markets Collide — it all says the same thing and aligns with the popular Hourglass Theory from Citi (also see Gini index)- that while the Third World grows, we have reached a plateau. If we plateau as a nation, than no new resources or jobs will be created and what will happen to the cash strapped, the unemployed, the uninsured?

Part of the shift in the power in the global community is tied to the middle class. Historically this community didn’t exist in places like China and India but the push for Mainland to boost domestic consumption came from their desire to decrease their reliance on Western purchases. The peasants can’t buy iPhones and L’Oreal products, and it’s not enough that the rich go crazy for Louis Vuitton. An interesting note my econ professor, Farhoud Kafi, mentioned, was that most of China is funded by foreign investments so even though they are growing, it’s at least partially thanks to our moving operations abroad. But, he added, once their middle class starts buying more, we may no longer have access to the goods at the cheap prices we now get.

The other night Paypal Founder Peter Theil spoke with Niall Ferguson at Harvard’s Kennedy school. He bottom lined this situation in one sentiment. He said that in the past people spoke of the First World and the Third World. Now they speak of the Developed World and the Developing World. Essentially, he said if America, Europe and Japan represent “Developed,” than we have no more growth left in us. If we do not grow, there is no new product or money but simply a shift of resources between people.

Average is no longer enough, or so argues The Atlantic. The truth is prior generations might have benefited from the post WWII growth that stemmed from rebuilding, the period when Deming helped Japan bounce back, while America too began working on its renaissance. But now working the line isn’t enough, there’s no gold watch, we all need to innovate and yet we’re more exhausted than ever.

I have no answers. Somehow now I feel a bit comforted that this is all happening while I’m in B school because even though the U.S. government is charging me 6.8% to borrow to educate myself, I know it will change me. If The Atlantic is right, what I have to offer without an MBA may not be enough in the world at large. If I don’t change anything, than I too could plateau and I can’t have that.

I have no answers. I don’t know how the world, this country, can save itself. I could say we should use more technology in schools but who will pay for it? I could say we need more technical and vocational schools as alternatives to college but who will develop these programs? I could say we need more condoms, more mentoring programs, more student entrepreneurship programs but who will do the outreach? I suppose at the very least I can promise myself I won’t take any more from the system, the government, than I need and that in the future, when I have more than I need, I will help lend my knowledge and money to those that can develop these programs. And I can say I won’t lose hope, I won’t make myself see right through the homeless, I won’t give up on the junkies, I won’t give up on Obama, and I will do my best to better myself and support programs working to fill the aforementioned voids.

Starbucks vs. Dunkin: Licensing, BRIC Expansion, & CSR

27.09.11 | Bain CapitalBaskin-RobbinsCarlyle GroupDNKNDunkin' BrandsDunkin' DonutsHoward SchultzMitt RomneySBUXStarbucksThomas H. Lee PartnersTrans Fairmiddle classtax brackethourglass theory

Last night I had my first presentation for a communications class at Babson. I spent too much time on the research part and not enough rehearsing. I hate to waste all this research so here’s what I learned about Starbucks (SBUX) and Dunkin Donuts (DNKN).

• SBUX and DNKN both have coffee for sale nationwide in grocery stores, drugstores and more. But, SBUX also has iced coffee blends, ice cream, and RTD (ready-to-drink) options, the latter of which places them alongside the energy drink makers and soda companies.

• Both have are in on the Keurig trend but DNKN was first to market, with a summer 2011 launch, exclusively in stores. SBUX is taking a difference approach. The SBUX Keurig cups won’t be out until about November 2011 but in grocery stores and drugstore locations, with a launch in SBUX locations in 2012. But, SBUX aims to make this is a $1 billion business after watching VIA bring in $200 million in its first year.
• Both SBUX and DNKN have inked partnerships with companies in India and China. The difference between their aims is that while DNKN is moving forward with their franchising approach, SBUX is aiming to both expand the number of stores and work with local farmers to source beans in both of the BRIC nations. 
• Both have unveiled a LEED standard location, but SBUX made a goal to have all new stores after December 2010 be built according to LEED standards.

• All coffee used in DNKN espresso drinks is certified by Fair Trade USA. This is a huge deal when thinking about the social bottom line. It reminds me of the scenes in Food Inc. when (1) the Wal-Mart dairy buyers go to an organic dairy farm in Vermont and (2) when a Stonyfield co-founder is interviewed. It shows that the consumer DOES have power because as the Wal-Mart buyers said, it matters not what corporate thinks, but what the consumer demands.
• Finally, both companies are looking at ways to cut consumption of paper and plastic by coming up with different cup material options. According to information culled from their respective CSR reports, DNKN decided to stick to their current cups because they have yet to find an option that like its current stock, keeps the drink warm and protects the customer. SBUX is also struggling with this issue and has run a few pilots to come up with different options.

Both have set deadlines. DNKN aims to have a cup recycling program by 2013 at the same time it plans to have a new material set for the Baskin-Robbins “pink spoon.” Starbucks, which purchased “58% of electricity in owned stores in North America,” making it the fourth largest buyer of renewable energy in the U.S. (EPA), hopes to make “100% of electricity used in company-owned stores renewable energy equivalent by 2015.” Starbucks also slashed its water usage by almost 22% over 2008 levels and aims to have ALL cups be reusable or recyclable by 2015. Meanwhile they aim to have all coffee “responsibly grown and ethically traded” by 2015. It’s worth noting SBUX doesn’t use Fair Trade USA, which is the most trustworthy fair trade certification organization in The States. 

Bottom Line: In a way, I’d consider buying both stocks. But, I think DNKN is a better short term buy and SBUX is a better long term buy. Please note I haven’t looked at their numbers but for stock price, number of shares and market cap. Also note that the previous owners of DNKN (before the July 2011 IPO), Bain Capital, Thomas H. Lee Partners, and The Carlyle Group, collectively own more than 30% of DNKN stock (according to SEC filings which list all three as “beneficial owners”) and hold six of the nine board seats.

I think DNKN is a better ST buy because their franchising structure allows them to expand faster and though they have about 9800 locations globally to SBUX’ roughly 17K, their revenues are ~$7.7B to SBUX’ $10.7B. This implies they must have better margins or more traffic. If the latter is true, that might explain SBUX’ mission to rid its stores of laptop hobos.

That said, SBUX seems to have a “bigger picture” approach in India and China and if some of the beans used for stores in those countries are domestic, it might save them on shipping and import costs.

Finally, there’s the issue of the buyer and their tax bracket. If America is losing it’s middle class and the developing world has a growing middle class (translation: more buying power), what does that say about these companies’ future sales?

I know one thing—I should’ve bought Green Mountain Coffee in January when I first thought about it. Another day, another ticker.