Harmless stimulants for the non-adventurous type

“Chocolate, men, coffee – some things are better rich” ~ Author Unknown

While men – rich or poor – are best left to women to discuss, it is worth spending a bit of time on coffee and chocolates, though the latter is arguably a domain for women as well. And with stimulants and performance boosters in the news again this year (thanks to Michael Phelps and Alex Rodriguez), it is perhaps time to look at a couple of items at the “harmless” end of the spectrum.

Part 1: Musings on coffee, and how Captain Ahab’s first mate is changing the world

In spite of growing up in a typical eastern Indian home where at least two cups of tea a day – with generous amounts of milk and sugar is de rigueur – I never took a great liking for tea. Coffee was an occasional luxury at best, and maybe that is why held a greater attraction for me. But it was only with the exposure to the hard-driving, energetic workplace at the banks I have worked in, and the necessity to be alert and enthusiastic in spite of myself, that I realized the true magic of coffee. No less was the influence of the rapidly growing culture of coffee shops in India in the last ten years.

By any standard, I am not a heavy coffee drinker. In fact, my average consumption of 2 – 4 cups a week will qualify as moderate in any consumer survey of my peer group. However, I cannot deny the instant, if short-lived, impact it has on me. Now there can be a discussion on whether coffee is good or bad, or how much of coffee is just about the right amount to drink. But keeping that aside for a moment, the uses of coffee are quite diverse:
• Wake-me-up coffee: After a long night, to get ready for a new day. Needs to be strong enough to give a jolt to your senses. And yes, the aroma matters
• “Timepass” coffee: For those of you not familiar with Indian English, this is just an excuse to catch up with a friend in a lazy afternoon, or to just kill time at the office water cooler
• Anything-but-coffee: When this is just a ruse to meet someone, where coffee is just an excuse for conversation (In fact, Singapore has a coffee shop chain called Coffee & Conversation). And in this camp we find an interesting mix of players, looking for a wide range of professional and personal alliances and deals.



Photo source: www.freefoto.com

Given the supposedly robust nature of the business, you would imagine that the Starbucks’ of the world would do a steady business and not be affected by the ups and downs of the economy. Going through their corporate disclosures, I found that revenues grew from US$1.3bn in FY1998 to US$10.4bn in FY2008 (the company’s fiscal year ends in September), a whopping eight-fold growth in ten years. Year-on-year quarterly growth (e.g. 2008 Q3 compared to 2007 Q3), which is a good indicator of regular growth adjusted for seasonality, was positive for each of the quarters, every year since 1993 when they started disclosing this information after going public. Now this is as much a result of their continuous global expansion as it is of the growing strength of the brand and coffee-drinking as a habit. However one exception – Q1 2009 ending December 2008 – when year-on-year revenues dipped 6%, probably shows that they are not immune to the macro environment. Delving one level deeper, when you look at “comparable store sales” (which strips out the effect of opening of new stores), the impact of the downturn is more visible. Revenues were flat in 2008 compared to 2007, while the last time it shrunk – by 1% - was in 2002. Remember the aftermath of the bursting of the dotcom bubble?

And what about profitability? After growing every year for five years, earnings per share (EPS) dropped in FY2008 to 71 cents. Research analysts at stock brokerages expect a further dip in FY2009 to 68 cents, before recovering in the subsequent years. Sounds unexpectedly coupled to the global economy, does it not?

The Starbucks stock has also moved in the same broad direction as the market in the last few years, though both outperformance and underperformance has been significant.

Chart source: www.starbucks.com

So are people happier than ever in the middle of the recession and don’t need coffee to perk them up?

Certainly not. Starbucks is as much about marketing and supply chain management (think new-sounding products and cheap sourcing) and portfolio management (think opening new stores at the right time, and shutting loss-making ones, as well juggling the right mix of coffee and non-coffee offerings, including merchandise) as it is about coffee. Paying as much for a cup of Starbucks coffee as a decent lunch in a Singapore food court is not everyone’s idea of how money well-spent. And if you really crave for the brew, why not make yourself one at home or get your free cuppa at the office coffee machine?

Clearly, the business of coffee is as interesting and absorbing as business over coffee. Maybe the Starbucks website says it all – “It’s bigger than coffee”.

P.S: the world’s most famous coffee chain got its name from Captain Ahab’s first mate in Moby Dick – Starbuck

Part 2: Bitter water from Mexico, and hoardings at Patel Bridge

If you have travelled along Marine Drive in South Mumbai on your way to work, or frequented the nearby Chowpatty Beach, you cannot have missed Patel Bridge. An otherwise nondescript structure, Patel Bridge has probably the two most coveted advertising hoardings aimed at people connected with finance and investments. And it is, in a way, the barometer of the Indian economy in general, and financial markets in particular. At any point in time in the last four or five years, Patel Bridge has hosted at least one advertisement that sells a financial product, especially new initial public offerings (IPOs) from companies.

It was, therefore, no great surprise last December as my taxi approached Patel Bridge, a large advert for Tata Capital – the Tata Group’s new improved financial services foray –caught my attention. Turning back after five minutes, however, I noticed the other advert – for Cadbury’s new brand of chocolates Bournville.

Now that was interesting. But maybe not unexpected. Financial markets were down in the dumps, so what else to keep the citizens of India’s financial capital in the right mood than the first offering in India of “fine, dark chocolate” from Cadbury’s?
It has been a long and victorious march across the globe for what the Aztecs and Mayas in Mexico associated with the goddesses of fertility. The word “chocolate” is derived from the words xocolli (“bitter”) and atl (“water”) in the Nahuatl language spoken by the Aztecs. Cultivation of cocoa beans in Central and South America led to drinking of chocolate. It was only in the 1700s, however, that solid chocolate was first manufactured, and that has since been the primary form of consumption across the world.

Fans of chocolate tout its benefits to the circulatory system, and its stimulating effect is often romanticized, especially by women, as nothing less than a morale booster. Detractors point to its high fat content, and chances of over-consumption resulting in obesity and even poisoning from its lead content. However, it remains one of the most loved food items, and is an all-time favourite as a gift item that you can rarely go wrong with.

It is interesting to note that prices moved lockstep with the mood in the global economy for the better part of the last seven months. Retail prices of chocolate do not, of course, fluctuate wildly; so we look at the iPath Dow Jones – AIG Cocoa Index, which in simple words is a measure of the expectation of cocoa prices at any given point in time. Also, given the impact that the upheaval in the financial markets has had on the public at large, the state of the market and the economy may be used as a proxy for the mood of the masses.


Chart source: Bloomberg

Note the spike in cocoa prices in the aftermath of the Lehman Brothers bankruptcy (September 15, 2008) and the immediate fear that gripped the financial world. In October, however, governments across the Western world injected capital into the financial system, and coordinated intervention raised hopes of a recovery – note the plunge in cocoa prices. Late into the fourth quarter of 2008, the world realized this may not be enough, and cocoa prices go up. As we enter 2009, the early-January bounce in stock markets again brings the Index down. In short, bad news make you run to the fridge for a bite of chocolate to convince yourself that this is not the end of the world, after all. Conversely, good news reduces the need for another bite.

However, correlation does not necessarily imply causation, and I am certain there are other factors related to the weather, global trade and technical factors in the global commodities markets that have resulted in this seemingly high connectedness. In addition, the recent rally in the global stock markets in late March, and accompanying positive macro-economic news, has not had a meaningful impact on cocoa prices.

For believers in the potency of chocolate, however, this could just be the sign of the times, to be ignored at your own peril!