What’s Your Coffee Telling You?

Melbournians are lucky.

They are spoilt for choice when it comes to getting a good cup of coffee.

Spanish are also big coffee drinkers.

They are also very particular about their coffee. In a way, coffee in Spain is simple and complicated at the same time.

Let me show you.

The picture below shows the different quantities of milk people like in their coffee in southern Spain, and the name for how to order it.

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Source: Gerald Brenan’s Cultural Association
[Click to enlarge]

And these are just some of the few types of coffee you can order.

There is also americano (solo with water), carajillo (solo with a dash of brandy), bombon (coffee with condensed milk), cappuccino, espresso…you name it.

As I said, coffee in Spain is simple and complicated at the same time.

Growth and decline of Starbucks

I remember when, back in the mid-2000s, Starbucks went into an aggressive expansion. In Madrid, stores started popping up everywhere.

The flavoured coffees and plush sofas gave Spaniards a very different experience from drinking coffee at their traditional cafeteria or standing at the bar with friends.

The economy was booming back then…and Starbucks was a hit.

That is, until the 2007 crisis.

By 2009, Starbucks’ expansion was slowing. After decreasing sales, it announced store closings and a reduction in the work force.

The thing is, Starbucks is expensive compared to other coffee retailers in Spain, or the US for that matter. Those extra daily amounts can quickly add up.

You could even say a Starbucks coffee is a luxury item. When times are good, luxury items thrive. When times are bad, people start doing away with them.

The US economy seems to be ticking away strongly. In recent years, Starbucks has been expanding again.

Yet, as Bloomberg reports, Starbucks’ growth is slowing.

The coffee behemoth is retrenching in its home market as it contends with sales growth that Chief Executive Officer Kevin Johnson acknowledges isn’t fast enough. The cafe chain said Tuesday it expects comparable sales to rise just 1 percent globally for the current quarter—the worst performance in about nine years. That’s well below the 2.9 percent analysts were expecting, according to Consensus Metrix.

‘Starbucks also plans to close about 150 company-operated stores in densely penetrated U.S. markets next fiscal year, three times the number it historically shuts down annually. Shares slid as much as 5.1 percent in early trading on Wednesday.

As you can see in the chart below, the store sales forecast is well below sales in recent years.

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Source: Bloomberg
[Click to enlarge]

Starbucks has been dealing with increased competition from rivals like McDonalds, who has been promoting $2 fraps and coffees.

Does the fact that people aren’t splurging on an expensive coffee mean things in the US economy aren’t as good as they seem?

I think so.

Americans aren’t saving

A recent report from Bankrate.com shows another worrying sign.

As they wrote, while the recommended savings amount, as a buffer, is six months’ worth of emergency expenses, only 29% of adults say they have that amount.

As you can see in the graph below, most Americans have less than the recommended savings amount, with almost a quarter having no savings at all.

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Source: Bankrate.com
[Click to enlarge]

As Bankrate continued:

Bankrate issued a report in May on the hardest and easiest cities to build a six-month emergency fund. The median amount needed, for a family of four, was roughly $19,500.

‘Only the top 80 percent of earners have that much saved, according to the Federal Reserve. Median income households, meanwhile, have about a fifth of that in savings, according to the Fed, the same inflation-adjusted amount as they did 15 years earlier.

US households aren’t saving…and they aren’t worried about it either.

According to Bankrate’s survey, the majority of respondents, (61%) are either very or somewhat comfortable with their level of savings.

bloomberg2-220618

Source: Bloomberg
[Click to enlarge]

The US economy may be going strong, unemployment may be low. Yet while it has led to higher gains in assets like property and the stock market, it’s not leading to higher savings.

Instead it is leading to higher debt. US household debt reached a peak the first quarter of this year to reach 13.21 trillion, much higher than in 2008.

The tax cuts may be boosting the economy in the short run. But with interest rates rising and more tariffs, things are bound to get more expensive.

Americans may be feeling optimistic about the future. They are spending more, but they are doing so at the cost of saving less.

And salaries can only stretch so far.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent thinks the next big crisis is at our door step. We could be about to enter an ‘Economic Winter’…one that could freeze the Australian economy for years. If you want to learn more about Harry’s worrying forecasts, click here.


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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