Starbucks Gets Buzzed

9th_Oct (2)

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What's going on?

Bill Ackman, a famous activist investor, has picked up a stake just shy of $1 billion in American coffee staple Starbucks. He thinks the shares could more than double over the next three years (tweet this).

What does this mean?

Starbucks has been having a rough time of it in the US lately, with store traffic stagnating and sales growth slowing. As far as the coffee chain business goes, it’s up against cheaper brands like Dunkin’ Donuts and McDonald’s. And, where Starbucks was once considered reasonably high-end, it’s now got more premium, hipster competitors to fend off, leaving it sandwiched in the middle. Last year, Starbucks shut down three times more US stores than it usually does each year.

But Ackman’s not bothered – he reckons this is a mere blip in its meteoric rise. According to Ackman, Starbucks China’s going to rocket on, growing twice as fast as the rest of the company and lifting the overall business with it.

Why should I care?

For markets: Where Ackman goes, investors follow.

Ackman (and his investment firm, Pershing Square) coughed up around $51 per share and it’s already paying off – a Starbucks share currently changes hands for $57. Starbucks stock frothed up a bit after Ackman announced his stake, with other investors jumping onboard and snagging some shares of their own. No real surprises there – the last few years aside, Ackman’s got a decent track record of picking winners (with the notable exception of supplement company Herbalife – he bet $1 billion that its shares would fall, to no avail).

The bigger picture: Activist investors pack some pull.

Activist investors like Ackman have a reputation for taking companies to task if they think those companies aren’t doing enough to look after shareholders’ best interests (which, funnily enough, often coincide with rising share prices). Like activist investors in British chain Costa Coffee’s parent company, Whitbread, who successfully pushed it to split up its businesses – it’s now selling Costa to Coca-Cola.

Originally posted as part of the Finimize daily email.

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