Investing in the Age of Frugality

01/21/2010 1:00 pm EST


Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, says luxury is out and cheap chic is in, so how do some once high-flying luxe brands adapt?

Goodbye, $5 coffee. So long, gourmet supermarket food. Adios, expensive shows and gambling tables in Las Vegas.

Now, with the bubble burst, we're worried about losing our jobs. As a result, many of us are adopting much more frugal lifestyles.

That’s the challenge facing many of the companies that used to post big profits and fast growth by selling us the good life—a list of once-trendy or posh names including Starbucks (Nasdaq: SBUX), Whole Foods Market (Nasdaq: WFMI), and MGM Mirage (NYSE: MGM).

Several of these names are cutting costs and offering discounts. But cost cutting can get them only so far, and reducing prices probably means thinner profit margins. [So,] while the stocks of these companies have had a nice run from their March 2009 lows, this is a good time for investors to be wary.

Take Starbucks: The landmark coffee chain now stocks supermarket shelves with its products, including a popular—and frugal—single-serve coffee called Via. Starbucks is also being more frugal itself. In its fiscal year ending in September, it squeezed out an impressive $580 million in costs. But worldwide, coffee lovers spent $592 million less at Starbucks in that fiscal year than a year earlier.

In short, chances are slim that Starbucks will get back to its glory days any time soon. So it's no surprise that Wall Street analysts have a median price target of $24 on Starbucks' stock, according to Thomson Reuters. The stock was trading just above $23 this week.

Whole Foods faces similar problems. The grocery chain has long been a mecca for lovers of fine foods, including organic and gourmet products. But it's getting harder for Whole Foods to charge the premium prices that go with those products.

Although Whole Foods enjoyed double-digit sales growth during much of the past decade, sales have now slipped for six quarters in a row and were down 2.3% in last year's third quarter.

Whole Foods is fighting back with "madness" sales and "Whole Deal" coupons, [and it’s] slowing down its growth. Opening fewer stores raises overall profit margin, but at the same time it robs the company of the growth that would lead investors to pay a higher price for the stock. (It closed above $29 Wednesday—Editor.)

Last month, MGM Mirage opened the doors of CityCenter, an $8.5-billion casino, hotel, retail, and luxury condo extravaganza on 67 acres of the Las Vegas Strip. The complex adds more than 4,000 hotel rooms at a time when casinos have had to cut room rates dramatically. In the first nine months of 2009, MGM cut its average daily room rate to $111 from $154 the year before.

Overall, MGM revenue was down 16% during the first nine months of last year compared with the year before. Noncasino revenue fell 21% to $3 billion, and casino revenue fell 12% to $1.9 billion.  (The stock closed above $12 Wednesday—Editor.)

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