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With over 38,000 stores worldwide and nearly $36
billion in net
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revenue. It's one of the most recognizable brands in
the world.
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Starbucks love the long term chart here.
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We think they
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Have more control over their own destiny right now than
a lot of other consumer names.
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It's Willy Wonka in the in the Cold brew factory.
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But in recent months, Starbucks isn't looking like the
company that many Americans once fell in love with.
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Jim, when we look at The Biggest Loser today, it's
going to be Starbucks.
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It's among the worst performers in the S&P 500.
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It's down double digits.
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There's no question that the occasional customer is
cutting back on visits to us.
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We have not been able to communicate to them the value
that we provide.
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They were banking on a consumer that looked a lot like
the 2022 aspirational
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consumer. Uh, not a value seeking consumer.
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But Starbucks is trying to turn things around.
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The company is focusing on making that experience
better for you, making the wait times shorter, ensuring
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that you get your beverage in a timely fashion, and
that you have a good experience and a good connection
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with the baristas.
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With consumers spending their dollars more carefully
than ever before, will improved workflows and a push
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towards value be enough for Starbucks to get back on
track?
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I'm walking into the CNBC offices in midtown
Manhattan, which is one of the busiest parts of New
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York City. I'm about to place an order in the
Starbucks app, and we're going to see how long it takes
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to prep a drink.
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Starbucks stock price peaked in July of 2021 at over
$125 per share, after
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having tanked with the rest of the market during the
pandemic.
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The start of 2022 led to a sharp decline in its share
price, as the company battled tension with its union,
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faced ongoing Covid lockdowns in China and overall
just weaker margins.
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But the stock rallied as the company revealed plans to
reinvent its store operations and promised investors
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ambitious growth.
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This chart looks at the company's quarterly earnings
over the past few years.
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Between 2021 and 2023, the company only missed Wall
Street expectations twice.
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2024, however, has broken that streak as the company
reported two quarters of consecutive earnings misses
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quarter three. Earnings per share did meet Wall Street
expectations, but missed revenue expectations by
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$130 million.
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At the end of July, the share price was still down
more than 15% since the start of the year.
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I think what we are seeing is pressures on the wallet
for some of our most occasional customers.
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It had another issue, though, that was interesting high
rates of incomplete orders in the mid-teens on its
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mobile app and mobile order and pay has become
increasingly important for Starbucks.
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So people would hypothetically kind of put in an
order, see the wait time, or perhaps see the price, and
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then not complete the order.
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It was ready in just three minutes.
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I've been at this exact same location before, around
the same time, and it has taken upwards of 15 to 20
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minutes, so there's clearly a focus on lowering wait
times and increasing efficiency.
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That's because longer wait times have been a problem.
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Survey data shows that about 25% of Starbucks visitors
say their wait time has gotten longer, up from about
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16% just two years ago in May.
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Former Starbucks CEO Howard Schultz took to LinkedIn
to express his feelings about the company's second
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quarter earnings miss.
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He stressed the importance of coffee forward
innovation as well as a reinforcement of being
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experiential, not transactional.
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Coffee and cold brew is definitely growing.
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Hot drip is not.
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The energy drinks are also very competitive, so I
think they need to be in that game.
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But it's tough because then to some extent, Starbucks
loses
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a little bit of its, uh, cachet as being this coffee
first kind of place.
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It has been a drifting away of people from Starbucks to
other cafes to
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independent coffee shops, and that's a problem because
those people aren't necessarily spending less on
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coffee or beverages.
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They're just spending less at Starbucks.
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Competition in the coffee industry is intense.
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More than half of the market is composed of small
business shops, and it's only set to get worse in the
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coming year. On top of it, Starbucks is contending
with a new set of competitors as consumers are
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increasingly price conscious.
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When you're trying to go from being a third place where
people wanted to kind
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of hang out to being a convenience place, well, then
suddenly you're you're competing with McDonald's
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and convenience stores, and the uniqueness of your
proposition is watered
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down.
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Starbucks is considered a quick service restaurant.
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Research firm Technomic pulled pricing data from a US
Starbucks location over the past few years to track the
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increases it has seen.
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Take a look at the cost of a latte at Starbucks in
2020 versus 2024.
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It's up about 25%.
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Now take a look at the cost of a latte from
McDonald's.
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It's up over 40% during the same time period.
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While that increase is a lot higher, it's still
cheaper than Starbucks.
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So more attractive to a price conscious consumer that
matters because Starbucks now has to increasingly
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compete as a value player.
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Summer 2024.
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So the start of the fast food value wars with players
like McDonald's, Burger King, Wendy's and Taco Bell
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bundling food and drink deals to incentivize
customers.
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Starbucks got in on the game, too, with the
introduction of a discounted pairings menu.
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Its breakthrough for Starbucks because Starbucks has
been such a premier pricer.
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Uh, and the, uh, the different kinds of promotion
innovation is something which is very new to
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Starbucks. They never had to innovate on that level.
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But some analysts warn that it may not address the
company's underlying problem head on, citing that when
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people are concerned about price, they're typically
talking about wanting a cheaper base price, not
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necessarily additional free items.
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I think it's a very tangled solution to what actually
is a much simpler
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problem. They've sort of really gone round the houses
with it, and I think it suggests that management is
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not really focused and doesn't really understand the
core of the issues, which is why
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it's sort of addressing them in a very oblique way.
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But the coffee giant is not just hurting in the US,
competition overseas has also taken a toll on sales.
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Starbucks saw its same store sales decline at an even
stronger rate in China than North America.
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It was previously the largest coffeehouse chain in
China, but that changed in 2023, when another coffee
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chain called Luckin took the country's top spot.
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It nearly doubled its store count in just a year,
leaving the total number of Starbucks company operated
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locations trailing by nearly 3700 stores.
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Starbucks is still focusing on opening stores around
the globe in markets including India, which is a
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newer expansion plan for them, and China, which is
their second home market and has long been a key market
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for the company. There's been some criticism of that
approach, given the challenges that Starbucks is seeing
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in the US, which is its home market, of if it should
continue to expand while business is struggling, but it
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is pushing ahead with those plans because it's seeing
demand in those areas.
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It wants to continue to grow and also improve its
business in the US at the same time.
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Look at the fundamentals of the US business we are
holding share in the US.
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We are still the largest player in out-of-home coffee.
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If you look at some of the metrics that we have into.
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Tim Hortons said you were not holding shares, sir.
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I regard them as being seminal companies that are just
as good when it comes to McDonald's says you are
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losing share.
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They need to get that US business back on a steady
footing.
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They need to get it back into growth and that really
will push the business back into
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positive territory in the minds of investors.
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Workers on strike.
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Starbucks and Workers United, a union that represents
some of its workers, have long standing tension,
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especially under Howard Schultz, who ended his third
stint as CEO in March of 2023.
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It has long been known as a company that offers some of
the most progressive benefits, particularly in the
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restaurant space. And when Howard Schultz came back,
they did revamp some of the things that are offered to
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partners. But the catch there is that they were not
necessarily automatically extended to stores that had
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opted to unionize because Starbucks would say it can't
unilaterally offer new
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benefits to unionized stores without sitting down and
bargaining face to face, because that's how labor law
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works.
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Starbucks doesn't really like unions.
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A lot of coffee shops have wanted to unionize.
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It's led to great friction between management and
those workers.
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There have been some firings, and obviously the unions
are very much against that, and it alienates other
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workers, even those who are not looking to unionize.
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Former PepsiCo executive Laxman Narasimhan took the
helm as Schultz successor in 2023.
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He has worked to help remedy the strained
relationship.
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The Israel-hamas war is another issue Starbucks has
been dealing with.
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The company has not taken any official stance, but a
narrative took off on social media that led to
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widespread boycotts that hurt sales in the region and
beyond.
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I think that the the current social issue that is
plaguing Starbucks right now
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in the Middle East from a, you know, a perception
standpoint will dissipate.
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I think, you know, as we look into 25, it'll be less
of a headwind.
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I think these kind of boycotts, they tend to be from a
small but pretty vocal
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minority. It's a shame that Starbucks loses that
custom, sure, but it doesn't make an enormous
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dipped in the revenue for Starbucks.
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When analyzing the problems that Starbucks is facing,
the size and scope of the business must be put into
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context. The company generated about $36 billion of
net revenue last year, and controls
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26.5% of the US coffee and snack shop market.
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For reference, the second largest player was Krispy
Kreme, with less than a 3% share.
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It's not a business that's in dire straits.
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It's not a business that suddenly is irrelevant to
consumers.
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It's just finding growth a lot more difficult to come
by.
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So they just need to re-engineer, tweak the
proposition, really get back on the front foot and they
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should be able to punch out some better numbers.
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Starbucks quarter three earnings were better than some
investors expected, but sales from existing stores
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still declined 3% globally.
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With all of the initiatives that the company put out
during this quarter, particularly in the US.
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When it comes to energy drinks, boba, um, all the
deals that were coming through the app, it's it's
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disheartening to not see traffic improve that much.
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The company is streamlining its in-store operations
with the introduction of the siren craft system.
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They're doing a few different things.
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One of them is adding a play caller role to the
production line, so that's someone who can kind of jump
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out and help in certain areas when the store gets busy
unexpectedly.
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The baristas also have access to the digital
production manager, and that's essentially an iPad
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system. But they're able to better control orders as
they come in and perhaps reorder them if
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necessary. And then one more thing that they're doing
is resequencing how beverages are made, seeing.
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The new siren system that they're in the process of
implementing it makes total sense.
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It's not rocket science.
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It's linear batch flow.
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The digital apps aren't cutting it.
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You need more obvious value across the system.
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It was also reported that activist firm Elliott
Investment Management has been working with the company
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in recent weeks to help boost its stock price.
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Thank you. With the company's acknowledgment of an
increasingly choosy customer.
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The implementation of systems being put in place to
reduce wait times and improve the customer experience,
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along with easing tensions with the Workers United
Union.
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Only time will tell if the company can regain its
footing after the rocky first half of 2024.
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It all adds up to a picture of a company that has lost
its way.
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The thing is, of course, you can lose your way fairly
easily, but you can get back on track again.
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It's very rare. People remain lost forever.
