Why Starbucks Is Struggling
Summary
TLDRStarbucks, a global coffee giant, faces declining performance and competition. Amid pressure from rising consumer value-seeking behavior, Starbucks is addressing issues such as long wait times, missed earnings expectations, and competition from independent coffee shops and fast food chains like McDonald's. While the company has launched initiatives to improve customer experience and efficiency, tensions with unionized workers and expanding overseas have added challenges. Despite recent struggles, Starbucks remains the largest U.S. coffee chain, focusing on innovation and operations to regain its footing after a rocky 2024.
Takeaways
- 📉 Starbucks' stock has been struggling, with the company facing challenges and being one of the worst performers in the S&P 500.
- 📱 Mobile orders are a growing part of Starbucks' business, but a significant percentage of orders remain incomplete due to long wait times or higher prices.
- 🔄 Starbucks is working on improving efficiency, reducing wait times, and enhancing the customer experience to combat decreasing customer traffic.
- 💰 Price sensitivity has become an issue for Starbucks, with the company having to compete on value with fast food chains like McDonald's.
- 💼 The company's earnings have fallen short in 2024, with missed revenue expectations and increasing competition, especially from Luckin Coffee in China.
- 🌍 Starbucks is focusing on international growth, particularly in markets like India and China, even as its U.S. business faces challenges.
- 🛠 Starbucks is implementing new systems like the 'Siren Craft' and 'Play Caller' to streamline operations and improve service in busy stores.
- 💥 Union tensions have been an ongoing issue, with labor disputes and strikes affecting worker morale and customer perception.
- 🌱 Despite setbacks, Starbucks remains a dominant player in the U.S. coffee market, controlling 26.5% of the market share.
- 📊 The company is working with investment firms to try to boost its stock price and regain investor confidence, with the focus on operational improvements and customer satisfaction.
Q & A
What is the main challenge Starbucks is currently facing?
-Starbucks is facing challenges with declining customer visits, increased competition, and pressures from price-conscious consumers. The company is also dealing with higher wait times and operational inefficiencies, especially through its mobile app.
How has Starbucks' stock price performed recently?
-Starbucks' stock price peaked in July 2021 at over $125 per share but has since declined by more than 15% in 2024 due to multiple challenges, including weaker sales and competition.
What specific operational improvements is Starbucks focusing on?
-Starbucks is focusing on improving wait times and enhancing the customer experience. This includes implementing the Siren Craft System, reordering drink preparation sequences, and using digital tools like a production manager iPad system.
How has competition affected Starbucks, particularly in China?
-In China, Starbucks has been surpassed by Luckin Coffee, which nearly doubled its store count, leaving Starbucks behind by almost 3,700 stores. This intense competition, combined with rising local coffee culture, has hurt Starbucks' sales in the region.
What are the main consumer trends Starbucks is struggling to address?
-Starbucks is struggling to address the shift from an aspirational consumer to a more value-seeking one. Customers are becoming more price-conscious, leading to a preference for cheaper alternatives or independent cafes.
How has Starbucks’ response to the value-driven market impacted its strategy?
-In response, Starbucks introduced a discounted pairings menu, which is a new strategy for the brand. However, some analysts believe this approach doesn't directly address the core issue of high base prices, as consumers are mainly looking for cheaper options.
What is Starbucks' approach to expanding its store network?
-Despite challenges in its U.S. market, Starbucks is continuing to open stores globally, especially in markets like India and China. However, this has been criticized as some feel Starbucks should focus more on improving its U.S. operations first.
How is the relationship between Starbucks and its unionized workers evolving?
-Starbucks has had ongoing tension with Workers United, the union representing some employees. The new CEO, Laxman Narasimhan, is working to ease this tension, though unionized stores did not automatically receive some of the updated benefits due to legal requirements for negotiation.
What social issue has affected Starbucks sales recently?
-Starbucks faced a social media backlash related to the Israel-Hamas war, leading to boycotts that impacted sales, particularly in the Middle East. While this is seen as a short-term issue, it has had a noticeable effect on regional revenues.
What is the outlook for Starbucks in terms of regaining growth?
-Starbucks remains a dominant player in the U.S. coffee market, but it needs to address declining traffic, union tensions, and competition to regain steady growth. The company is implementing operational changes and focusing on improving customer experience to drive better results in the future.
Outlines
☕ Starbucks' Global Impact and Recent Challenges
Starbucks, a globally recognized brand with over 38,000 stores and nearly $36 billion in revenue, has faced challenges in maintaining its customer base. The company's stock has seen a sharp decline, with occasional customers cutting back on visits. Despite this, Starbucks is trying to turn things around by improving customer experience and reducing wait times, but competition and consumer spending habits pose significant hurdles.
📉 The Rise of Competitors and the Value Challenge
Starbucks is increasingly positioned as a value player amid the 2024 fast food value wars, competing with brands like McDonald's and Burger King. Starbucks introduced a discounted pairings menu, marking a significant shift from its premium pricing model. However, some analysts argue that this doesn't address core issues, as customers are seeking lower base prices rather than promotional items. International competition, especially from China's Luckin Coffee, further complicates the company's strategy.
🛠 Operational Changes and Efficiency Initiatives
Starbucks is working on operational improvements, including the implementation of the 'Siren Craft System,' which streamlines in-store processes and enhances order management. These efforts aim to reduce wait times and enhance customer experiences, especially given declining global sales in existing stores. Despite efforts in areas like energy drinks and app-based deals, customer traffic hasn't significantly improved, signaling ongoing challenges.
Mindmap
Keywords
💡Starbucks
💡Union Tension
💡Mobile Order and Pay
💡Wait Times
💡Value-seeking Consumer
💡Discounted Pairings Menu
💡China Market Competition
💡Siren Craft System
💡Consumer Spending Patterns
💡Activist Investors
Highlights
Starbucks has over 38,000 stores worldwide and generated nearly $36 billion in net revenue, making it one of the most recognizable brands globally.
Starbucks' stock price peaked in July 2021 at over $125 per share but experienced sharp declines in 2022 due to COVID-19 lockdowns, weaker margins, and union tensions.
In 2024, Starbucks missed Wall Street expectations for two consecutive quarters, with earnings falling short by $130 million in Q3.
Starbucks has faced challenges with incomplete orders in its mobile app, which has become a crucial part of its business, leading to a higher rate of abandoned transactions.
Starbucks is focused on improving customer experience, such as shortening wait times and enhancing its connection with baristas.
Survey data shows that 25% of Starbucks visitors reported longer wait times, up from 16% two years ago, indicating an operational issue the company is trying to address.
Despite introducing a discounted pairings menu to compete in fast food value wars, analysts argue that Starbucks' core issue is not being addressed properly.
The coffee chain saw increased competition from smaller coffee shops, and in 2023, it lost its leading position in China to Luckin Coffee, which has nearly 3,700 more stores.
Starbucks continues to focus on expansion in markets like India and China while trying to improve its U.S. business, which is still the largest player in out-of-home coffee.
Union tensions remain a significant challenge for Starbucks, with ongoing friction between the company and Workers United, representing some of its workers.
Former PepsiCo executive Laxman Narasimhan succeeded Howard Schultz as Starbucks CEO in 2023 and has focused on remedying labor disputes and strained relationships.
Starbucks faced boycotts and declining sales due to social media narratives linking it to the Israel-Hamas conflict, despite not taking an official stance.
The company maintains a 26.5% share of the U.S. coffee and snack shop market, far ahead of competitors like Krispy Kreme with less than a 3% share.
Starbucks has introduced the Siren Craft system in stores, streamlining operations and improving order efficiency to reduce wait times.
Despite implementing various initiatives, including new energy drinks, boba offerings, and app-based deals, Starbucks did not see significant traffic improvement.
Transcripts
With over 38,000 stores worldwide and nearly $36 billion in net
revenue. It's one of the most recognizable brands in the world.
Starbucks love the long term chart here.
We think they
Have more control over their own destiny right now than a lot of other consumer names.
It's Willy Wonka in the in the Cold brew factory.
But in recent months, Starbucks isn't looking like the company that many Americans once fell in love with.
Jim, when we look at The Biggest Loser today, it's going to be Starbucks.
It's among the worst performers in the S&P 500.
It's down double digits.
There's no question that the occasional customer is cutting back on visits to us.
We have not been able to communicate to them the value that we provide.
They were banking on a consumer that looked a lot like the 2022 aspirational
consumer. Uh, not a value seeking consumer.
But Starbucks is trying to turn things around.
The company is focusing on making that experience better for you, making the wait times shorter, ensuring
that you get your beverage in a timely fashion, and that you have a good experience and a good connection
with the baristas.
With consumers spending their dollars more carefully than ever before, will improved workflows and a push
towards value be enough for Starbucks to get back on track?
I'm walking into the CNBC offices in midtown Manhattan, which is one of the busiest parts of New
York City. I'm about to place an order in the Starbucks app, and we're going to see how long it takes
to prep a drink.
Starbucks stock price peaked in July of 2021 at over $125 per share, after
having tanked with the rest of the market during the pandemic.
The start of 2022 led to a sharp decline in its share price, as the company battled tension with its union,
faced ongoing Covid lockdowns in China and overall just weaker margins.
But the stock rallied as the company revealed plans to reinvent its store operations and promised investors
ambitious growth.
This chart looks at the company's quarterly earnings over the past few years.
Between 2021 and 2023, the company only missed Wall Street expectations twice.
2024, however, has broken that streak as the company reported two quarters of consecutive earnings misses
quarter three. Earnings per share did meet Wall Street expectations, but missed revenue expectations by
$130 million.
At the end of July, the share price was still down more than 15% since the start of the year.
I think what we are seeing is pressures on the wallet for some of our most occasional customers.
It had another issue, though, that was interesting high rates of incomplete orders in the mid-teens on its
mobile app and mobile order and pay has become increasingly important for Starbucks.
So people would hypothetically kind of put in an order, see the wait time, or perhaps see the price, and
then not complete the order.
It was ready in just three minutes.
I've been at this exact same location before, around the same time, and it has taken upwards of 15 to 20
minutes, so there's clearly a focus on lowering wait times and increasing efficiency.
That's because longer wait times have been a problem.
Survey data shows that about 25% of Starbucks visitors say their wait time has gotten longer, up from about
16% just two years ago in May.
Former Starbucks CEO Howard Schultz took to LinkedIn to express his feelings about the company's second
quarter earnings miss.
He stressed the importance of coffee forward innovation as well as a reinforcement of being
experiential, not transactional.
Coffee and cold brew is definitely growing.
Hot drip is not.
The energy drinks are also very competitive, so I think they need to be in that game.
But it's tough because then to some extent, Starbucks loses
a little bit of its, uh, cachet as being this coffee first kind of place.
It has been a drifting away of people from Starbucks to other cafes to
independent coffee shops, and that's a problem because those people aren't necessarily spending less on
coffee or beverages.
They're just spending less at Starbucks.
Competition in the coffee industry is intense.
More than half of the market is composed of small business shops, and it's only set to get worse in the
coming year. On top of it, Starbucks is contending with a new set of competitors as consumers are
increasingly price conscious.
When you're trying to go from being a third place where people wanted to kind
of hang out to being a convenience place, well, then suddenly you're you're competing with McDonald's
and convenience stores, and the uniqueness of your proposition is watered
down.
Starbucks is considered a quick service restaurant.
Research firm Technomic pulled pricing data from a US Starbucks location over the past few years to track the
increases it has seen.
Take a look at the cost of a latte at Starbucks in 2020 versus 2024.
It's up about 25%.
Now take a look at the cost of a latte from McDonald's.
It's up over 40% during the same time period.
While that increase is a lot higher, it's still cheaper than Starbucks.
So more attractive to a price conscious consumer that matters because Starbucks now has to increasingly
compete as a value player.
Summer 2024.
So the start of the fast food value wars with players like McDonald's, Burger King, Wendy's and Taco Bell
bundling food and drink deals to incentivize customers.
Starbucks got in on the game, too, with the introduction of a discounted pairings menu.
Its breakthrough for Starbucks because Starbucks has been such a premier pricer.
Uh, and the, uh, the different kinds of promotion innovation is something which is very new to
Starbucks. They never had to innovate on that level.
But some analysts warn that it may not address the company's underlying problem head on, citing that when
people are concerned about price, they're typically talking about wanting a cheaper base price, not
necessarily additional free items.
I think it's a very tangled solution to what actually is a much simpler
problem. They've sort of really gone round the houses with it, and I think it suggests that management is
not really focused and doesn't really understand the core of the issues, which is why
it's sort of addressing them in a very oblique way.
But the coffee giant is not just hurting in the US, competition overseas has also taken a toll on sales.
Starbucks saw its same store sales decline at an even stronger rate in China than North America.
It was previously the largest coffeehouse chain in China, but that changed in 2023, when another coffee
chain called Luckin took the country's top spot.
It nearly doubled its store count in just a year, leaving the total number of Starbucks company operated
locations trailing by nearly 3700 stores.
Starbucks is still focusing on opening stores around the globe in markets including India, which is a
newer expansion plan for them, and China, which is their second home market and has long been a key market
for the company. There's been some criticism of that approach, given the challenges that Starbucks is seeing
in the US, which is its home market, of if it should continue to expand while business is struggling, but it
is pushing ahead with those plans because it's seeing demand in those areas.
It wants to continue to grow and also improve its business in the US at the same time.
Look at the fundamentals of the US business we are holding share in the US.
We are still the largest player in out-of-home coffee.
If you look at some of the metrics that we have into.
Tim Hortons said you were not holding shares, sir.
I regard them as being seminal companies that are just as good when it comes to McDonald's says you are
losing share.
They need to get that US business back on a steady footing.
They need to get it back into growth and that really will push the business back into
positive territory in the minds of investors.
Workers on strike.
Starbucks and Workers United, a union that represents some of its workers, have long standing tension,
especially under Howard Schultz, who ended his third stint as CEO in March of 2023.
It has long been known as a company that offers some of the most progressive benefits, particularly in the
restaurant space. And when Howard Schultz came back, they did revamp some of the things that are offered to
partners. But the catch there is that they were not necessarily automatically extended to stores that had
opted to unionize because Starbucks would say it can't unilaterally offer new
benefits to unionized stores without sitting down and bargaining face to face, because that's how labor law
works.
Starbucks doesn't really like unions.
A lot of coffee shops have wanted to unionize.
It's led to great friction between management and those workers.
There have been some firings, and obviously the unions are very much against that, and it alienates other
workers, even those who are not looking to unionize.
Former PepsiCo executive Laxman Narasimhan took the helm as Schultz successor in 2023.
He has worked to help remedy the strained relationship.
The Israel-hamas war is another issue Starbucks has been dealing with.
The company has not taken any official stance, but a narrative took off on social media that led to
widespread boycotts that hurt sales in the region and beyond.
I think that the the current social issue that is plaguing Starbucks right now
in the Middle East from a, you know, a perception standpoint will dissipate.
I think, you know, as we look into 25, it'll be less of a headwind.
I think these kind of boycotts, they tend to be from a small but pretty vocal
minority. It's a shame that Starbucks loses that custom, sure, but it doesn't make an enormous
dipped in the revenue for Starbucks.
When analyzing the problems that Starbucks is facing, the size and scope of the business must be put into
context. The company generated about $36 billion of net revenue last year, and controls
26.5% of the US coffee and snack shop market.
For reference, the second largest player was Krispy Kreme, with less than a 3% share.
It's not a business that's in dire straits.
It's not a business that suddenly is irrelevant to consumers.
It's just finding growth a lot more difficult to come by.
So they just need to re-engineer, tweak the proposition, really get back on the front foot and they
should be able to punch out some better numbers.
Starbucks quarter three earnings were better than some investors expected, but sales from existing stores
still declined 3% globally.
With all of the initiatives that the company put out during this quarter, particularly in the US.
When it comes to energy drinks, boba, um, all the deals that were coming through the app, it's it's
disheartening to not see traffic improve that much.
The company is streamlining its in-store operations with the introduction of the siren craft system.
They're doing a few different things.
One of them is adding a play caller role to the production line, so that's someone who can kind of jump
out and help in certain areas when the store gets busy unexpectedly.
The baristas also have access to the digital production manager, and that's essentially an iPad
system. But they're able to better control orders as they come in and perhaps reorder them if
necessary. And then one more thing that they're doing is resequencing how beverages are made, seeing.
The new siren system that they're in the process of implementing it makes total sense.
It's not rocket science.
It's linear batch flow.
The digital apps aren't cutting it.
You need more obvious value across the system.
It was also reported that activist firm Elliott Investment Management has been working with the company
in recent weeks to help boost its stock price.
Thank you. With the company's acknowledgment of an increasingly choosy customer.
The implementation of systems being put in place to reduce wait times and improve the customer experience,
along with easing tensions with the Workers United Union.
Only time will tell if the company can regain its footing after the rocky first half of 2024.
It all adds up to a picture of a company that has lost its way.
The thing is, of course, you can lose your way fairly easily, but you can get back on track again.
It's very rare. People remain lost forever.
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