Starbucks retrenches in home market
CHICAGO: Americans’ long-running joke about a Starbucks on every corner may be nearing its end.
The behemoth coffeehouse chain is retrenching in its home market as it contends with sales growth that chief executive Kevin Johnson acknowledges isn’t fast enough.
Starbucks Corp said on Tuesday that it expected comparable sales to rise just 1% globally for the current quarter — the worst performance in about nine years. That’s well below the 2.9% analysts were expecting, according to Consensus Metrix.
The company also plans to close about 150 company-operated stores in densely penetrated US markets next fiscal year, three times the number it historically shuts down annually.
“Our growth has slowed a bit,” Johnson said in an interview. “I expect better, I think our shareholders deserve better, and we’re committed to address that.”
Although business abroad has been booming and the chain has been opening more and more cafes, US sales growth has stalled for the company that brought espresso to the masses.
With about 14,000 stores domestically, Starbucks is now pumping the brakes on licensed and company-operated locations, with a renewed focus on rural and suburban areas — not over-caffeinated urban neighbourhoods where locals already joke that the next Starbucks will open inside an existing store.
“The closing stores are often in major metro areas where increases in wage and occupancy and other regulatory requirements are making them unprofitable,’’ Johnson said.
“Now, in a lot of ways, it’s middle America and the South that presents an opportunity.”
For the ubiquitous chain, moving slower and shutting unprofitable stores may trigger some deja vu.
In 2008, longtime leader Howard Schultz returned to the company that was struggling after expanding too quickly across the US, giving competitors like McDonald’s Corp a chance to elbow back into breakfast.
Investors cheered as Schultz retook the helm and closed some underperforming stores, and share prices at the chain have been up eight of the last 10 years. So far this year through Tuesday’s close, shares have been essentially flat.
But now, with Schultz stepping back from his beloved company, the task of the righting the ship will fall to Johnson, who took over as a CEO just over a year ago.
While Schultz had been trying to expand the Seattle-based company’s premium business, dubbed Reserve, along with Italian bakery Princi, analysts have speculated that these may be put on the back burner under the new leadership.
The company is also facing a resurgent McDonald’s, which has been advertising $2 cold-brew coffees, along with other steep discounts from fast-food rivals.
“The competitive environment has really become a lot stronger in the US and a lot of that is the fast-food chains really improving the quality and breadth of their offerings in terms of hot beverages and breakfast,” said Bloomberg Intelligence analyst Jennifer Bartashus.
“Americans can get that same flavour profile at a much lower price somewhere else. That becomes an area of concern for Starbucks.”
Starbucks has also faced backlash this spring after two black men were arrested at one of its stores in Philadelphia while waiting for a meeting to begin. The company and Johnson apologised, calling the arrests “reprehensible.”
Last month, Starbucks closed about 8,000 cafes so its employees could undergo racial-bias training, which did hurt sales in the quarter, Johnson said.
After stores reopened following the May 29 training, sales have started to rebound at US locations, with the chain expecting domestic same-store sales growth of around 3% in June, according to the company.
The company now expects to report adjusted earnings of between $2.39 and $2.43 per share this fiscal year, down from an earlier forecast of $2.48 to $2.53, according to an investor presentation.
“The competitive environment has really become a lot stronger in the US.”
Starbucks says it can attract more diners in the US with new menu items and will focus on its expanding tea business, as well as capitalising on health and wellness trends.
The company just added a new mangodragon fruit iced drink to its permanent menu in the US and Canada. And it’s focused on improving its food line-up with sous vide egg bites, plus a new line of lunch salads and sandwiches that it’s expanding across the nation.
“We’re putting more of our energy into that afternoon day part and the portfolio of beverages that are offsetting some of the declines we’re seeing in Frappuccino beverages,” Johnson said, citing a consumer shift away from sugary drinks.
“The company is also preparing to lean into more plant-based beverages,” he said, noting that a new plant-based protein cold-brew drink would be introduced this summer.
The chain is also relying on its digital initiatives to contribute between 1-2% to comparable sales next fiscal year. There’s going to be a new way for non-rewards customers to earn stars and rewards starting next spring, allowing visitors to cash in on loyalty without fully signing up.
On Tuesday, Starbucks said that it would return more cash to shareholders — about $25 billion in buybacks and dividends through fiscal 2020, representing a $10 billion increase from the previous guidance.
Additionally, it plans to cut general and administrative costs, and has hired a consultant to help in this area. It’s also exploring options to license some company-operated stores “in other appropriate markets.”