Starbucks, a global coffee giant with over 38,000 stores worldwide and nearly $36 billion in net revenue, is facing significant challenges. Despite being one of the most recognizable brands, Starbucks has recently reported a 3% decline in global same-store sales and missed revenue expectations by $130 million in its fiscal third-quarter earnings as of July 30, 2024. This has resulted in its share price tumbling nearly 25% over the past year. Let’s explore CNBC’s video about the reasons behind Starbucks’ struggles and the steps it is taking to address these issues.
Facing Multiple Challenges
Ryan Baker of CNBC reports that Starbucks is currently one of the worst performers in the S&P 500, with its stock price down double digits. CEO Laxman Narasimhan acknowledges that occasional customers are cutting back on visits due to a failure to effectively communicate the value Starbucks provides. Kevin McCarthy, a portfolio manager at Neuberger Berman, notes that Starbucks was banking on a consumer profile from 2022, not accounting for the current price-sensitive market.
Operational Improvements
To combat these challenges, Starbucks is focusing on improving customer experience by reducing wait times and enhancing interactions with baristas. CNBC’s Kate Rogers highlights these efforts, noting that streamlined workflows and a push towards value might help Starbucks regain its footing. However, as consumers become more price-conscious, the question remains whether these improvements will be enough.
Declining Stock Performance
Baker explains that Starbucks’ stock peaked in July 2021 but has since declined due to union tensions, COVID-19 lockdowns in China, and weaker margins. Despite initially rallying with plans to reinvent store operations, the company has recently reported consecutive earnings misses. In Q3, Starbucks met earnings per share expectations but missed revenue targets by $130 million.
Competition and Value Wars
The coffee industry is fiercely competitive, with over half of the market comprising small business shops. McCarthy points out that Starbucks is now competing with fast-food chains like McDonald’s for price-conscious consumers, diluting its unique proposition as a “third place” for customers. Starbucks has responded by introducing a discounted pairings menu, but analysts like Neil Saunders of GlobalData suggest this approach may not address core issues.
International Struggles
Starbucks is also experiencing challenges overseas, particularly in China, where same-store sales have declined more sharply than in North America. Once the largest coffeehouse chain in China, Starbucks was overtaken by Luckin Coffee in 2023, which rapidly expanded its store count. Despite these setbacks, Starbucks continues to open new stores in India and China, aiming to capitalize on growing demand.
Union Tensions and Boycotts
Starbucks has long faced tensions with Workers United, a union representing some of its workers. Rogers notes that while Starbucks offers progressive benefits, these are not automatically extended to unionized stores due to labor laws. Saunders adds that Starbucks’ anti-union stance has created friction with employees. Additionally, social media narratives around the Israel-Hamas conflict have led to boycotts that further impacted sales.
Efforts to Fix the Problems
Baker explains that despite these challenges, Starbucks remains a dominant player in the U.S. coffee market, holding 26.5% of the coffee and snack shop market. The company is implementing the Siren Craft system to streamline operations and reduce wait times. McCarthy sees this system as a positive step towards improving efficiency and customer experience.
“Rather Support Local Businesses”
People in the comments shared their thoughts: “Too pricy. I’d rather support local businesses”
Another commenter added: “Why is it so hard for companies to understand that they just need to lower prices”
One person said: “30 years ago, going into a starbucks was like walking into someones living room. Book on the wall, plush chairs and couches, nice lighting and carpet. Now, its a burger king”
Looking Ahead
As Starbucks collaborates with activist firm Elliott Investment Management to boost its stock price, the company is focusing on reducing wait times, improving customer experience, and easing union tensions. Saunders believes that while Starbucks has lost its way, it is possible for the company to regain its direction. Time will tell if these efforts will enable Starbucks to recover from the challenges of the first half of 2024 and restore investor confidence.
Consumer Perception
What do you think? How can Starbucks better communicate its value proposition to attract and retain customers in a price-sensitive market? What strategies can Starbucks adopt to differentiate itself from fast-food chains and regain its unique market position? Should Starbucks continue its international expansion efforts amid domestic challenges, and how can it ensure success in new markets?
Check out the entire video for more information on CNBC’s YouTube channel here.
