For the second quarter in a row, Starbucks reported a same-store sales decline as the Seattle-based coffee chain struggles to attract consumer demand, particularly among its non-regular customers. For the third quarter ended June 30, Starbucks reported 3% global same-store sales decline driven by traffic declines (though offset by pricing increases and larger orders).
Starbucks CEO Laxman Narasimhan attributed the disappointing sales and 6% decline in U.S. traffic to “a more cautious consumer spending environment and intensified competition in the past year,” including a discounting and “pricing war,” which has been intensified at the expense of comps and profitability.
Drilling down, Narasimhan said that much of the traffic declines could be attributed to non-Starbucks rewards members, who comprise 40% of the business and are not purchasing Starbucks as much anymore. In short, the coffee chain’s regulars are still making their daily or weekly trips to Starbucks, but everyone else has more options, including other coffee chains and their coffee pot at home.
“We are operating in a challenging consumer environment,” Narasimhan said during Tuesday’s earnings call. “We still maintain the number one position in terms of coffee shops visited, so I think that this is a statement around the overall [spending] environment. We know that there are things that we can do in order to communicate value better to our non-rewards customers, which is why we've opened up the app for all starting this quarter. Once they come in, and once they see what's happening inside the convenience of the mobile order pay channel, they will get exposed to what we have going on inside the app.”
Despite the negative numbers, Narasimhan said that the company’s reinvention plan “is working” and that in the long-term, there are “significant changes” happening within Starbucks stores. The reinvention plan includes such action items as reaching new customers and growing demand through remodeled stores, menu innovation, increasing store efficiency, lowering wait times, and introducing new value pricing, like the meal deals announced last month. It’s early days though, Narasimhan added, and the fruits of the company’s labor likely won’t be seen until 2025.
“Looking forward, we will continue to use more targeted offers coupled with select pricing actions funded by efficiency initiatives to drive traffic and conversion,” he said. “We plan to leverage permits of paid media acquisition and retention offers to stop the signage and partner education to drive transactions and increase the frequency of visits, with a focus on product launches and continued Starbucks towards member growth.”
Increasing consumer demand is intrinsically linked with improving the employee experience, Starbucks has said, so that continues to be an area of focus, like the new Siren Craft System, which was unveiled last month as a tech-driven system designed to help baristas meet demand. Narasimhan said that the system was rolled out company-wide this week, and Starbucks is also introducing a refit to their espresso machines, which is designed to improve espresso throughput by up to 15%.
Beyond addressing these challenges, Starbucks its stretching its attention between several areas of focus as the company looks to improve its numbers in the long-term. Starbucks is accelerating its store renovation plan, with more than 580 new stores and 800 remodels planned for the rest of the year, with designs meant to meet “underserved demand” in smaller cities and suburban areas, including new equipment and the Siren Craft System.
Starbucks also wants to focus on beverage innovation, particularly with its coffee lineup (though the non-coffee-based beverages with popping pearls introduced last quarter were so popular, they ran out), and meeting delivery demand (the company will be expanding its relationship with GoPuff to 100 delivery-only kitchens across the U.S.).
Beyond this long list of action items, Starbucks also addressed some of the controversies that have been surrounding the coffee chain, including recent mobile app outages, which have disrupted service in many stores. App downtime and service downtime have been a particular issue for the company, as many individual stores struggle to keep up with demand.
“There are 10% of our stores that have the highest customer service outages,” Narasimhan said. “For these 10% stores — that’s less than 1,000 — there's work going on store by store, to look at this combination of process improvements, how we run the stores, as well as looking at our renovation cycle to potentially re-sequence them, in order for us to bring the Siren Systems in an accelerated fashion to help us de-bottleneck these stores.
Finally, Narasimhan confirmed the persistent rumors that Elliott Investment Management has taken a sizable stake in Starbucks, and has been pressuring the struggling chain for representation on the board behind the scenes, which allegedly has not sat well with Starbucks former CEO and current board member Howard Schultz.
“I would like to confirm that Elliott Management is a shareholder in our company, and our conversations to date have been constructive,” Narasimhan said, declining to address the issue further.
Starbucks’ net revenues were down 1% in Q3 to $9.1 billion. The company’s net income for Q3 decreased 7.6% from $1.14 billion or $0.99 per share to $1.05 billion or $0.93 per share. The company opened 526 net new stores in Q3, ending the quarter with 39,477 stores globally.
Contact Joanna Fantozzi at [email protected]
