As Starbucks reported its second quarter in a row of negative same-store sales this week — a rarity for the brand — the coffee chain’s sales and traffic challenges offer up two possible causes: Starbucks CEO Laxman Narasimhan places the blame mainly on lower consumer spending, and many analysts agree. After all, Starbucks isn’t the only brand that’s struggling: McDonald’s’ sales softened this quarter too, with weaker consumer spending.
But critics of Starbucks’ new leadership — including the company’s founder and former CEO Howard Schultz — have called out Starbucks for overcomplicating its operations and trying out too many solutions at once while under pressure after a leadership change. These whirlwind changes include a more crowded LTO calendar (which adds new SKUs to store operations like the boba-esque popping pearls), meal deals, store renovations, new store equipment, and the Siren Craft System. Narasimhan also needs to navigate negotiating with the growing union movement and address the challenge from activist investor, Elliott Management, which could pose a power struggle at the top of the organization.
“While Laxman Narasimhan is trying to reorganize the senior leadership team, one key issue is a loss of confidence in leadership,” Phil Kafarakis, president and CEO of the International Foodservice Manufacturers Association, said. “He has a newly arrived activist investor. While that reassured the markets, this investor has presented an entire laundry list of things they want Narasimhan to do. If there's an emergency out there, Starbucks is up against it: union problems, technology, menu, pricing, operations, promotions, and of course sky-high commodity inflation with ingredients like cocoa and cinnamon.”
So, which of these is the main culprit? The challenging consumer environment or Starbucks’ complex and unwieldy operational strategy? The answer is probably a little bit of both.
And while Starbucks can’t control the macroeconomic circumstances that led customers to cut back on their non-essential expenditures, the company can simplify its menu and operations, and pivot toward focusing on everyday value. After all, it’s not like all sectors are losing out on customer purchasing decisions. According to recent Technomic data, Starbucks is lagging behind in snacking and non-meal occasions, as compared with other coffee chains. Starbucks’ share of customer visits during these occasions declined from 65% to 58% between 2021 and 2024. Also, intent to return is declining among Starbucks’ more regular guests (those who visit once a month or more) and has shrunk from 43% to 34% of customers over the past three years. Starbucks’ competitors also saw a small dip among more frequent guests, but not quite as dramatic of a shift (a decline of 4% from 2021 to 2024).
“Given that promotions in the U.S. market are so ubiquitous, it will eventually become a problem,” Kafarakis said. “U.S. consumers are concerned about their wallets, which is slowing down Starbucks’ performance here. And while leadership is trying to fix things, they’re still dealing with consumer sentiment that's really pushing on value. That’s challenging both from within and outside the company.”
One demographic Starbucks has been struggling to reach recently is surprisingly Gen Z, between this younger generation’s fiscal challenges, as well as some politically motivated boycotts of Starbucks as it relates to the company’s clashes with unions and friction caused by the Israeli-Palestinian conflict.
“Starbucks has visitation problems with Gen Z [specifically 18-24-year-olds] and with those 55 and up, while they are stronger in the middle,” John Gordon, restaurant analyst and founder of Pacific Management Consulting Group, said. “The reasons are the drinks aren’t affordable for what you get, and Gen Z had a notable problem with Starbucks’ political views…The union has salted some of that.”
One of Starbucks’ strategies should be focused on fixing its perception problem, whether that’s with consumers perceiving that the brand’s offerings are not a good value, or Gen Z’s negative political perception of the brand.
“The majority of the U.S. traffic decline was driven by younger, non-rewards customers in the afternoon,” Peter Saleh, an analyst with BTIG, said in his report on Starbucks’ recent earnings. “We note that non-rewards customers account for 40% of revenue, implying a near double-digit decline in this customer base.”
Analysts noted that Starbucks’ new meal deals, which were introduced in June, provided some traffic lift for the brand and resonated with customers. However, since these meal deals are limited time offers, Starbucks needs to maintain that momentum by focusing long-term both on perception of brand value and the brands core menu.
While Starbucks tried to hop on trends like boba and energy drinks, Gordon noted that the company was often late to the party, which would lessen the impact of these new menu items.
“In the long term, they have to address the notion of what their core menu is going to do,” Kafarakis said. “What does the loyal Starbucks customer want from that menu? They also have to take out some of the complexity. A refresh is also needed with regard to the incentives that go to loyal customers, so that they keep coming back on a frequent basis, the way they previously did.”
This sentiment echoes the advice of Schultz, who posted his opinion on Starbucks’ struggles last quarter on LinkedIn, warning that the company “should not try to do everything at once” and that the company needs to be laser-focused on improving the customer experience (including improved wait times and fewer downtimes on the mobile app) instead of getting distracted by other levers they could pull:
“The stores require a maniacal focus on the customer experience, through the eyes of a merchant,” Schultz wrote. “The answer does not lie in data, but in the stores.”
In short, the answer to improving Starbucks in the long-term is to simplify its current operations strategy: make it less frustrating for customers to place and pick up mobile orders, focus on the core menu instead of a quickly churning LTO cycle, and emphasize value. If customers have a friction-free experience, perception of value might go up, even without introducing additional discounting into the mix.
Contact Joanna at [email protected]
