Starbucks' comparable store sales have decreased as a result of a difficult business climate and fewer patrons. In the first quarter, global comps fell 4%, with North American comps down 4% and overseas comps falling 4%. A 2% drop in comparable transactions and a 4% drop in average tickets caused a 6% drop in comparable store sales in China. In addition, the business is having difficulties in Southeast Asia, the Middle East, and several regions of Europe. The business expects these challenges to continue for a while.
Investment Upsides
Strong Brand Position: Starbucks is one of the most recognized coffee brands in the world. From espresso to specialty roast and ground coffee to premium single-serve market, Starbucks commands authority and a leading position in all coffee segments. Further, management focuses on increasing global market share by judiciously opening stores in new and existing markets, remodeling existing stores, deploying technology, controlling costs and aggressive product innovation and brand building.
Starbucks' focus on operational excellence, backed by a reinvention plan, has resulted in significant improvements. During the first quarter of fiscal 2025, Starbucks swiftly realigned its business, mission and marketing efforts to reinforce its position as a premier coffee brand. The company reduced reliance on discount-driven promotions, resulting in a 40% decline in discounted transactions year over year. Additionally, Starbucks eliminated extra charges for non-dairy milk and customizations while identifying further steps to enhance pricing transparency for customers. As part of this effort, the company recently launched its "Coffee Forward" marketing campaign in the Unites States, aimed at broadening its customer reach.
To strengthen its positioning as a community hub, Starbucks is reintroducing condiment bars across all U.S. company-operated stores. The company rolled out ceramic mugs, handwritten cup notes and new service standards to elevate the in-store experience. Also, it has expanded free refills on brewed coffee and tea to non-Starbucks Rewards customers. The company aims to focus on reducing the number of new stores and renovations in fiscal year 2025 and accommodate redesigning while also unlocking capital to support its broader turnaround.
Global Coffee Alliance With Nestle Expands Starbucks' Channel Development Footprint: Starbucks and the Swiss-based food giant Nestle SA have teamed up to revitalize their coffee domains. Starbucks and Nestle announced a global marketing deal that gives the latter "perpetual rights" to market Starbucks' products globally outside its coffee shops. This alliance will expand the global reach of Starbucks brands in the consumer-packaged goods (CPG') and food service categories to nearly 190 countries around the world. The Global Coffee Alliance with Nestle has been a powerful partnership and the company finished the year 2020 as the number one coffee brand across the entire coffee category. The company has increased the footprint of its partnership with Nestle across 81 markets. On Jan. 13, 2023, Starbucks sold the assets (mainly intellectual properties) of Seattle's Best Coffee brand to Nestle for $110.0 million. In September 2023, it celebrated the five-year partnership of the Global Coffee Alliance with Nestle. In fourth-quarter fiscal 2023, the Global Coffee Alliance contributed to the growth of the Channel Development segment's revenues.
Emphasis on China: Over the years, Starbucks experienced different growth phases in China. It focuses on various strategic partnerships in technology, real estate and supply chain to enhance its business capabilities. Furthermore, improving customer experience with innovative new store designs and upgraded product offerings, and supply-chain efficiencies are likely to bode well.
In its China strategy, Starbucks focused on three main aspects. Firstly, it introduced more coffee options tailored to local preferences and boosted its social media presence through influences and partnerships, enhancing customer engagement. Secondly, the company invested in technology to expand its omni-channel capabilities, improving efficiency in the supply chain and stores. Lastly, it prioritized opening new stores in smaller markets for better economics. The company remains confident in its long-term growth strategy.
The store count as of Dec. 29, 2024, in China, was 7,596, indicating 10% year-over-year growth. With the ongoing store count growth, Starbucks sees abundant growth opportunities, particularly as populations continue to move to suburban and rural areas. In China, cash-on-cash returns from expanding into lower-tier cities have been strong, demonstrating solid returns. Given the remarkable financial returns from the new stores, it is confident in reaching its goal of 9,000 stores in China by 2025.
Looking ahead, Starbucks envisions higher growth and margin opportunities in the region. The company is building the next generation of Starbucks, grounded with premium brands and incorporating more digital, innovative and locally relevant elements. The company is in the early stages of exploring strategic partnerships to further enhance its competitive position, accelerate growth and drive long-term success.
Robust Digitalization: The company is focusing on digitalization to drive growth. The company's partnership with Alibaba to provide a seamless Starbucks Experience continues to drive growth in China. Starbucks has introduced its mobile order and pay feature Starbucks Now to multiple platforms in the Alibaba Digital Economy, which includes Taobao, Amap, Koubei and Alipay. The company made progress concerning personalized digital relationships to expand its reach with members. This includes program enhancements like Stars for Everyone. Starbucks initiated payment partnerships with PayPal and Bakkt, thereby allowing customers to reload their Starbucks cards through a range of cryptocurrencies (including Bitcoin and Ethereum) coupled with the option of converting digital currencies to physical currency. Notably, the company is exploring the blockchain platform for ways to connect the Starbucks Rewards program with other merchant rewards programs coupled with the motive of tokenization of stars. The initiative paves a path for the exchange of value across brands, enhanced digital services as well as swapping of other loyalty points for stars. To support this initiative, the company launched the Canadian loyalty program with Air Canada. Going forward, the company is likely to highlight this format as it is likely to serve as the foundation for a new modern payment that aligns expenses with the value received by customers and merchants.
Starbucks is piloting a new in-store prioritization algorithm and exploring additional technology investments to optimize order sequencing and improve operational efficiency. The company is also advancing initiatives that leverage the strength of its mobile app, including the development of a capacity-based time slot model that enables customers to schedule mobile orders. A midyear update to the Starbucks app will likely streamline customization options, enhance upfront pricing clarity and introduce real-time price adjustments as customers modify their beverages. Additionally, the company plans to fully implement digital menu boards across all U.S. company-owned stores within 18 months. These enhancements aim to improve customer experience by making menu offerings clearer and highlighting customization options more effectively.
SBUX believes that enhancements to the digital experience and more effortless ordering will continue to drive Starbucks Rewards membership over time. As customers increase their frequency and spending, their engagement across channels will grow, leading to enhanced value.
Focus on Innovation: Starbucks is strengthening its product portfolio with significant innovation around beverages, refreshments, health and wellness, tea and core food offerings. Starbucks is leaning toward fast-growing categories like Cold Brew, Draft Nitro beverages, and plant-based modifiers, including almond, coconut, and soy milk alternatives. Apart from the numerous beverage innovations, Starbucks has also been making an effort to offer more nutritional and healthy products to its customers. Starbucks' collaboration with Beyond Meat to roll out a plant-based lunch menu in China is a testament to the same. Now Starbucks customers can enjoy pasta and lasagna made utilizing Beyond Meat's plant-based beef products.
Considering various developments regarding its menu offerings, Starbucks highlighted that starting from the holiday launch on Nov. 7, 2024, it will be eliminating the upcharge for non-dairy kinds of milk at the owned and operated North American cafes. This noteworthy customization follows the customers' favorite customization of an extra shot of Espresso. The new change will result in customers paying 10% less or more when choosing a non-dairy milk type. The company is also investing in its customers with the intent of not increasing menu prices at company-owned and operated stores in North America through fiscal year 2025.
The company's focus on reinforcing its brand identity has already begun yielding results, with a noticeable shift in sales mix toward core coffee and espresso beverages. These categories outperformed expectations and offset weaker-than-anticipated holiday promotions. To improve operational efficiency and consistency, Starbucks has streamlined its menu, implementing late-stage simplifications to its holiday lineup. Moving forward, the company aims to introduce fewer but more premium beverage and food offerings through a structured innovation process.
In the coming months, Starbucks plans to reduce beverage and food stock-keeping units (SKUs) by approximately 30% by the end of fiscal 2025. This initiative is designed to enhance operational efficiency while fostering innovation in response to evolving customer preferences. Starbucks also intends to leverage insights from its highly engaged baristas, as seen with the successful launch of its Lavender lineup. Additionally, the company remains committed to capitalizing on cultural trends, as demonstrated by the popularity of the Dubai Matcha offering.
The Summer-Berry Starbucks Refreshers beverages with Pearls and newly formulated iced coffee received positive feedback upon launch. Cold espresso innovations continued to drive platform growth, up 4% year over year as of the third quarter of fiscal 2024. Starbucks launched Milano Duetto whole bean coffee in Milan, ahead of a global launch in October 2024. Recognizing the growing appeal of the energy category, it launched new handcrafted iced energy beverages across U.S. stores. In February 2023, the company launched the Starbucks Oleato range of beverages, available in about 650 stores across Italy, Japan and the United States. The range of beverages received a fair amount of success, courtesy of which the company plans to expand its availability in more markets in the coming period. Meanwhile, the company's Reserve Roastery and Tasting Room elevates the coffee experience to the next level, with small-batch super-premium coffee produced using innovative coffee-brewing techniques.
The company believes that product offerings, including the return of pumpkin spice, combined with supporting marketing activities and offers, will drive customer interest, demand, and deeper engagement with both new and existing customers through fiscal 2025 and beyond.
Siren Craft Systems Roll Out: The Siren Craft System, whose Phase 1 was introduced by Starbucks in the fiscal third quarter of 2024, is a partner-driven evolution for the ease of operations. Through this system, the company aims to evolve its ways of operating its stores in the United States by focusing on elevating the partner experience and delivering best-in-class customer wait times. Key changes include a new peak time play caller role, strategic investments in partner hours, training, new routines, technology enhancements, and an evolved beverage build process. The company reported significant improvements in performance, throughput, efficiency, and reliability metrics. Backed by the results, Starbucks fully deployed the Siren Craft systems process improvements across all US company-operated stores. The company stated plans to refit espresso machines to improve throughput by up to 15%. It also stated that food throughput enhancements are in the pipeline.
During the fiscal first quarter, the company initiated segmenting stores based on transaction volume and is prioritizing the installation of siren equipment in the highest-quartile locations where it is needed.
Valuation
What Strategic Alliances is Starbucks Pursuing in China
Free Cash Flow
What Strategic Alliances is Starbucks Pursuing in China
DCF
What Strategic Alliances is Starbucks Pursuing in China
Investment Downsides
Comps Decline a Major Concern: Starbucks' comparable store sales have been affected by a challenging operating environment driven by reduced customer traffic. During the fiscal first quarter, global comps declined 4% due to a 6% decline in comparable transactions. Segment-wise, comps in the North America segment declined 4%, due to an 8% fall in comparable transactions, while International comps reduced 4% due to a 2% decline in average tickets. China comparable store sales declined 6%, which was attributed to a 4% decline in average tickets and a 2% fall in comparable transactions. The China market for the company is hurting due to intensified competition and a soft macro environment impacting consumers' sentiments.
Also, challenging consumer environments in the Middle East, Southeast Asia and parts of Europe added to the downside. The company anticipates the headwinds to persist for some time. Margin Declines in Q1: During the fiscal first quarter, the company's operating margin contracted 390 basis points year over year to 11.9%. The decline was mainly due to deleveraging and investments in the Back to Starbucks plan, including store partner wages, benefits and hours, and the removal of the extra charge for non-dairy milk customizations. Going forward, the company remains cautious of continued complex macroeconomic challenges across multiple markets. It expects general and administrative expenses (as a percentage of revenues) in the second quarter to be up year over year due to a hike in several expenses, including near-term restructuring charges, costs to support the organization, and severance pay and related benefits.
Tricky Retail and Consumer Spending Environment in the United States: Being a retail restaurant, Starbucks is dependent on consumer discretionary spending environment. Consumers' propensity to spend largely depends upon the overall macro-economic scenario. Although higher disposable income and increased wages are favoring the industry right now, it can change with the slightest disruption in the economy. The company, therefore, is highly vulnerable to the inconsistent nature of consumer discretionary spending. If it does not make pragmatic use of advanced technologies to innovate across value chains, it has high chances of fading out like many other restaurant retailers.
Guru Activity
What Strategic Alliances is Starbucks Pursuing in China
SBUX has seen a sharp and sudden rise in the volume of shares bought in recent quarters. This was largely driven by the increased dividend SBUX had announced last year and this brought the dividend yield to 2.52%. This is a lucrative passive income opportunity for retail and even for some deep value investors.
Portfolio Management
SBUX is overvalued by a third of its current share price. Portfolio managers need to be watchful of the company's strategic decisions under the new CEO. Starbucks has been concentrating on expanding in China by forming strategic alliances in supply chain, technology, and real estate. The business has expanded its social media presence, built more locations in smaller regions, invested in technology to boost supply chain efficiency, and added more coffee alternatives catered to local tastes. With 7,596 locations in China, Starbucks has grown by 10% annually. Starbucks is sure that it will accomplish its target of 9,000 outlets in China by 2025 because of the excellent cash-on-cash returns from its expansion into lower-tier cities. By adding more digital, creative, and regionally relevant components, the firm is creating the new Starbucks. In order to strengthen its competitive position, spur development, and promote long-term success, it is now investigating strategic alliances.
