Continue to Site

    Starbucks CEO: Our Recent Performance is Not Acceptable

  • The chain plans to close about 150 underperforming company-run stores and slow licensed growth in 2019.

    Starbucks
    Starbucks has a lot of changes in store. Can they accelerate U.S. sales?

    It’s probably an exaggeration to say these are uncertain times at Starbucks. But they surely have been interesting. Now, with Howard Schultz set to exit the company’s board of directors June 26, the coffee giant is forging ahead without the iconic figure for the first time in 40 years.

    READ MORE: Starbucks aims to engage the "occasional" customer.

    Starbucks discussed some of its future targets Tuesday afternoon at the Oppenheimer 18th Annual Consumer Conference in Boston. Some of the news was striking. Among the lead points: Starbucks’ plan to shutter underperforming company stores at a rate triple its average, a slowdown of licensed U.S. growth, and the anticipation for the lowest comparable same-store sales growth since the chain started sharing figures on its investor site in 2011. Bloomberg reports it's the weakest comps growth in nine years.

    Starbucks said it is expecting 1 percent same-store sales growth globally in Q3. Wall Street was calling for 3 percent. The figures below illustrate the past 31 quarters. These are all compared to the prior-year period.

    2018

    • Q3: 1 percent (predicted)
    • Q2: 2 percent
    • Q1: 2 percent

    2017

    • Q4: 2 percent
    • Q3: 4 percent
    • Q2: 3 percent
    • Q1: 3 percent

    2016

    • Q4: 4 percent
    • Q3: 4 percent
    • Q2: 6 percent
    • Q1: 8 percent

    2015

    • Q4: 8 percent
    • Q3: 7 percent
    • Q2: 7 percent
    • Q1: 5 percent

    2014

    • Q4: 5 percent
    • Q3: 6 percent
    • Q2: 6 percent
    • Q1: 5 percent

    2013

    • Q4: 7 percent
    • Q3: 8 percent
    • Q2: 6 percent
    • Q1: 6 percent

    2012

    • Q4: 6 percent
    • Q3: 6 percent
    • Q2: 7 percent
    • Q1: 9 percent

    2011

    • Q4: 9 percent
    • Q3: 8 percent
    • Q2: 7 percent
    • Q1: 7 percent

    Another understatement would be to say Starbucks is running the same business as it was in 2011. For example, in Q2, Starbucks' 2 percent comps growth was driven by a 3 percent hike in average ticket with flat transactions. CEO and president Kevin Johnson acknowledged the need for the brand to ratchet up results.

    “While certain demand headwinds are transitory, and some of our cost increases are appropriate investments for the future, our recent performance does not reflect the potential of our exceptional brand and is not acceptable,” Johnson said.

    What’s also different: the Starbucks customer. Today’s dynamic is far removed from the days when guests would walk in, wait in line, and stick around a while—with no expectation for anything different. While that still happens, on all fronts, there’s a growing convenience factor at play that has challenged Starbucks’ U.S. business in recent years.

    A shift in growth

    Starbucks said it is “optimizing its U.S. store portfolio at a more rapid pace” in fiscal 2019. This breaks down as follows:

    • Starbucks will shift new company-operated store growth to underpenetrated markets.
    • The chain will slow licensed growth, it says.
    • Starbucks expects to close underperforming company-operated restaurants in its mostly densely penetrated markets to about 150 restaurants in 2019, up from a historical average of up to 50 annually. This will result in a slightly lower growth rate in net new company-operated stores, Starbucks said. Johnson, on a conference call with analysts, said the overall number of stores would continue to increase, but it would be more focused. These target growth regions include the Midwest and South, where Starbucks has less density than other areas, such as New York City and Washington, D.C. This mirrors the brand's push about a decade ago to close units following years of aggressive growth that slowed comps growth.
    • The chain is also “actively exploring strategic options to license company-operated stores in other appropriate markets.”

    Starbucks opened 468 net new stores in Q2 to bring the total to 28,209 stores across 76 markets. The company has previously set a target of 2,300 net new units globally in fiscal 2018. Starbucks said in May that it plans to open roughly 600 Starbucks per year in China, or a restaurant every 15 hours for five years, to bring the brand to about 100 new cities across Mainland China by the end of 2022.

    “The company’s streamlining initiatives will enable greater agility in adapting more quickly to changes in consumer preferences,” Starbucks said in a release. “This includes accelerating product innovation around core beverages while leveraging the growing tea and refreshment category, as well as consumer behavior trends towards health and wellness.”

    Let’s go digital

    The brand said Tuesday it expects major digital initiatives to contribute about 1–2 percent comparable sales growth in 2019.

    Starbucks has a redesigned Starbucks Rewards program that provides customers more choice around redemptions and payment, as well as expanded personalization capabilities for customers that have a digital relationship with the company. Just last week (June 11) Starbucks announced that its Rewards Visa Prepaid Card—the second co-branded product introduced by Starbucks and Chase this year—was now available. It’s the first prepaid or debit product where customers can earn Stars outside of Starbucks. It’s the only general purpose reloadable prepaid product that allows guests to earn Stars for purchases made with the card, with no monthly, annual or reload feeds.

    The card integrates directly with the Starbucks Rewards loyalty program, and customers who use the card automatically receive Gold Status, earn Stars with spend, and become eligible for birthday rewards, free food, and beverage items from Starbucks. Earlier in the year, they launched a Starbucks Rewards Visa Card.

    Starbucks said it has added 5 million new digitally registered customers since April 2018, and 2 million active Starbucks Rewards members, year-over-year, to 15 million, an increase of 13 percent from the previous year.

    “We must move faster to address the more rapidly changing preferences and needs of our customers,” Johnson added. “Over the past year we have taken several actions to streamline the company, positioning us to increase our innovation agility as an organization and enhance focus on our core value drivers which serve as the foundation to re-accelerate growth and create long-term shareholder value.”

    In the past quarter, Rewards member spend increased to 39 percent of U.S. company-operated sales. Mobile Order and Pay represented 12 percent of U.S. company-operated transactions.

    Starbucks is also growing its digital flywheel and engaging “occasional guests” through WiFi signup in stores, and opening mobile order and pay to all customers. Its revised Happy Hour also engaged guests directly through digital with single-use coupons that asked customers to sign up through the Starbucks app or directly through email. This allowed Starbucks to target customers outside of its Rewards program with direct deals.

    Global reach

    Starbucks said it continues to progress toward closure of the Global Coffee Alliance transaction with Nestlé, which is intended to accelerate its consumer package goods and foodservice exposure by adding opportunity for another 5 million points of presence in 189 countries. The deal, announced in May, has Nestlé paying Starbucks $7.15 billion for the rights to sell, market, and distribute Starbucks, Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA, and Torrefazione Italia packaged coffee and tea in all global at-home and away-from-home channels. Nestlé is paying Starbucks $7.15 billion in closing consideration, and Starbucks, with a focus on long-term shareholder value creation, will retain a significant stake as a licensor and supplier of roast and ground and other products.

    Starbucks’ brand portfolio will also be represented on Nestlé’s single-serve capsule systems. The deal is expected to close summer or early fall, and excludes ready-to-drink coffee, tea, and juice products.

    Shareholder surge

    The company said, “with the execution of the company’s strategic priorities expected to improve the return profile of the business,” that it expects to return about $25 billion in cash to shareholders in the form of share buybacks and dividends through full-year 2020. This represents a $10 billion increase from the cash return target announced in November.

    Starbucks added that it plans to partner with an external consultant to drive speed and leverage best practices in identifying areas of opportunity in regards to G&A efficiency. In support of an accelerated return of cash to shareholders, the Board of Directors approved a 20 percent increase in the company’s regular quarterly dividend and declared a cash dividend of $0.36 per share payable on August 24, 2018, to shareholders of record as of August 9, 2018.

    Read More