Starbucks’ stock popped Friday as reports surfaced that Elliott Investment Management built a large stake in the coffee giant. Sources told The Wall Street Journal the activist in recent weeks pushed Starbucks privately on ways to lift its share price. The Journal added the situation was fluid and an agreement could be reached privately.

It’s unclear what Elliott’s demands are or how large its holding is. But there are plenty of changes stirring as Starbucks tries to navigate a tumultuous stretch and operating climate.

The 1977-founded hedge fund, which oversaw $65.5 billion in assets at the end of December, has a long trail in activist campaigns. In recent years, it’s dipped into tech, energy, industrials, transportation, pharma, financials, and media, according to William Blair. While it’s been less involved in consumer-facing brands, it did push Cabela’s for a sale in 2015, which ultimately led to an acquisition by Bass Pro Shops. It was also involved in Barnes & Noble and bought the company in 2019. Additionally, it advised Whitbread to sell Costa Coffee (that happened in 2019), and received a board seat at Etsy in 2024.

William Blair said Elliott’s track record includes the pursuit of board seats, management changes, spinoffs/breakups, share buybacks, and, as mentioned, outright sales. There are also cases where the group has pressured existing management teams to enact internal changes to improve the business.

So what could happen with Starbucks? William Blair feels the lowest-hanging fruit would be to pursue a slower pace of expansion that could free up capital to return to shareholders. The brand was the fastest-growing U.S. restaurant chain by net unit count over the past two years, scaling by 429 and 473 locations in the 2022 and 2023, respectively.

William Blair pointed out any decision to pull back would need to be balanced with the CapEx necessary to redesign domestic cafes to more effectively execute a primarily cold, on-the-go business. The days of Starbucks being a brand rooted in hot drinks served in a “third-place” are mostly gone. Just about a year ago, it shared with investors cold drinks had climbed to 75 percent of sales. As for assets, the company said in May 2022 that 90 percent of go-forward stores would include a drive-thru.

William Blair estimates $1 billion to $1.5 billion of Starbucks’ planned $3 billion CapEx for 2024 owes to new unit development. So this would be a significant reallocation.

The analyst added other potential initiatives could include a sale or spinoff of Starbucks China, “although with significant uncertainty as to what valuation the business would fetch,” and/or senior leadership changes and board seats.

At the end of Q2, stores in the U.S. and China comprised 61 percent of Starbucks’ global portfolio, with 16,600 and 7,093 units, respectively. North America and U.S. comp sales declined 3 percent, driven by a 7 percent drop in traffic, and partially offset by a 4 percent rise in average ticket.

China’s same-store sales fell 11 percent thanks to an 8 percent decline in average ticket and a 4 percent traffic slide. The company cited “slower-than-expected recovery and … fierce competition among value players in the market,” for its challenges. There are 21 million Starbucks Rewards members in China.

The company did mention in Q2 that while it expected to continue lifting its U.S. store count by about 4 percent, China was falling back a point from 13 to 12 percent.

A “left-field” idea, William Blair added, would be for Elliott to try to evolve Starbucks away from primarily company-owned development in favor of licensed. As of March 31, the North America split was 10,827 corporate stores and 7,238 licenses. Internationally, it broke apart as 9,282 company run and 11,604 licensed. Starbucks runs the largest corporate-operated fleet of restaurants in the world.

In the U.S., the next closest was Chipotle at 3,437 year-end 2023 (it doesn’t franchise). Starbucks came in at 9,645 (to go along with 6,701 U.S. licensed stores).

William Blair admitted such a shift could risk the “very underlying fundamentals of Starbucks’ success,” much of which stems from direct oversight of café operations and its willingness to pay up for labor to facilitate a better customer experience.

Moreover, the company said, Starbucks’ doesn’t franchise in the sense many chains do—it licenses to large corporations where company-owned locations are often not feasible, such as grocers or airports.

BTIG analyst Peter Saleh shared some of William Blair’s sentiments on what could be ahead. Namely, around the notions of slower investment or sale of the China business, as well as more aggressive share repurchase, faster implementation of Starbucks’ Siren system, and potentially “another about-face on unionization.”

Saleh estimated Starbucks invests more than $400 million annually in China to generate the low-teens unit growth that’s been reported in recent years, or 20–25 percent of the company’s capital spend. “In our view, slowing development makes more sense than an outright sales,” he said, “as we believe in the long-term potential of China and Starbucks’ company-owned model there.”

The brand has about $3 billion, as noted, in available cash and investments and financial leverage (net debt/EBITDA) of roughly 1.6X. Saleh feels an activist offers the potential to push Starbucks to add modest leverage (0.5–1.0X), raising $3.5 billion to $7 billion and returning that through increased share repurchased over the next year or year and a half. That would represent about 6–10 percent of Starbucks’ current market cap. “We think the higher leverage would be manageable,” Saleh said, “especially if the company slowed development in China.”

MORE: What’s Suddenly Going Wrong at Starbucks?

Regarding igniting its Siren System, Starbucks introduced the platform in September 2022. But it’s been relegated a bit to the backburner by more recent aims. It’s a system that improves throughput by reducing the time it takes to make a Frappuccino by 50 percent and is currently slated to cover about 10 percent of U.S. stores by year-end 2024. “Given that it was described as a major problem-solver and the focal point of the investor day almost two years ago, we expected a more aggressive rollout plan,” Saleh said. “We believe that this investor could push for faster implementation of this system”

The Siren System also cuts the need for workers to open refrigerators while making cold drinks. There are features like a custom ice dispenser, faster blenders, and a milk-dispensing system. The blockbuster, though, is Starbucks’ Clover Vertica system, which can serve a cup of coffee on demand in less than 30 seconds. Each machine is topped by six hoppers and brewers don’t require paper filters.

Previously, every 30 minutes, employees would need to grind coffee beans, batch it in paper filters, and brew. They threw away anything unsold each half hour—a cycle of grind, batch, dump, do over.

In July, Starbucks unveiled a “Siren Craft System” that focuses on easier operations and adds a “Peak Play Caller” position where an employee floats through the store to help as needed. This upgrade doesn’t require any capital and has reportedly bumped peak throughput in early tests (it was live in more than 1,000 units, with plans to expand systemwide by August). There are now fresh routines for popular beverage, like streamlined steps for creating orders, as well as new positions and digital tools to anticipate and meet demand. One key modifications employees helped develop, for instance, was a change in what Starbucks labels “beverage sequencing,” or where milk gets steamed before espresso shots are pulled. Employees through tests realized they could save time by reversing the process and pulling espresso before steaming milk.

An example of the tech mentioned is a new Digital Production Manager tool that allows employees to anticipate bottlenecks and react accordingly.

But to Saleh’s point, the Siren System itself is a more involved and equipment-focused revamp that’s going to take capital and time to develop. Can an activist accelerate it?

With unionization, Saleh wouldn’t be surprised to see an activist bring forth a different perspective. Earlier this year, Starbucks said it would reengage with unions in an effort to strike a contract by year-end. “It is possible the company reverses course on these negotiations, in our view,” he said.

A collation of labor unions in March ended its boardroom battle at Starbucks after the company agreed to work toward reaching agreements. The unionization conversation at Starbucks has roiled since 2021. The Strategic Organizing Center urged investors to elect three of its director candidates to Starbucks’ 11-member board.

Starbucks’ shares on Wall Street have fallen in price about 35 percent since reaching a record mark in July 2021. It’s market value today sits at roughly $90 billion. The stock was down about 22 percent year-to-date before rising roughly 7 percent after The Journal’s report broke Friday.

The company continues to adjust to fresh leadership following CEO Laxman Narasimhan’s ascension into the role last March. He succeeded founder Howard Schultz, who has taken to social media to criticize some of the company’s strategies. When Schultz left his CEO role, Starbucks was worth closer to $115 billion. He still holds about a 2 percent stake in the company and the title of chairman emeritus.

Starbucks is scheduled to report Q3 earnings on July 30.

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