Different leaders are pulling it in different directions.
Starbucks (SBUX -2.66%) stock soundly outperformed the market for most of its lifetime, but it has struggled to meet the moment since the pandemic started. It has cycled through three CEOs over the past few years, including the return of leader Howard Schultz. But so far, it remains in limbo, with middling results and no clear path forward.
This can mean one of two things for investors. Starbucks stock is in the dumps right now, down 21% this year while the S&P 500 is up 12%, and it could be an excellent time to buy a winning stock on the dip. Alternatively, Starbucks could be at a dangerous inflection point that won’t necessarily end well. How should investors play this?
No more third meeting place
I won’t bore you with too many numbers, but the short story is that sales were about flat in the 2024 fiscal third quarter (ended June 30), earnings per share were 6% lower than last year, and operating margin was thinner.
Let’s be clear that Starbucks is the largest coffee chain in the world by far, with more than 39,000 stores and $9.1 billion in third-quarter sales. Lots of people love Starbucks and buy there daily. It has nearly 34 million members, 7% more than last year. In fact, many of its woes are due to not being able to match demand. The problems themselves speak to the company’s continued popularity.
That being said, Starbucks is having trouble changing with shifting trends. It’s not the first time. Any company that’s been in operation as long as Starbucks is going to deal with these kinds of issues. Companies often stress being “agile” and “nimble” because large businesses can become unwieldy and turn into dinosaurs if they can’t move fast enough.
Its last successful pivot, about 15 years ago, also came after a period of struggle when it seemed out of touch with consumer demand. It positioned itself as a “third meeting place” after home and work, and it attracted drinkers to sit and enjoy the company’s dining venues and growing, modern menu.
As people embrace remote working and a digital lifestyle, Starbucks has struggled to match digital preferences. People complain of long lines and slow service. It’s been moving toward digital for years, but it’s not there yet.
24 karat coffee
Starbucks is a premium coffee chain and charges accordingly. That’s affecting it negatively in the inflationary environment. Suddenly, a $6 cup of coffee seems unnecessary for people who didn’t think twice about it before. Throw that on top of Starbucks’ other problems, and it’s easy to see why Starbucks is struggling right now.
There are two views on how Starbucks can best move forward. CEO Laxman Narasimhan, who’s only been in charge for about a year, consistently talks about providing “value,” and Starbucks has been offering lots of promotions lately to bring more people in. Although he’s fairly new at Starbucks, Narasimhan has decades of consumer goods experience at companies like PepsiCo and Reckitt. He’s also spent a good amount of the past year visiting different Starbucks locations and filling orders, and he has his ears on the ground.
However, Schultz hasn’t been quiet about his views, which have been correct on many other occasions. He knows Starbucks better than anyone, and he’s doubling down on the idea that Starbucks should maintain its premium branding.
Value doesn’t have to equal cheap
If Starbucks lowers its prices, that could dilute its premium image, and it would need a large-scale rebranding, becoming something else entirely. That’s pretty risky. But if it leans toward premium, will it lose customers? It has plans to open more than 10,000 more stores globally, but is there enough of a market for premium coffee, especially in this environment?
One thing to note is that value doesn’t have to come with a price cut. That’s what luxury retail is. As long as there’s perceived value, people are willing to pay, and the market is huge. It also comes with higher margins. Luxury conglomerate LVMH, for example, is the largest apparel company in the world by sales. Starbucks can continue to target the premium drinker and provide value in quick service, better beverages, upscale food, and so on. Schultz has been urging management to improve customer service, which he sees as the key to regaining consumer trust and turning around.
For investors sitting on the sidelines, I would recommend sitting back and letting this play out before diving in. Starbucks has proved naysayers wrong in the past, and it can do that again. But it has new leadership now, and until there’s more progress, the stock isn’t likely to move much higher.
