I’ve always been critical of Starbucks (SBUX).
I remember covering the company as a stock analyst and spending weeks studying the workflow of each department in the stores. It was an extreme move that didn’t get support from Starbucks’ management (especially former CEO Howard Schultz), but I was young and didn’t care what management thought, and I believed I had to do it to make the right call on the stock.
I downgraded Starbucks to a sell rating in January 2014, citing how its increasingly complex operating system was hurting profit margins, sales potential and employee relations, and then wrote an opinion piece for CNBC leaning into the call in the hopes that investors wouldn’t take a hit. This also failed to win any fans for Starbucks.
Over a decade later, my job has changed. I have evolved (though in a different way, and I’m still as passionate as I was in 2014). I no longer drink 15 cups of coffee a day (including one energy drink). But as I think about Starbucks’ awful, awful earnings report last night (a by-product of a terrible quarter), and watch its stock plummet 12% premarket (that’s Starbucks!), I realize that Starbucks is emulating the company I remember from 2014: the company throwing 97 pieces of gum at the wall in the hopes that something will stick.
And ad-hoc thinking from management is not good for shareholders.
Here’s what I didn’t like about the quarter and the conference call:
Their new products, such as Lavender Latte, aren’t being 100% accepted by consumers. Why? Like many new products launched recently, it doesn’t taste good (if you try it, it’s not good!). What’s going on in the R&D labs?
The company is stumped about what to do to get back to steady sales growth. It’s now trying to launch a beaded drink to add texture and compete with bubble tea shops. At the same time, it’s also launching zero-sugar products, energy drinks, and tomato and mozzarella sandwiches. All of this could be a management nightmare, including conflicting relationships with overworked store staff, and the products may not resonate with consumers. If you want an energy drink, you’ll go to the refrigerated section of 7-Eleven.
The company is making a bigger push to cater to its evening crowd. Why? We don’t drink coffee before bed, and we don’t go to Starbucks for happy hour at work. Starbucks is happy to give us two cups of coffee quickly (preferably at a discount) and without it tasting burnt before noon.
China’s performance has plummeted amid price cuts.
While McDonald’s (MCD) coffee is surprisingly good, the company isn’t offering enough value to occasional, cost-conscious shoppers who don’t see the need to spend $7 on an iced coffee at Starbucks.
Jefferies analyst Andy Barish noted this morning:
“There are many factors at play here, including consumers’ reluctance to pay more at discretionary restaurants, but we believe recent menu innovations (Lavender, Oleato) have simply not been well-received, despite management citing successes. Churn rates from the second quarter through April indicate continued headwinds despite the launch of Lavender late in the quarter. We are also skeptical of new products planned for this year (Pearl, Energy) and believe it would be prudent to refocus on core menu and other drivers – value, promotions, loyalty, operational improvements and marketing – which appear to be well-received, all else considered.”
Barish is right.
CEO Lakshman Narasimhan has officially been in the company for a year now, and every quarter since has been disappointing, with each quarter worse than the last. Narasimhan and his team have offered a variety of excuses, including blaming bad weather for last night’s conference call.
Ultimately, Narasimhan’s honeymoon is over, and he now finds himself in a tough spot: If the company doesn’t stabilize after a series of new initiatives this summer, he may have to take his favorite Starbucks coffee, Doppio Espresso Macchiato, out of the Seattle headquarters in 2025 and take a different role elsewhere.