The news: Starbucks’ premium positioning is hampering its recovery as price-sensitive consumers seek cheaper ways to fuel their caffeine habits.
- US same-store sales were flat in the quarter ended September 28, with a 1% decline in comparable transactions offset by a 1% increase in average ticket.
- Overall, the company’s Q4 performance was uneven: While net revenues of $9.6 billion beat estimates for $9.35 billion, earnings were softer than expected due to costs associated with store closures, layoffs, inflation, and its turnaround plan.
The challenges: While this marked the first quarter of global same-store sales growth in nearly two years, CEO Brian Niccol’s “Back to Starbucks” strategy is yet to yield consistent results.
Customers are spending less time in stores. While convincing people to linger is the centerpiece of Niccol’s strategy, the share of people spending 10 minutes or less in a Starbucks café has increased by 3 percentage points since he joined the company, per Placer.ai data reported by Bloomberg. That could reflect shorter wait times—but it could also indicate that efforts to spruce up the in-store experience are falling flat.
Barista morale is low. Stricter dress codes and requirements to write messages on each customer’s coffee cup (or else risk being written up) are heightening a sense of corporate surveillance and increasing already-stretched workloads. The company has not yet reached a deal with unionized workers—triggering criticism from investors and increasing the risk of a strike during Starbucks’ popular Red Cup Day.
Starbucks is underperforming relative to peers. Total visits to Starbucks stores fell 1.7% YoY in Q3, even as overall traffic to coffee chains ticked up by 1.4%, per Placer.ai. Most of the momentum is shifting to chains like Dutch Bros (up 8.8% YoY) and 7 Brew (up 80.4%) that offer innovative flavors and affordability.
Our take: Starbucks’ ongoing weakness can be attributed at least in part to the challenging economic environment, which is driving consumers to cut back on consuming food and drinks outside the home. But its competitors’ ability to drive sales even with the same headwinds suggest that Starbucks’ hold on customer loyalty is slipping.
Whether Starbucks can win back that loyalty will depend on its ability to keep pace with competitors’ menu innovation, as well as its ability to offer value to cash-strapped customers.