How does the old saying go? A picture is worth a thousand words? If that’s true (and it usually is), then owners of coffeehouse chain Starbucks Corporation (NASDAQ:SBUX) may want prepare for the bitter aftertaste of seeing a picture most of them know is out there, but have thus far been able to ignore. See, that picture makes it crystal clear that Starbucks’ growth is slowing down, and it’s only a matter of time before that reality is reflected in SBUX stock.
But new initiatives will offset the impact of a saturated — and now oversaturated — market? Maybe.
However, that’s an optimistic viewpoint more rooted in wishful thinking than a plausible outcome.
Starbucks Stock: The Numbers Don’t Lie
Granted, it’s tough to wave a red flag for SBUX stock here in the shadow of the 14% advance it has mustered since its Nov. 7 low. Take a step back, however, and sip in the fact that even with that big gain in less than one month’s time, Starbucks shares are still down 5% since this same day a year earlier. The S&P 500, for comparison, is up nearly 5% for the same timeframe.
What gives? Broadly speaking, SBUX is spending relatively more for relatively less growth. Take a look.
In its defense, simple mathematics makes it increasingly difficult to show the same year-over-year growth rates, which would require increasingly larger absolute growth. The dollars-growth pace could remain steady, and over time, the percentage-growth pace is going to taper off. Never even mind the fact that the more SBUX stock has grown in the past, the more difficult it becomes to carve out new growth in the future.
On the other hand, the reason for slowing growth is irrelevant. Starbucks shareholders have become accustomed to big time forward progress. If it can’t deliver it, the premium pricing SBUX stock once commanded does need to be reevaluated.
But What About …
Yes, at least part of the slowing growth rate is a function of saturation — there really doesn’t need to be a Starbucks on every single metropolitan street corner. But, to maintain revenue growth, SBUX has put a stronger focus on lateral expansion and greater marketability.
Case in point: The company’s mobile ordering and mobile payment initiative.
Consumers are undeniably making their smartphones a true digital assistant. Organizations that make ordering and paying for goods a mere tap of the screen away are better positioned to draw — and keep — a nice funnel of customers coming in their doors. Last quarter, 7% of Starbucks tickets were ordered and paid for with a mobile device.
Another key growth driver for SBUX stock is food.
At the end of 2014, Starbucks announced it was aiming to double its food sales within five years; it has been particularly focused on the lunch crowd, and those patrons have enjoyed the robust improvement in each stores’ food choices.
And of course, the unveiling of its own Teavana brand of teas was expected to drive big growth, especially in China … a market that was once viewed as a crucial piece of the company’s growth story.
Yet, for all the initiatives Starbucks has taken on to drive lateral growth when there was no geographic growth to readily tap into, the mere 4% same-store sales growth reported for its most recent quarter is the slowest pace the company has reported in 25 quarters. It was also the second-consecutive slowdown in same-store sales growth.
COO Kevin Johnson dismissed it as a one-time stumble caused by economic concerns. But, the company has done better in worse environments.
Bottom Line for SBUX Stock
Simply put, all the initiative to diversify its product offerings as a means of growing revenue aren’t getting nearly enough traction.
It’s surprising, too, considering higher-end coffee drinks are more popular this year than ever before, and millennials view coffee as a form of entertainment and a means of expression more so than as a simple cup of java.
Cannibalization is a partial possible explanation of Starbucks’ headwind, but more realistically, it’s an indication the next evolution in coffee drinking takes fans beyond SBUX to even more sophisticated choices for a wide swath of drinkers. That, and/or consumers are scaling back to more reasonably priced choices … especially now that Starbucks cranked up its prices just in time for the holidays.
Yes, SBUX can (and intends to) keep adding more stores as a means of driving growth. That’s the costliest way of posting sales growth though, especially not knowing if the company’s increasingly larger product mix is worth the trouble. It sure hasn’t been yet.
Whatever the case, while there’s no denying SBUX stock had a good run, its best days may be behind it. The company is struggling to remain as relevant as it has been in the past now that times have changed … again.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
