Never let it be said Starbucks (NASDAQ:SBUX) can’t come up with excuses why it’s not performing as well as it has in the past. Within the past few days, the company has suggested slowing delivery-based business in China, higher labor costs, healthier diets and lackluster innovation all contributed to the lowering of an already-tepid growth outlook for the current quarter.
And, if we’re being intellectually honest, there’s some legitimacy in all four explanations as at least partial reasons the coffee shop chain is hitting a wall. In that same vein of intellectual honesty though, there’s a much bigger reason slowing sales led to a two-day, 11% plunge from SBUX stock that dragged it to multi-month lows.
That reason? Too many stores against a backdrop of waning interest in premium coffees and specialty drinks.
What He Said
After Tuesday’s closing bell rang, Starbucks released a less-than-thrilling outlook for the quarter currently underway. All told, same-store sales will only grow on the order of 1%, below analysts’ outlook for a 1.5% improvement. Perhaps even more alarming to SBUX stock owners was news that the company plans on closing approximately 150 stores this year — or three times as many as it normally would — as it simultaneously slows its new-store development plans.
President and CEO Kevin Johnson said in a company statement, “While certain demand headwinds are transitory, and some of our cost increases are appropriate investments for the future, our recent performance does not reflect the potential of our exceptional brand and is not acceptable.”
In the subsequent conference call, Johnson argued that sales of certain drinks “are oftentimes more indulgent beverages — higher in sugar, higher in calories,” which were falling out of favor as consumers become more health-conscious.
Johnson lamented the bulk of the planned store closures were “in major metro areas where increases in wage and occupancy, and other requirements or things that were making those stores unprofitable.”
And, Johnson opined of China’s slow-down in delivered coffee “was driven by the government to want to stop having third parties do that because it was creating annoyances.”
Johnson went on to suggest “we are less differentiated on that (slushy coffee) beverage than we are on our core beverages around coffee, espresso and tea. So that category is declining.”
OK, fair enough. Sometimes bad stuff happens.
What if, however, those problems weren’t actually the problems, but the symptoms of an even bigger challenge ahead? For that matter, shouldn’t the company have foreseen these headwinds, and addressed them before they started to take a toll? (Spoiler alert: Yes, Starbucks should have seen it coming. That’s what a company’s top brass gets paid big bucks for.)
Sometimes it’s easy to miss the forest for the trees.
What’s been happening — really been happening — to Starbucks is akin to what happened to the brick-and-mortar retailing industry over the course of the past 20 years. In a superficial sense Amazon.com (NASDAQ:AMZN) gets the credit/blame for the demise of retailers like Sears (NASDAQ:SHLD), and there’s some truth to that premise. But, Sears and its peers were more than content to let Amazon siphon off business, and did little to stop it.
But, the Amazon-effect is more than just the convenience and lower prices it brings to the mix. Retailers like Sears lost sight of the fact that shopping is also a form of entertainment. In the 80s and even into the 90s, a trip to the mall was an adventure. Overly secure in their positions as shopping venues though, too many retailers slowly and collectively made the mall a depressing, difficult place to visit.
In other words, the retailing market changed. Most retailers didn’t change with it.
In a similar sense, while Starbucks has spent the past several years expanding its menu and (literally) inventing new drinks, it largely lost sight of the fact that its biggest draw wasn’t so much the drinks, but the experience of stepping foot into one of its stores for a relaxing time — alone, or with friends. In the quest for growth, Starbucks found new ways to crank out drinks at a brisk pace, becoming little more than a machine.
To that end, it’s not terribly surprising consumers are losing interest as the company’s stores continue to lose their charm.
Even to the extent Starbucks still has some charm, however, consumers themselves have changed. The company’s target demographic (younger and slightly more affluent than average) places less value on the premium label itself and is just as content with similar drinks sold by more accessible venues like McDonald’s (NYSE:MCD).
Bottom Line for SBUX Stock
Is Starbucks doomed? No, its brand name is still a strong one, even if it’s having a tougher time selling its products to increasingly-distracted consumers. And, if you’ve not yet, there’s little value in shedding your SBUX stock now; the damage has been done.
Still, while Johnson has identified some specific things that are working against the company and has proposed solutions, it’s not clear anyone among Starbucks’ executive ranks fully understands how the marketplace has changed over the course of the past several years. Until investors start to see a complete rethinking of everything it is, don’t be surprised if the company continues to struggle.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.