Investors have dumped their shares of stocks across the restaurant industry. Understandably so. Restaurants are closed in the U.S. and around the world. And there’s not a clear timeline yet on when things will get back to normal. Some things, like fast food and pizza chains, have done reasonably well with takeout and delivery. Still, on average, restaurant sales are way down, as consumers have shifted their food purchases to grocery stores such as Kroger (NYSE:KR). Starbucks (NASDAQ:SBUX) and SBUX stock have dropped along with the industry.
In fact, Starbucks fell from a 52-week high of $100 to just $50 at the height of the recent crash, making for a rapid 50% decline.
Even after the recent recovery, Starbucks is down 25% from its recent peak. As such, opportunistic investors can still take advantage of the weakness in the coffee chain’s shares.
SBUX Stock Will Form a Stronger Habit
Before the coronavirus shutdown, I was a twice-a-day Starbucks patron – a four-shot latte in the morning and a triple espresso in the afternoon. Now I’m a none-a-day customer since all the local outlets are closed.
But believe me: As soon as Starbucks reopens its stores nationwide, I’ll be resuming my habit. The company’s outstanding coffee is only one of the reasons why. Technology is the other reason. I’m as addicted to the Starbucks mobile app as I am to its coffee. I just open the app, click on “Favorites,” hit “triple espresso,” and walk into the local store five minutes later to pick it up.
This mode of commerce utilized “social distancing” before that even became a thing. No close human interaction required. This mobile ordering capacity is one big reason why I expect the company to flourish in the post-COVID-19 world.
Already, nearly two-thirds of Starbucks customers use the company’s app, only about 20% use it to place orders in advance. I expect that percentage to soar. Furthermore, 60% of Starbucks outlets include a drive-thru feature, which provides a second mode of low-interaction coffee-buying.
Small Business Can’t Compete
A major trend stemming from the coronavirus crisis is that the big will get bigger, and smaller companies will struggle. It’s simply a fact of life. Small businesses are fighting to just to get by, and many won’t make it through this crisis. Meanwhile Starbucks, as of its last quarterly report, had more than $4 billion in cash on hand.
That means Starbucks has a huge advantage in adjusting its business to the realities of a post-coronavirus world. It can quickly change its app, payment methods, store layout, and whatever else is necessary to provide a clean, welcoming, and hospitable environment. The neighborhood coffee shop or local chain will struggle to keep up.
A Major Rival Stumbles
Speaking of struggling to compete, one of Starbucks’ major Chinese competitors just took a major blow. Investors were fretting about an apparent rival, Luckin Coffee (NASDAQ:LK). Luckin was building thousands of stores across China. It had a great mobile app and offered huge discounts on its drinks. All that could have threatened Starbucks’ profit margins in China. However, Luckin recently confessed to accounting fraud, and the company’s stock has been indefinitely halted.
It seems that Luckin will lose access to new sources of outside capital, and as such, it will no longer serve as a major threat to Starbucks’ dominant market position in China. This is vital to the Seattle company’s long-term growth story, as Starbucks has huge plans in China. It already has 4,200 stores there, including locations in 177 different cities. And once COVID-19 passes, there’s much room to grow beyond that.
SBUX Stock Verdict
The stock market has moved past its initial panic phase. Now, investors are becoming more discriminating. Truly dominant, well-capitalized companies will make a decisive break from their financially troubled counterparts. This divergence is already underway, but it will become even more pronounced in the weeks ahead. Companies like Starbucks will be at the front of the pack as investors focus their attention on quality companies.
Near-term, Starbucks will suffer a huge hit to sales. But sales should recover and resume growing soon, just as they have in China. Starbucks reports that sales in China have increased for seven straight weeks, and CEO Kevin Johnson said that Starbucks is seeing “encouraging signs of recovery in China.” Investors will get the memo and buy both Starbucks stock and coffee again soon.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.