Starbucks share price is starting to resemble the taste of their coffee (ie. it’s a little bit shit). Last week investors weren’t too impressed with the announcement of the closure of 150 stores as a strategy against falling sales and decreased foot traffic. That’s three times the stores they normally close each year.

Sales in the current quarter were expected to rise a mere 1% globally, well below the 2.9% analysts were originally predicting. Whilst their business overseas has been booming, US sales growth has essentially stalled. Shares fell about 10% on the back of the announcement, topping out a period of flat share growth over the last three years.

Starbucks Corporation (SBUX) 5 year share growth. Source: Google 26th June 2018.

So what the hell happened? Here’s our key takeaways:

Consumers aren’t drinking as many Frappuccinos.

First you need to understand how important the Frappuccino is to Starbucks. What’s a Frappuccino?  It’s essentially a sugar filled iced coffee topped with whipped cream (which is also trademarked by the company).

Frappuccino’s have traditionally been a big moneymaker for the company. To put this in perspective for every $1 dollar spent at Starbucks in 2015, 14c of this was from Frappuccino sales.

However unfortunately consumers tastes have been changing. We don’t know whether this is due to a move towards healthier options or that consumers want for something new, but the trend away from the drink is clear. Interestedly soda sales in the US have shown a very similar pattern.

Blended Frappuccino year-over-year revenue growth. Source: CNBC.

Starbucks have tried a number of things to combat the fall. For example expanding into healthier options like tea and adding additional food items to the menu.

They’ve even tried to innovate the Frappuccino. Last year they debuted the “Unicorn Frappuccino” for a limited five-day release. Although it looked disgusting, the drink was an instant viral success with younger consumers. More recent options however such as the Crystal Ball or Christmas Tree Frappuccino have fallen flat.

#unicornfrappuccino

There’s now significantly more competition.

Whilst Starbucks had a practically free run of the market a few years ago, the competition has significantly increased. Especially from the likes of McDonald’s – who have been aggressively promoting their (significantly cheaper) coffee and discounted food items.

McDonald’s are giving a Starbucks a run for their money.

There’s too many stores.

Remember that joke that there’s a Starbucks on every corner in the US? It’s actually become true – especially if you live in California or New York. The company has become a victim of their own success and new stores are cannibalising existing store revenue. In 2017 over 62% of stores compete with at least one other Starbucks.

The Simpsons called it 20 years ago.

A string of bad PR.

Starbucks recently faced backlash after two black men were arrested within one of their stores. Their crime? They were waiting for a meeting to begin…

The company apologised for calling the cops on them and closed stores across the network so employees could undergo racial-bias training. The training cost Starbucks millions of dollars, not too mention wasn’t a good look for the company.

Starbucks closed about 8,000 of their stores for two days so employees could undergo racial-bias training.

So are Starbucks doomed?

Probably not.

It is important to note that most fast food companies go through the same teething problems as they grow and expand their footprint (e.g. what we saw a few years ago with McDonalds).

But for all it’s faults Starbucks has two things going for it.

Firstly the company has been quite digital savvy and have invested significantly in tech. Both its mobile payment and digital loyalty program have huge potential for future growth. Currently they have about 15 million active Starbucks Rewards members in their database, which make up about 40% of their current business. Not only does this increase customer loyalty, but it increases in-store productivity and allows the company to personalise it’s marketing efforts.

Secondly Starbucks up-market retail concept “Starbucks Reserve” looks promising. Whilst it’s currently an unproven concept (there’s only 2 stores operating in the US), sales results so-far have been stellar. There’s strong growth potential and it could be a new direction for the brand.

The Starbucks Reserve concept is built around destinational retail, offering premium coffee and food made in-house.

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Author Trent Rigby

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