I have always been hypercritical of Starbucks (SBUX).
I remember covering the company as a stock analyst and spending weeks inside its stores studying the workflows of each department. It was an extreme exercise that did not win me any fans among Starbucks management (especially with former CEO Howard Schultz), but I was young, didn’t give a damn what management thought, and believed it had to be done to make a proper call on the stock.
I cut my rating on Starbucks to Sell in January 2014, citing an increasingly complex operating system that was hurting margins, sales potential, and employee relations. Then I wrote an op-ed on CNBC, leaning into the call in the hopes that investors didn’t get burned. That, too, didn’t win me any fans at Starbucks.
More than 10 years later, my job has changed. I have personally evolved (though I am still as intense as I was in 2014, just in different ways), and I no longer drink 15 coffees (five with one energy drink) a day. But as I sit here today pondering Starbucks’ awful, awful earnings call last night (the byproduct of a horrendous quarter) and seeing the stock shockingly plunge 12% premarket (this is Starbucks!), Starbucks is mirroring the company I remember in 2014 — one that is throwing 97 pieces of gum at the wall in the hopes something sticks.
And that all-over-the-place mentality by management is NOT a good thing for shareholders.
Here’s what I didn’t like about the quarter and call:
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The company’s new products, such as the lavender latte, aren’t 100% resonating with consumers. Why? It doesn’t taste good (try it, it doesn’t!), much like many of the new products they have dropped of late. What is going on in that R&D lab?
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The company feels confused about what to do to bring back steady sales growth. It’s now going to introduce drinks with beads, aka pearls, to add texture and compete with boba tea shops. This is coming at the same time it’s introducing zero-sugar options, an energy drink, and a tomato and mozzarella sandwich. This all sets up to be an operational nightmare, with its contentious relationships with overworked store employees, and the products may not resonate with consumers. If I want an energy drink, I am going to the cooler section at 7-11.
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The company has ramped up efforts to cater to the evening crowd. Why? We aren’t drinking coffee before bed, and we aren’t going to Starbucks for a workplace happy hour. It’s Starbucks — get us our two coffees before noon quickly (maybe with a discount), don’t make them taste burnt, and we’re good.
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China’s results have fallen off a cliff amid more discounting.
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The company isn’t delivering enough value to the occasional, cost-conscious consumer who is reasoning that there is no need to spend $7 on an iced coffee at Starbucks when McDonald’s (MCD) coffee tastes surprisingly great.
As Jefferies analyst Andy Barish pointed out this morning:
“Many factors at play here including broad consumer tepidness on discretionary restaurant spend, but we think recent menu innovation (Lavender, Oleato) simply haven’t been received well, even as management cites success there; note exit rate of out the second quarter into April showed continued headwinds, even with the Lavender launch later in the quarter. We are also skeptical towards the planned slate of new products this year (“pearls”, energy), and think a re-focus on the core menu and other drivers i.e. value, promos, loyalty, operational improvements, and marketing would be prudent – drivers that appear to be resonating well, all else considered.”
Barish is on the mark.
CEO Laxman Narasimhan is officially one year into the top job. Every quarter since he took over has been a letdown, if not increasingly more so than the prior one. He and his team have served up a host of excuses, including blaming bad weather on the call last night.
The bottom line is that the honeymoon is over for Narasimhan, and he now enters the hot seat. If the company doesn’t stabilize after a host of new initiatives this summer, he could be taking his favorite Starbucks coffee, the doppio espresso macchiato, out the door of the company’s Seattle HQ and into another role elsewhere in 2025.
