With over 38,000 stores worldwide and nearly $36 billion in net revenue. It's one of the most recognizable brands in the world. Starbucks love the long term chart here.
We think they Have more control over their own destiny right now than a lot of other consumer names. It's Willy Wonka in the in the Cold brew factory. But in recent months, Starbucks isn't looking like the company that many Americans once fell in love with.
Jim, when we look at The Biggest Loser today, it's going to be Starbucks. It's among the worst performers in the S&P 500. It's down double digits.
There's no question that the occasional customer is cutting back on visits to us. We have not been able to communicate to them the value that we provide. They were banking on a consumer that looked a lot like the 2022 aspirational consumer.
Uh, not a value seeking consumer. But Starbucks is trying to turn things around. The company is focusing on making that experience better for you, making the wait times shorter, ensuring that you get your beverage in a timely fashion, and that you have a good experience and a good connection with the baristas.
With consumers spending their dollars more carefully than ever before, will improved workflows and a push towards value be enough for Starbucks to get back on track? I'm walking into the CNBC offices in midtown Manhattan, which is one of the busiest parts of New York City. I'm about to place an order in the Starbucks app, and we're going to see how long it takes to prep a drink.
Starbucks stock price peaked in July of 2021 at over $125 per share, after having tanked with the rest of the market during the pandemic. The start of 2022 led to a sharp decline in its share price, as the company battled tension with its union, faced ongoing Covid lockdowns in China and overall just weaker margins. But the stock rallied as the company revealed plans to reinvent its store operations and promised investors ambitious growth.
This chart looks at the company's quarterly earnings over the past few years. Between 2021 and 2023, the company only missed Wall Street expectations twice. 2024, however, has broken that streak as the company reported two quarters of consecutive earnings misses quarter three.
Earnings per share did meet Wall Street expectations, but missed revenue expectations by $130 million. At the end of July, the share price was still down more than 15% since the start of the year. I think what we are seeing is pressures on the wallet for some of our most occasional customers.
It had another issue, though, that was interesting high rates of incomplete orders in the mid-teens on its mobile app and mobile order and pay has become increasingly important for Starbucks. So people would hypothetically kind of put in an order, see the wait time, or perhaps see the price, and then not complete the order. It was ready in just three minutes.
I've been at this exact same location before, around the same time, and it has taken upwards of 15 to 20 minutes, so there's clearly a focus on lowering wait times and increasing efficiency. That's because longer wait times have been a problem. Survey data shows that about 25% of Starbucks visitors say their wait time has gotten longer, up from about 16% just two years ago in May.
Former Starbucks CEO Howard Schultz took to LinkedIn to express his feelings about the company's second quarter earnings miss. He stressed the importance of coffee forward innovation as well as a reinforcement of being experiential, not transactional. Coffee and cold brew is definitely growing.
Hot drip is not. The energy drinks are also very competitive, so I think they need to be in that game. But it's tough because then to some extent, Starbucks loses a little bit of its, uh, cachet as being this coffee first kind of place.
It has been a drifting away of people from Starbucks to other cafes to independent coffee shops, and that's a problem because those people aren't necessarily spending less on coffee or beverages. They're just spending less at Starbucks. Competition in the coffee industry is intense.
More than half of the market is composed of small business shops, and it's only set to get worse in the coming year. On top of it, Starbucks is contending with a new set of competitors as consumers are increasingly price conscious. When you're trying to go from being a third place where people wanted to kind of hang out to being a convenience place, well, then suddenly you're you're competing with McDonald's and convenience stores, and the uniqueness of your proposition is watered down.
Starbucks is considered a quick service restaurant. Research firm Technomic pulled pricing data from a US Starbucks location over the past few years to track the increases it has seen. Take a look at the cost of a latte at Starbucks in 2020 versus 2024.
It's up about 25%. Now take a look at the cost of a latte from McDonald's. It's up over 40% during the same time period.
While that increase is a lot higher, it's still cheaper than Starbucks. So more attractive to a price conscious consumer that matters because Starbucks now has to increasingly compete as a value player. Summer 2024.
So the start of the fast food value wars with players like McDonald's, Burger King, Wendy's and Taco Bell bundling food and drink deals to incentivize customers. Starbucks got in on the game, too, with the introduction of a discounted pairings menu. Its breakthrough for Starbucks because Starbucks has been such a premier pricer.
Uh, and the, uh, the different kinds of promotion innovation is something which is very new to Starbucks. They never had to innovate on that level. But some analysts warn that it may not address the company's underlying problem head on, citing that when people are concerned about price, they're typically talking about wanting a cheaper base price, not necessarily additional free items.
I think it's a very tangled solution to what actually is a much simpler problem. They've sort of really gone round the houses with it, and I think it suggests that management is not really focused and doesn't really understand the core of the issues, which is why it's sort of addressing them in a very oblique way. But the coffee giant is not just hurting in the US, competition overseas has also taken a toll on sales.
Starbucks saw its same store sales decline at an even stronger rate in China than North America. It was previously the largest coffeehouse chain in China, but that changed in 2023, when another coffee chain called Luckin took the country's top spot. It nearly doubled its store count in just a year, leaving the total number of Starbucks company operated locations trailing by nearly 3700 stores.
Starbucks is still focusing on opening stores around the globe in markets including India, which is a newer expansion plan for them, and China, which is their second home market and has long been a key market for the company. There's been some criticism of that approach, given the challenges that Starbucks is seeing in the US, which is its home market, of if it should continue to expand while business is struggling, but it is pushing ahead with those plans because it's seeing demand in those areas. It wants to continue to grow and also improve its business in the US at the same time.
Look at the fundamentals of the US business we are holding share in the US. We are still the largest player in out-of-home coffee. If you look at some of the metrics that we have into.
Tim Hortons said you were not holding shares, sir. I regard them as being seminal companies that are just as good when it comes to McDonald's says you are losing share. They need to get that US business back on a steady footing.
They need to get it back into growth and that really will push the business back into positive territory in the minds of investors. Workers on strike. Starbucks and Workers United, a union that represents some of its workers, have long standing tension, especially under Howard Schultz, who ended his third stint as CEO in March of 2023.
It has long been known as a company that offers some of the most progressive benefits, particularly in the restaurant space. And when Howard Schultz came back, they did revamp some of the things that are offered to partners. But the catch there is that they were not necessarily automatically extended to stores that had opted to unionize because Starbucks would say it can't unilaterally offer new benefits to unionized stores without sitting down and bargaining face to face, because that's how labor law works.
Starbucks doesn't really like unions. A lot of coffee shops have wanted to unionize. It's led to great friction between management and those workers.
There have been some firings, and obviously the unions are very much against that, and it alienates other workers, even those who are not looking to unionize. Former PepsiCo executive Laxman Narasimhan took the helm as Schultz successor in 2023. He has worked to help remedy the strained relationship.
The Israel-hamas war is another issue Starbucks has been dealing with. The company has not taken any official stance, but a narrative took off on social media that led to widespread boycotts that hurt sales in the region and beyond. I think that the the current social issue that is plaguing Starbucks right now in the Middle East from a, you know, a perception standpoint will dissipate.
I think, you know, as we look into 25, it'll be less of a headwind. I think these kind of boycotts, they tend to be from a small but pretty vocal minority. It's a shame that Starbucks loses that custom, sure, but it doesn't make an enormous dipped in the revenue for Starbucks.
When analyzing the problems that Starbucks is facing, the size and scope of the business must be put into context. The company generated about $36 billion of net revenue last year, and controls 26. 5% of the US coffee and snack shop market.
For reference, the second largest player was Krispy Kreme, with less than a 3% share. It's not a business that's in dire straits. It's not a business that suddenly is irrelevant to consumers.
It's just finding growth a lot more difficult to come by. So they just need to re-engineer, tweak the proposition, really get back on the front foot and they should be able to punch out some better numbers. Starbucks quarter three earnings were better than some investors expected, but sales from existing stores still declined 3% globally.
With all of the initiatives that the company put out during this quarter, particularly in the US. When it comes to energy drinks, boba, um, all the deals that were coming through the app, it's it's disheartening to not see traffic improve that much. The company is streamlining its in-store operations with the introduction of the siren craft system.
They're doing a few different things. One of them is adding a play caller role to the production line, so that's someone who can kind of jump out and help in certain areas when the store gets busy unexpectedly. The baristas also have access to the digital production manager, and that's essentially an iPad system.
But they're able to better control orders as they come in and perhaps reorder them if necessary. And then one more thing that they're doing is resequencing how beverages are made, seeing. The new siren system that they're in the process of implementing it makes total sense.
It's not rocket science. It's linear batch flow. The digital apps aren't cutting it.
You need more obvious value across the system. It was also reported that activist firm Elliott Investment Management has been working with the company in recent weeks to help boost its stock price. Thank you.
With the company's acknowledgment of an increasingly choosy customer. The implementation of systems being put in place to reduce wait times and improve the customer experience, along with easing tensions with the Workers United Union. Only time will tell if the company can regain its footing after the rocky first half of 2024.
It all adds up to a picture of a company that has lost its way. The thing is, of course, you can lose your way fairly easily, but you can get back on track again. It's very rare.
People remain lost forever.
