I’ve always been hypercritical of Starbucks (SBUX).
I remember covering the company as an equity analyst and spending weeks studying departmental workflows in its branches. It was an extreme exercise that didn’t win me any fans among Starbucks management (particularly 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 do something good Call the stock.
In January 2014, I lowered my rating on Starbucks to Sell, citing an increasingly complex operating system that was hurting margins, revenue potential and employee relations. Then I wrote an op-ed on CNBC and joined the call, hoping investors wouldn’t get burned. That didn’t win me any fans at Starbucks either.
More than 10 years later, my job has changed. I’ve evolved personally (although I’m still as intense as I was in 2014, just in a different way), and I no longer drink 15 coffees (five with an energy drink) a day. But as I sit here today reflecting on Starbucks’ terrible, terrible earnings release last night (the byproduct of a terrible quarter) and watching the stock plunge a shocking 12% premarket (that’s Starbucks!), Starbucks reflects the company, that I remember in 2014 – someone throwing 97 pieces of gum at the wall in the hope that something would stick.
And this all-over-the-place mentality from management is NOT good for shareholders.
Here’s what I didn’t like about the quarter and the call:
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The company’s new products, such as the lavender latte, are not 100% popular with consumers. Why? It doesn’t taste good (try it, it doesn’t!), just like many of the new products they’ve released lately. What’s going on in this research and development lab?
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The company is confused about what to do to return to steady revenue growth. Beverages with pearls, also known as pearls, are now being introduced to increase consistency and compete with boba tea shops. At the same time, sugar-free options, an energy drink and a tomato and mozzarella sandwich are being introduced. This all becomes an operational nightmare as relationships with overworked store employees are contentious and products may not resonate with consumers. If I want an energy drink, I go to the refrigerated section between 7:00 p.m. and 11:00 a.m.
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The company has increased its efforts to cater to the evening crowd. Why? We don’t drink coffee before bed or go to Starbucks for happy hour at work. It’s Starbucks – get us both of our coffees (maybe discounted) before noon, make sure they don’t taste burnt, and we’ll be good.
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China’s results have slumped due to further price reductions.
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The company doesn’t provide enough value to the casual, cost-conscious consumer who argues that there’s no reason to spend $7 on an iced coffee at Starbucks when McDonald’s (MCD) coffee tastes surprisingly good.
As Jefferies analyst Andy Barish pointed out this morning:
“There are many factors at play here, including general consumer reluctance to voluntary restaurant spending, but we believe recent menu innovations (Lavender, Oleato) simply have not been well received, even though management cites successes there; note the exit rate in the second quarter April continued to show headwinds despite the launch of Lavender later in the quarter. We are also skeptical about the planned list of new products this year (“Pearls”, Energy) and think a refocus on the core menu and other factors such as value, promotions, loyalty, operational improvements and marketing would be prudent – factors that are under “Taking all other factors into account, it seems to be well received.”
Barish is on the right track.
CEO Laxman Narasimhan has officially been at the helm for a year. Every quarter since he took office has been a disappointment, if not worse than the last. He and his team have made a number of excuses, including blaming bad weather for the call last night.
The bottom line is that Narasimhan’s honeymoon is over and he is now in the hot seat. If the company doesn’t stabilize after a flurry of new initiatives this summer, he could take his favorite Starbucks coffee, the Doppio Espresso Macchiato, out of the company’s Seattle headquarters in 2025 and take on a different role elsewhere.