Should Starbucks Investors Be Worried?

Starbucks profits have been hit with a global shutdown in place. How are they prepared to weather the crisis and will competitors pounce?

Starbucks (NASDAQ: SBUX) is the largest coffee company in the world, with over 31,000 locations worldwide. It is arguably the most well-known coffee chain on Earth but has recently been hit by the current crisis with earnings per share slashed by 47% in the most recent quarter.

What happens if a recession comes, and the downturn continues?

Starbucks products are more expensive than competitors such as fast-food chain McDonald’s (NYSE: MCD). Starbucks’ pricing power is a testament to its strong brand and customer loyalty. However, in the event of a recession where discretionary spending is cut, its sales could suffer. 

Historically how has Starbucks performed?

Starbucks weathered the worst recession in recent history with former CEO Howard Schultz returning to the company during this time. In 2009 Starbuck’s comparable store sales declined by 6% for the year in comparison to the growth of 7% in 2010. Schultz helped to get the company back on track with a strong emphasis on customer experience and a loyalty program (currently boasting 19.4 million members) while also shutting down hundreds of unprofitable stores. Starbucks used this phase to rebuild and garner a following on social media, which has helped to connect with customers. Starbucks was undoubtedly affected by the recession but was arguably hurt more by its own poor decisions before Schultz returned to the helm.

Will competitors pounce?

Starbucks is significantly bigger than its competitors like Dunkin Brands, (NASDAQ: DNKN) which owns Dunkin’ and Baskin-Robbins. It is asset-light, operating as a franchise with 13,100 Dunkin’ stores worldwide, including 16 in China. Dunkin’ has been hit by the current crisis with comparable-store sales down 19.4% for the last three weeks of the quarter. Before the crisis Dunkin’ U.S was set to have its best comparable sales in six years. Dunkin’ is planning to continue to execute their plan of expanding by 3% annually, opening 1,000 new restaurants by the end of 2020. Dunkin’ has also invested heavily in installing espresso machines for a “handcrafted espresso experience” to drive growth. It is clearly making attempts to grow and gain market share but will have a difficult time catching up with its larger rivals Starbucks and McDonald’s.

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Starbucks’ Q2 revenue was $6 billion, representing a 5% decline year-over-year with comparable store sales decreasing by 10% globally. By the third week of May, Starbucks had regained 60-65% of prior year comparable store sales in the U.S and 80% in China. China is Starbucks’ fastest-growing market with 4,300 stores in 180 cities in mainland China and 500 more openings planned this fiscal year. Nearly all stores in China have reopened, albeit with less seating and other safety procedures in place. This global footprint has hurt Starbucks; however, by navigating the re-opening in China it can provide a blueprint for other markets.  

Starbucks was also given a boost when the Chinese company Luckin Coffee (NASDAQ: LK) was found to have been fraudulently reporting sales numbers. Luckin Coffee was regarded by many as the most significant threat to Starbucks in China and leaves an even bigger opportunity as Chinese consumers’ tastes continue to change from tea to coffee. 

Starbucks is in a better place than it was in 2008 when the Great Recession hit and has grown substantially in the years since then. It has invested heavily in digital technology and client engagement with the Starbucks app and loyalty program. An economic downturn may cause sales to decline in the short term, but Starbucks is arguably better positioned to emerge and prosper from difficult times than ever before.

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