Analysis: Starbucks needs to tweak domestic strategy; improve food offerings
Although Starbucks claims its first-quarter results show its engines of growth are spinning, the pace of increase suggests that they are idling rather than pushing the company forward.
Overall revenue growth of 5.9% is not bad. However, it is driven mostly by expansion in China and the opening of new stores. As such, it hides an underlying softness, although we would stop short of saying problems, in the rest of the business.
Barring last quarter - which was affected by one less week of trade than the prior year - Starbucks growth trajectory has slowed. This is most noticeable in the United States, where both overall and comparable sales growth is trending lower.
This slowdown does not mean the domestic business is broken. Instead, it is a function of maturity and saturation which has made both adding new stores and driving performance from existing locations steadily more challenging. Given that this dynamic will only worsen over time, it raises a question as to how Starbucks intends to remedy the issue.
Part of the solution has been to look to the premium market for growth, using the Starbucks Reserve and Roastery formats as vehicles for expansion. We believe this is a sound strategy that Starbucks is executing well. However, in the context of the overall business, this is only ever going to be a niche operation that makes a small contribution to growth. Premium has neither the power nor potential to reignite US performance.
As such, Starbucks has to look to get more out of its existing stores. Given the popularity of Starbucks, this may seem like a tall order. However, we believe there are many areas - especially in foodservice - where Starbucks underperforms and could work harder. Admittedly, steps have been taken to remedy this, and the sales mix of food is slowly advancing towards the 25% by 2020 target that Starbucks set itself.
Starbucks food offer is not terrible but compared to more innovative companies like Pret; there is a lot of room for improvement. To us, Starbucks efforts in this area are incremental and slow, and we think the company should push a great deal harder.
This imperative isn't just a matter of going on the offensive; it is also about building a defensive position. Some operators, like Dunkin', are advancing into Starbucks core coffee territory. Meanwhile, smaller players like Pret are nibbling at the edges of Starbucks' market share. Whether these players will be successful in the longer term remains to be seen, but it would do Starbucks no harm to bolster its proposition and appeal.
Increasing loyalty also extends to how stores operate. During peak times, some shops are busy, and service is painfully slow - something we believe is becoming more problematic over time. Although Starbucks uses technology well, we think it needs to look again at how it can use digital solutions ordering in store to cut wait times. Starbucks may well balk at such a suggestion, saying it flies in the face of the type of atmosphere it wishes to create. However, in a busy city location where the priority is to get in and out as quickly as possible, we believe the idea has merit and would also help to improve margins.
Fortunately, Starbucks is a solid business with good growth prospects in markets like China. As such, it has some time to tweak its domestic strategy. However, the time to do that is now.
Overall revenue growth of 5.9% is not bad. However, it is driven mostly by expansion in China and the opening of new stores. As such, it hides an underlying softness, although we would stop short of saying problems, in the rest of the business.
Barring last quarter - which was affected by one less week of trade than the prior year - Starbucks growth trajectory has slowed. This is most noticeable in the United States, where both overall and comparable sales growth is trending lower.
This slowdown does not mean the domestic business is broken. Instead, it is a function of maturity and saturation which has made both adding new stores and driving performance from existing locations steadily more challenging. Given that this dynamic will only worsen over time, it raises a question as to how Starbucks intends to remedy the issue.
Part of the solution has been to look to the premium market for growth, using the Starbucks Reserve and Roastery formats as vehicles for expansion. We believe this is a sound strategy that Starbucks is executing well. However, in the context of the overall business, this is only ever going to be a niche operation that makes a small contribution to growth. Premium has neither the power nor potential to reignite US performance.
As such, Starbucks has to look to get more out of its existing stores. Given the popularity of Starbucks, this may seem like a tall order. However, we believe there are many areas - especially in foodservice - where Starbucks underperforms and could work harder. Admittedly, steps have been taken to remedy this, and the sales mix of food is slowly advancing towards the 25% by 2020 target that Starbucks set itself.
Starbucks food offer is not terrible but compared to more innovative companies like Pret; there is a lot of room for improvement. To us, Starbucks efforts in this area are incremental and slow, and we think the company should push a great deal harder.
This imperative isn't just a matter of going on the offensive; it is also about building a defensive position. Some operators, like Dunkin', are advancing into Starbucks core coffee territory. Meanwhile, smaller players like Pret are nibbling at the edges of Starbucks' market share. Whether these players will be successful in the longer term remains to be seen, but it would do Starbucks no harm to bolster its proposition and appeal.
Increasing loyalty also extends to how stores operate. During peak times, some shops are busy, and service is painfully slow - something we believe is becoming more problematic over time. Although Starbucks uses technology well, we think it needs to look again at how it can use digital solutions ordering in store to cut wait times. Starbucks may well balk at such a suggestion, saying it flies in the face of the type of atmosphere it wishes to create. However, in a busy city location where the priority is to get in and out as quickly as possible, we believe the idea has merit and would also help to improve margins.
Fortunately, Starbucks is a solid business with good growth prospects in markets like China. As such, it has some time to tweak its domestic strategy. However, the time to do that is now.