Commentary: Starbucks now “firmly in middle age”

Neil Saunders, CEO of retail research and consulting firm Conlumino, comments on Starbucks’ first quarter results in the remarks below.



While Starbucks has kicked off its new fiscal year with the lowest same-store sales growth since 2009, we are not overly discouraged by these results. Certainly, there are a few areas of softness, but the uplift of 3% in the Americas comes off the back of a 9% rise in the prior year. For a mature, fairly saturated company operating in a competitive segment of the market, we believe the numbers show resilience.



In any case, the overall revenue numbers are somewhat more robust – both within the Americas and on a global basis – thanks to a healthy program of store expansion. Starbucks may be reaching its peak in some localities, but it has demonstrated that even in its more mature markets it can still find headroom for new openings.



We also believe that Starbucks has done a reasonable job of managing its profitability at a time when margins are being squeezed by higher staffing costs. During this period, overall operating income increased by 7% on a global basis and by 3% within the Americas – partly thanks to the price increases of last year.



All of that noted, there is no doubt that Starbucks is now firmly in middle age: It is finding growth more difficult to come by and, in financial terms, the business is not moving upwards at the pace it once did. In our view, this is not demonstrative of a company in trouble, or even a company doing the wrong things, it is simply a reflection that Starbucks is a more mature business.



Given that this dynamic is only likely to intensify over the next few years, it is incumbent on Starbucks to find new avenues for growth. In our view, the company is managing this well and has already set out its stall in terms of the innovations it intends to pursue to drive both the top and bottom lines.



Some of these future plans lie outside the existing business model. We applaud Starbucks for having the courage to look beyond its existing core operation, and to indicate its commitment to these ventures by putting Howard Schultz in charge of the new division.



In truth, the push into premium through the development of the Princi chain and the Roastery and Reserve-only stores are not going to deliver sales volumes anywhere near those of the main business. However, their contribution will take the edge off the more subdued growth coming from core markets.



As much as new initiatives will help, we also maintain it is important for Starbucks to look for ways to improve productivity at existing stores. This includes improvements to the food offer, which remains fairly low key and lackluster.



The year ahead will be both exciting and challenging in equal measure. However, we maintain our view that Starbucks is a solid operator that will deliver single digit comparable sales growth, with total revenue uplifts just nudging into double digits.