Analysis: Starbucks’ store remodeling efforts paying off
Starbucks has kicked off its new fiscal year with a solid set of numbers which show continued momentum in the core U.S. part of the business. Unfortunately, not all regions matched this performance, with EMEA revenue down by 5.3%. In China, overall revenue soared thanks to the opening of more outlets, but underlying numbers remain soft - with a very slight comparable sales rise of 1%.
Within the U.S., we remain encouraged by Starbucks' momentum in what is now a very mature and competitive market. It is clear to us that a number of the company's initiatives are paying dividends and helping to deliver growth. Foremost among these is the remodeling of many stores to create a more engaging and pleasant experience. From our data, this has increased the amount of time customers linger and has helped to ease up average transaction values. We also believe that the refurbishment is an important step in preventing customers from switching to other brands.
Starbucks has also worked hard at boosting its afternoon trade, primarily through loyalty-based discounts. This has had partial success, however, we maintain our view that the company has a lot more work to do in order to become as much of a destination of afternoon beverages as it is for morning coffee. Part of the solution lies in creating a more compelling afternoon food and snack offering which appeals to those looking for a treat or pick-me-up.
As much as we applaud Starbucks' efforts in the U.S., our praise comes with two pinches of caution.
The first is that these numbers have been delivered against the backdrop of a very strong consumer economy in which people were more willing and able to indulge in coffee. The real test will be whether Starbucks can maintain this growth as economic conditions become somewhat more challenging.
The second issue we have with the numbers is that most of the growth appears to be coming from existing customers spending more. Starbucks does not seem to be attracting all that many new audiences. Indeed, it still underperforms with younger coffee drinkers who are increasingly going to niche independent coffee shops because of the more authentic vibe and modern atmosphere. In our view, this weakness will become more obvious as conditions become tougher and it is not something we believe Starbucks has plans to remedy.
One of the ways in which Starbucks hopes to expand its audience is with its growing partnership with Uber Eats. This scheme allows customers to order via the app and have products delivered to their home or workplace. While the trial has reportedly been successful, we have mixed feelings about its further roll out. If the scheme is successful, one of our major concerns is how some stores will cope with the additional orders. Wait times in some Starbucks are already poor and this service may only exacerbate a major pain point for customers.
Away from the U.S., China remains a clear area of opportunity. However, rapid store expansion has created some cannibalization, and competition from players like Luckin Coffee is now growing rapidly. This will inevitably weaken both the return on investment and productivity growth from Chinese stores. Europe also remains challenging, largely thanks to negative economic headwinds and heavy competition. This suggests a continued reliance on the US as the primary engine of profitable growth.
Overall, the prospects for Starbucks look good in the short term, reasonable in the medium term, but somewhat more challenging over the longer term.
Within the U.S., we remain encouraged by Starbucks' momentum in what is now a very mature and competitive market. It is clear to us that a number of the company's initiatives are paying dividends and helping to deliver growth. Foremost among these is the remodeling of many stores to create a more engaging and pleasant experience. From our data, this has increased the amount of time customers linger and has helped to ease up average transaction values. We also believe that the refurbishment is an important step in preventing customers from switching to other brands.
Starbucks has also worked hard at boosting its afternoon trade, primarily through loyalty-based discounts. This has had partial success, however, we maintain our view that the company has a lot more work to do in order to become as much of a destination of afternoon beverages as it is for morning coffee. Part of the solution lies in creating a more compelling afternoon food and snack offering which appeals to those looking for a treat or pick-me-up.
As much as we applaud Starbucks' efforts in the U.S., our praise comes with two pinches of caution.
The first is that these numbers have been delivered against the backdrop of a very strong consumer economy in which people were more willing and able to indulge in coffee. The real test will be whether Starbucks can maintain this growth as economic conditions become somewhat more challenging.
The second issue we have with the numbers is that most of the growth appears to be coming from existing customers spending more. Starbucks does not seem to be attracting all that many new audiences. Indeed, it still underperforms with younger coffee drinkers who are increasingly going to niche independent coffee shops because of the more authentic vibe and modern atmosphere. In our view, this weakness will become more obvious as conditions become tougher and it is not something we believe Starbucks has plans to remedy.
One of the ways in which Starbucks hopes to expand its audience is with its growing partnership with Uber Eats. This scheme allows customers to order via the app and have products delivered to their home or workplace. While the trial has reportedly been successful, we have mixed feelings about its further roll out. If the scheme is successful, one of our major concerns is how some stores will cope with the additional orders. Wait times in some Starbucks are already poor and this service may only exacerbate a major pain point for customers.
Away from the U.S., China remains a clear area of opportunity. However, rapid store expansion has created some cannibalization, and competition from players like Luckin Coffee is now growing rapidly. This will inevitably weaken both the return on investment and productivity growth from Chinese stores. Europe also remains challenging, largely thanks to negative economic headwinds and heavy competition. This suggests a continued reliance on the US as the primary engine of profitable growth.
Overall, the prospects for Starbucks look good in the short term, reasonable in the medium term, but somewhat more challenging over the longer term.