Starbucks is facing a critical moment in its history, with insiders acknowledging that while the company’s issues are fixable, they will require significant time and effort. This sentiment comes on the heels of Starbucks’ recent earnings report, which painted a bleak picture for the coffee giant.
Despite a brief uptick in stock prices, the underlying numbers reveal serious challenges. North American transactions dropped by 6%, international comparable sales plummeted 7%, and comparable store sales in China fell a staggering 14%. Operating profit margins also declined to 16.7% from 17.4% a year ago. This has left investors and analysts scratching their heads, especially considering the company’s attempts to highlight minor successes, such as a 4% increase in cold espresso sales.
Wall Street, which has been wary of Starbucks for the past two years, remains unconvinced. The stock has dropped 9% during this period, while the S&P 500 has gained 35%. Danilo Gargiulo, a restaurant analyst at Bernstein, summed up the sentiment, citing various possible reasons for the slowdown in North America, including macroeconomic factors, boycotts, pricing resistance, and in-store operations. He also pointed out potential structural issues such as store saturation, increased competition, and declining appeal among younger consumers.
The broader picture for Starbucks is grim. Over the past five years, the stock has declined by 21%, a stark contrast to its once-iconic status. The past year alone has seen a series of setbacks. Howard Schultz, the company’s billionaire founder, has been a disruptive presence, undermining his successor, Laxman Narasimhan, in a LinkedIn post. This public criticism has not only embarrassed Narasimhan but has also highlighted Schultz’s inability to step out of the limelight.
Narasimhan, despite his credentials as an accomplished C-suite executive, faced further humiliation during a live TV interview with Jim Cramer. The interview, which was widely criticized, left many questioning Narasimhan’s readiness and competence. Some industry insiders have even speculated that he may not remain in his position beyond 2025.
Adding to the turmoil is a brewing conflict with activist investor Elliott Management. Elliott has acquired a significant stake in Starbucks and proposed changes to the board and corporate governance. However, Starbucks has yet to respond to these demands. Narasimhan described the ongoing talks as “constructive,” but the lack of resolution adds to the company’s instability.
At the core of Starbucks’ troubles is Howard Schultz. At 71, Schultz’s continued involvement, even in a reduced capacity, hampers the company’s ability to move forward. His presence at board meetings and other company activities, as reported by the Financial Times, creates an environment where the current executive team cannot operate independently.
For Starbucks to regain its footing, Schultz must make a complete exit. This would allow the executive team to make decisions without his shadow looming over them and enable new talent to rise within the organization. Furthermore, Schultz, with a net worth of $3.1 billion, should finance his own security services rather than relying on Starbucks, as detailed in the company’s proxy filings.
Beyond personnel changes, Starbucks needs a cultural and operational overhaul. The company must move away from its Seattle-centric mindset and acknowledge that there are competitors offering better and faster coffee. Embracing unions as a reality, rather than a threat, would also help improve worker relations and brand perception among younger consumers.
Starbucks’ leadership must recognize that the company is now a mature entity. Fixing its many problems will not happen overnight, and management must provide investors with a clear and honest assessment of the challenges ahead. Until then, Starbucks’ stock is likely to remain as cold as a nitro cold brew.
In summary, Starbucks is a company in need of a significant reset. The departure of Howard Schultz, combined with a shift in corporate culture and realistic expectations, could set the stage for a recovery. However, until these changes are made, Starbucks will continue to struggle, far removed from its former glory as a coffee empire.
