Americans’ long-running joke about a Starbucks on every corner may be nearing its end.
The coffee behemoth is retrenching in its home market as it contends with sales growth that Chief Executive Officer Kevin Johnson acknowledges isn’t fast enough. The cafe chain said Tuesday it expects comparable sales to rise just 1 per cent globally for the current quarter—the worst performance in about nine years. That’s well below the 2.9 per cent analysts were expecting, according to Consensus Metrix.
Starbucks also plans to close about 150 company-operated stores in densely penetrated U.S. markets next fiscal year, three times the number it historically shuts down annually. Shares of Starbucks slid as much as 6.3 per cent in late trading Tuesday to US$53.82.
“Our growth has slowed a bit,” Johnson said in an interview. “I expect better, I think our shareholders deserve better, and we’re committed to address that.”
Although business abroad has been booming and the chain has been opening more and more cafes, U.S. sales growth has stalled for the company that brought espresso to the masses. With about 14,000 stores domestically, Starbucks is now pumping the brakes on licensed and company-operated locations, with a renewed focus on rural and suburban areas—not over-caffeinated urban neighborhoods where locals already joke that the next Starbucks will open inside an existing store.
The closing stores are often in “major metro areas where increases in wage and occupancy and other regulatory requirements” are making them unprofitable, Johnson said. “Now, in a lot of ways, it’s middle America and the South that presents an opportunity.”
For the ubiquitous chain, moving slower and shutting unprofitable stores may trigger some deja vu. In 2008, longtime leader Howard Schultz returned to the company that was struggling after expanding too quickly across the U.S., giving competitors like McDonald’s Corp. a chance to elbow back into breakfast. Investors cheered as Schultz retook the helm and closed some underperforming stores, and share prices at the chain have been up eight of the last 10 years. So far this year through Tuesday’s close, shares have been essentially flat.
But now, with Schultz stepping back from his beloved company, the task of the righting the ship will fall to Johnson, who took over as a CEO just over a year ago. Schultz, who had already transitioned away from running the coffee chain’s day-to-day operations, announced earlier this month he’d be leaving the company, fueling speculation he could be gearing up for a political career. Veteran retailing executive Myron Ullman is taking over as the new head of the board as Schultz departs.
While Schultz had been trying to expand the Seattle company’s premium business, dubbed Reserve, along with Italian bakery Princi, analysts have speculated that these may be put on the back burner under the new leadership. The company is also facing a resurgent McDonald’s, which has been advertising US$2 cold-brew coffees, along with other steep discounts from fast-food rivals.
“The competitive environment has really become a lot stronger in the U.S. and a lot of that is the fast-food chains really improving the quality and breadth of their offerings in terms of hot beverages and breakfast,” said Bloomberg Intelligence analyst Jennifer Bartashus. Americans can “get that same flavor profile at a much lower price somewhere else. That becomes an area of concern for Starbucks.”
Starbucks has also faced backlash this spring after two black men were arrested at one of its stores in Philadelphia while waiting for a meeting to begin. The company and Johnson apologized, calling the arrests “reprehensible.” Last month, Starbucks closed about 8,000 cafes so its employees could undergo racial-bias training, which did hurt sales in the quarter, Johnson said. After stores reopened following the May 29 training, sales have started to rebound at U.S. locations, with the chain expecting domestic same-store sales growth of around 3 percent in June, according to the company.
“The competitive environment has really become a lot stronger in the U.S.”