I've always been very critical of Starbucks (SBUX).
I remember working for the company as a stock analyst and spending weeks inside its stores studying the workflow in each department. It was an extreme exercise that won me no fans among Starbucks management (especially with former CEO Howard Schultz), but I was young, didn't care what management thought, and believed it had to be done to achieve proper success. Call the stock.
I Lower my rating Starbucks was forced to sell in January 2014, citing an increasingly complex operating system that was hurting margins, sales potential and employee relations. Then I wrote Op-ed on CNBC, leans into the call hoping investors don't get burned. This also didn't win me any fans at Starbucks.
After more than 10 years, my job changed. Personally, I've evolved (although still as strong as I was in 2014, just in different ways), and no longer drink 15 cups of coffee (five with one energy drink) a day. But as I sit here today thinking about Starbucks' awful, horrific earnings last night (a byproduct of a terrible quarter) and seeing the stock fall a shocking 12% in premarket (that's Starbucks!), Starbucks reflects the company I remember in 2014 – the person Who throws 97 sticks of gum at a wall hoping something will stick.
This blanket mentality by management is not a good thing for shareholders.
Here's what I didn't like about the quarter and call it:
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The company's new products, like lavender lattes, don't resonate 100% with consumers. Why? It doesn't taste good (try it, don't!), like many of the new products that have been dropped recently. What's going on in this R&D lab?
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The company is confused about what to do to bring back steady sales growth. It will now introduce drinks with beads, also known as pearls, to add texture and compete with boba tea shops. This comes at the same time as it offers sugar-free options, an energy drink and a tomato and mozzarella sandwich. All of this makes for an operational nightmare, with its contentious relationships with overworked store employees, and the products may not resonate with consumers. If I want an energy drink, I'll go to the cold store at 7-11.
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The company intensified its efforts to meet the needs of the evening audience. Why? We don't drink coffee before bed, nor do we go to Starbucks for happy hour at work. It's Starbucks – get us two coffees before noon quickly (maybe at a discount), don't make them taste burnt, and we're good.
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Results in China have fallen off a cliff amid further cuts.
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The company doesn't offer enough value for the casual, cost-conscious consumer who thinks there's no need to spend $7 on an iced coffee at Starbucks when McDonald's (MCD) coffee tastes surprisingly good.
As Jefferies analyst Andy Parrish pointed out this morning:
“There are many factors at play here including widespread consumer apathy on discretionary spending in restaurants, but we believe the latest menu innovation (lavender, oliato) has not been well received, even with management citing success there; note the exit rate Q2 to April showed continued headwinds, even with the launch of Lavender later in the quarter. We also question the slate of new products planned for this year (“Pearl”, Energy), and are considering refocusing the slate. Core and other drivers, i.e. value, promotions, loyalty, operational improvements and marketing would be wise – drivers that seem to resonate well, taking everything else into account.”
Parrish is on the mark.
Laxman Narasimhan has officially become CEO after a year in charge of the top job. Each quarter since he took office has been a disappointment, if not more so than the last. He and his team have made a range of excuses, including blaming bad weather for the call last night.
The bottom line is that the honeymoon is over for Narasimhan and he is now in the hot seat. If the company doesn't settle on a host of new initiatives this summer, he could take his favorite Starbucks coffee, the Doppio Espresso Macchiato, out the door of the company's Seattle headquarters to another role elsewhere in 2025.