Starbucks CEO to Simplify Menu and Tackle Declining Sales
On Wednesday, October 30, 2024, Starbucks revealed a disappointing set of quarterly earnings, marking its third consecutive quarter of declining sales. This downturn has hit Starbucks’ two largest markets, the U.S. and China, particularly hard. New CEO Brian Niccol, who joined Starbucks in September, addressed the company’s weak performance with a pledge to overhaul Starbucks’ strategic approach to win back customers. Niccol’s swift actions aim to stabilize the company amid increasing competition and changing consumer preferences.
The company had already provided a preliminary earnings report on October 22 and announced it was suspending its fiscal 2025 forecast. Investors were waiting for details on Niccol’s turnaround plan, which he outlined during a company conference call on October 30 at 5 p.m. ET.
In the U.S., Starbucks has struggled to maintain its previous customer traffic levels. During this quarter, U.S. same-store sales fell by 6%, with a concerning 10% drop in foot traffic. Starbucks’ global performance was also impacted, with worldwide store traffic declining 8% and global same-store sales down by 7%. This weakening in demand also affected revenue. The company reported net sales of $9.07 billion, falling short of the $9.36 billion analysts had projected, while net income decreased to $909.3 million, or 80 cents per share, compared to $1.22 billion, or $1.06 per share, in the same period last year.
Niccol, in a statement, emphasized the urgency for a strategic shift. “It is clear we need to fundamentally change our strategy to win back customers,” he said. He outlined a focused approach to improving the customer experience and efficiency in U.S. stores, including ambitious goals for delivering drinks within four minutes. Currently, only about half of Starbucks’ transactions meet this benchmark, which Niccol plans to address with changes in staff allocation and streamlined processes.
One major component of the strategy is bringing back the self-service condiment bars, which were removed during the COVID-19 pandemic. Additionally, Starbucks will eliminate extra charges for milk alternatives and simplify its extensive menu offerings. Niccol emphasized the importance of “order to mobile order and pay,” aiming to enhance the digital ordering experience, which has become a crucial component of Starbucks’ operations in recent years.
Niccol’s focus is primarily on the North American market, but he also acknowledged the need to invest time in understanding the Chinese market before implementing any major changes there. In China, Starbucks faces stiff competition from local brands like Luckin Coffee, which has been able to offer lower prices, eroding Starbucks’ market share. The company’s same-store sales in China dropped by 14%, with traffic and average ticket size both decreasing.
CFO Rachel Ruggeri elaborated on Starbucks’ plans for fiscal 2025, which include reducing the pace of new cafe openings and renovations. This shift in focus will allow Starbucks to reallocate resources toward a broader redesign of its existing locations, ultimately supporting Niccol’s comprehensive turnaround strategy. Ruggeri explained that the move would “accommodate a redesign” and conserve capital for the core elements of the turnaround plan.
Investors showed caution following the earnings report, with Starbucks shares remaining mostly unchanged in after-hours trading on Wednesday. Analysts had expected higher earnings per share, with a projection of $1.03, but Starbucks delivered 80 cents per share. The revenue shortfall also raised concerns among investors, underscoring the immediate need for the company’s new strategic approach to reverse its current trajectory.
Niccol remains optimistic despite these immediate challenges, citing Starbucks’ enduring brand strength and loyal customer base as key assets. “I believe we have significant strengths, a strong, enduring brand,” he said. He reassured investors that the company has “a clear plan” and emphasized that Starbucks would be acting “quickly” to implement these changes. His confidence hinges on Starbucks’ ability to reclaim customer loyalty and adapt to evolving market demands, both in the U.S. and abroad.
Looking ahead, Starbucks faces a critical period as it seeks to regain its footing in the competitive coffee market. With Niccol’s strategic shift and renewed focus on customer satisfaction, the company aims to restore its brand appeal and market position. However, the coming quarters will be essential in determining whether Starbucks can achieve these goals amidst fierce competition and shifting consumer behaviors.
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