Starbucks Brand Check-up: Fewer Visits, Fading Third Place
Starbucks still sells coffee on a scale few brands can match, and its loyalty program keeps growing. Yet in fiscal 2024 fewer people came through the door, sales in China fell hard, two activist funds bought in and the chief executive stepped down as the board named a successor. This is our check-up as of August 27, 2024.
Key takeaways
- Global comparable store sales fell 4% and then 3% in the second and third quarters of fiscal 2024, and U.S. transactions dropped 7% and then 6%.
- Higher prices, long waits and crowded mobile-order counters have worn down the third place idea the brand was built on.
- China comparable sales fell 11% and then 14% amid a price war, after Luckin Coffee passed Starbucks in China sales with cheaper coffee.
- Shares rose 24.5% on August 13, their best day since the 1992 listing, when Chipotle’s Brian Niccol was named chief executive.
Download the full Starbucks Brand Check-up (PDF): vital signs, timeline, diagnosis, treatment and sources.
The symptoms: fewer visits, bigger tickets
For the quarter to March 31, Starbucks reported a 4% fall in global comparable store sales. U.S. transactions fell 7% as the average ticket rose 4%. The quarter to June 30 brought more of the same: global comparable sales down 3%, U.S. transactions down 6%, average ticket up 4%.
Fiscal 2023 revenue was a record $36.0 billion, and active U.S. Starbucks Rewards members grew 7% to 33.8 million. Loyal members are staying. Occasional customers are not. In April, chief executive Laxman Narasimhan said occasional customers are “clearly making choices based on the economic pressures they face.”
Diagnosis: a visit costs more money and more minutes
A suburban Chicago customer told The Wall Street Journal that each cup now costs him more than $6. In April, Narasimhan said Mobile Order & Pay reached 31% of U.S. transactions, and that “we currently have a challenge meeting our peak morning demand” in the U.S. He also reported that a mid-teens percent of mobile orders were started and never completed, with long waits and unavailable products among the reasons. The Journal reported that cafes that once averaged 1,200 orders a day are often now trying to make 1,500.
Diagnosis: the third place became a pickup counter
Howard Schultz built Starbucks as a “third place” between work and home. CNBC reported that mobile orders now account for roughly one third of sales and that more customers prefer not to linger at its cafes. Of a busy Chicago store, Schultz said: “Everyone shows up, and all of a sudden we got a mosh pit, and that’s not Starbucks.” In May he wrote that U.S. operations are the “primary reason for the company’s fall from grace.”
This is a positioning problem as much as an operations one. A brand’s positioning is a promise customers test on every visit. Starbucks promised a calm place worth paying extra for, and a crowded counter breaks that promise at the busiest hour of the day.
Diagnosis: a premium brand in a Chinese price war
China comparable sales fell 11% in the second quarter and 14% in the third. Luckin Coffee passed Starbucks in China annual sales for the first time in 2023, Bloomberg reported, with about 24.9 billion yuan (about US$3.5 billion) in revenue and more than 16,200 stores in China, against 6,975 for Starbucks at the end of December. Reuters reported in May that Luckin often sells lattes for 9.9 yuan with a coupon, against 33 yuan for a Starbucks latte. On price competition in China, Narasimhan said in April: “We’re choosing not to participate in that.” Holding price protects the brand but costs visits.
Activists and a new chief executive
In July, The Wall Street Journal reported that Elliott Investment Management had built a sizable stake, and the shares closed up nearly 7% at $79.27. On August 9, The Wall Street Journal reported that Starboard Value had also taken a stake. On August 13, Narasimhan stepped down and Starbucks named Brian Niccol, Chipotle’s chief executive, as chairman and chief executive from September 9. The shares rose 24.5%, their best day since the 1992 listing, and added $21.4 billion in market value. On August 27 they closed at $98.60, still about 22% below the record close of $126.06 set on July 26, 2021.
A new leader buys time. Discounts and app offers can lift visits for a quarter, but they do not rebuild the reasons people chose Starbucks. The balance between brand building and sales activation will decide the next year.
What growing companies can learn
Starbucks shows how a growth channel can wear down the experience that built the brand. The app filled the stores, and the stores stopped feeling like Starbucks. Track transactions and customer types next to revenue, because price increases can hide falling visits for a long time. When results slip, separate strategy from tactics: a new offer is a tactic, while deciding what a visit should feel like is strategy.
This check-up uses public information available on August 27, 2024. It is brand and marketing analysis, not investment advice.
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