Starbucks Might Take Time To Recover After A Decaf Quarter

The latest quarter report from the coffee giant Starbucks Corporation SBUX was bitter. Moreover, after missing top and bottom-line estimates, Starbucks also lowered its full year revenue outlook. CEO Laxman Narasimhan spoke of a negative impact that misperceptions of McDonald’s positioning had on its business both in the Middle East and in the US. McDonalds Corporation MCD also faced the same problem as the burger giant also reported its results were harmed by the Middle East conflict due to such misperceptions. McDonald’s also ended 2023 by launching its coffee spinoff, CosMc's, a small restaurant with a DNA of McDonald's but that serves customizable drinks along with sweet and savory treats. McDonald’s reported its sales still grew but they were also below Wall Street’s expectations. 

First Fiscal Quarter Results Were Below Wall Street Estimates

For the first fiscal quarter that ended on January 1st, revenue grew 8% YoY to $9.4 billion and came short of analyst estimates that expected a 10.2% rise to $9.6 billion. Adjusted earnings per share rose 20% to $0.90, but also came short of the estimated $0.93. Disappointing US same-store sales rose 5% with foot traffic rising only 1%, and check size going up 4%, with all three figures coming below estimates.

China Results Were A Far Cry From Estimates 

Same-store sales in China rose only 10%, below Wall Street’s 16% estimate and although foot traffic rose 21% YoY due to eased COVID-19 restrictions, check sizes tanked 9% due to consumers being cautious with their spending. Starbucks aimed to grow to 9,000 stores at its second-largest market by the end of 2025 but its plans got derailed by rising competition from locals such as Luckin Coffee and Cotti Coffee with aggressive pricing strategies. Yet, Starbucks remains confident in its positioning to lead China’s premium coffee market.

Overall, international sales rose 7% with increased foot traffic but a decline in average check size. Its loyalty customers also spent record amounts per member.

A Lowered Fiscal Year Outlook

Starbucks guided for 2024 total revenue growth in the range between 7% and 10% while it previously guided for the lower end of the 10% to 12% range. Starbucks is forecasting its global and US same-store sales will rise 4% to 6%, while it previously guided for the 5% to 7% range. It guided for China's same-store sales growth in low single digits, also lowering the prior 6% guidance to 4%. But earnings growth is expected to remain flat, ranging from 15% to 20%.

Still, Starbucks remains ahead of its industry peers.

To increase foot traffic at its U.S. stores, Starbucks will be introducing three new flavor lines to attract Gen Z consumers and afternoon visitors. During the current quarter, it will also bring out its special creations for Valentine's Day. Despite challenges that include the slower than expected recovery in China and Middle East conflict, CFO Rachel Ruggeri reiterated that Starbucks continues to pursue its international expansion strategy as it aims to increase its footprint from over 38,000 stores to 55,000 stores by the end of the decade. 

McDonald’s Could Challenge Starbucks In The Near Future

McDonald's is also cooking up an ambitious growth plan as back in December, it announced a record expansion to 50,000 locations by 2027, along with growing its loyalty program from 150 million to 250 million members.McDonald’s also announced a partnership with Alphabet GOOGGOOG-owned Google last year. With Google Cloud and its AI solutions, McDonald’s aims to have the most tech sophisticated and productive restaurant platform in the industry. With the multi-year partnership through which Google will equip the burger chain with the latest technology, McDonald’s already showed it is thinking big. Though McDonald’s, Google Cloud also gained a valuable opportunity to show what its tech can do and reinvent the future of fast food. Moreover, empowered by Google Cloud and AI, it isn’t unlikely for McDonald’s to go after another concept and perhaps go after Starbucks’ throne as well. But the tragedy that is occurring in the Middle East has shaken the world to the core as many mistakenly thought that the human civilization has evolved, so no wonder that consumers had something else on their minds before sweet and savory cravings. With such a gloom and doom global backdrop, both McDonald’s and Starbucks could face more ‘depresso’ financials ahead, but such global players will undoubtedly identify new ways to cultivate the relationship with their customers.

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