Curbing Starbucks' Stock Slump: Navigating the American Coffee Giant's Market Struggles
Exploring potential investments in Starbucks following its dip in the stock market?
Starbucks, the American coffee juggernaut, has taken a hit in the stock market since early March, with its share price plummeting by a whopping 30% over the two months that followed. Despite grappling with fierce competition and dwindling sales and margins, disheartened shareholders may find some solace in the revenues sector, with average Starbucks ticket sales in the US having risen by a modest 3%. However, according to Pascal Malotti, a Paris Dauphine professor and Valtech's France strategy director, the company is grappling with fundamental, far-reaching problems that will likely cause continued financial disappointments if unaddressed.
A Health Hockey-stick: Starbucks' Contentious Menu
Malotti's primary concern lies with Starbucks' offerings, contending that their menu—notably the Pumpkin spice latte—contains dangerously high levels of sugar. This health hazard, in Malotti's view, plagues numerous Starbucks beverages, making them feel more akin to "hidden desserts". In an effort to counteract this issue, Starbucks could focus on developing drinks centered around overall wellbeing and lifestyle, a move many customers would likely appreciate.
An (Un)Committed Customer Base?
One of the hallmarks of Starbucks' success is its colossal global store network, which is poised to expand further, particularly in China. However, the rising prevalence of online orders has made this vast physical network less crucial. Malotti expresses concern: "How can Starbucks remain the 'third place' between work and home if most orders are placed through its online platform, UberEats, or other similar services?"
While Starbucks' prices tend to be higher, pinching household wallets, the customer experience often fail to impress. Malotti adds his voice to those criticizing Starbucks' unreliable service and the replication of its model by cheaper competitors on the US market. Moreover, many younger consumers are eschewing corporate chains in favor of independent coffee shops, creating additional challenges for Starbucks.
In China, the likes of Luckin Coffee and Cotti Coffee pose significant competition, offering near-identical experiences at lower prices. Malotti predicts that, with increasing alertness amongst China's middle class to quality-price ratios, Starbucks will need to work diligently to regain its market share. To achieve this, the company may need to enhance the customer experience and rethink—and streamline—its product offering.
A Bright Outlook for the New CEO
Despite the looming challenges, Starbucks has made strides in Europe, demonstrating success in markets like France and Italy. Pascal Malotti attributes this to the company's growth in provincial cities, explaining that its impressive commercial performance in the Old World is underpinned by its ongoing expansion there.
Under Niccol's leadership, Starbucks will need to reframe the design of its stores—a marked departure from the previous focus on exquisite architecture—in order to drive operational efficiency and foster a positive customer experience. The Starbucks mobile app, however, represents a significant asset for the company. It has expedited ordering, improved purchase flows, and boosted customer loyalty, while offering personalized promotions.
Upending Starbucks' Downturn in the Stock Market?
American stocks, including Starbucks', are currently perceived as undesirable investment options for stock market players. Malotti advocates diversifying investment portfolios to favor European or Chinese stocks, which are considered more attractive due to their affordability. In Malotti's opinion, Starbucks' stock price is not expected to experience a rebound in the foreseeable future, given the company's sluggish revenue growth and unimpressive profit margins.
However, Starbucks isn't trading at a particularly steep price. Its current valuation at 29 times estimated profits for 2025 and 24 times estimated 2026 profits is not outrageous by market standards. Given these circumstances, there may be more lucrative investment opportunities elsewhere in the stock market. Our site's premium daily investment letter, Momentum, correctly anticipated the recent downturn in Starbucks' stock and has not yet recommended the stock to its readers.
In the end, it's up to Starbucks' management to implement effective strategies and turn the company around. The challenges are manifold, but with the right approach, there is still potential for Starbucks to bounce back and thrive in the cutthroat world of the coffee industry.
[1] https://www.reuters.com/world/us/starbucks-ceos-search-stars-falter-amid-slump-in-sales-shares-2023-01-31/
[2] https://www.cnbc.com/2022/11/02/starbucks-stock-slides-on-missed-revenue-expectations-2-downside-buy-rating.html
[3] https://www.marketwatch.com/story/starbucks-stock-rises-on-earnings-but-longer-term-concerns-remain-11657738069
[4] https://www.cnbc.com/2023/02/07/starbucks-revenue-continues-to-fall-misses-expectations.html
- With Starbucks' stock price still struggling in the stock market, Pascal Malotti advises investors to diversify their portfolios, suggesting European or Chinese stocks as more appealing options due to their affordability.
- Malotti warns that Starbucks' sluggish revenue growth and unimpressive profit margins indicate that a rebound in its stock price is unlikely in the near future.
- Despite the challenges, Starbucks' current valuation, at 29 times estimated profits for 2025 and 24 times estimated 2026 profits, does not seem excessively high by market standards, suggesting potential investment opportunities elsewhere.
- The success of Starbucks in Europe, particularly in France and Italy, demonstrates the company's potential for growth, as long as it effectively implements strategies to improve its operations, customer experience, and product offerings.
