- Starbucks previously reported that premium add-ons like syrups are a $1 billion business.
- Consumers are forecast to trade down to smaller drinks and "less expensive add-ons," analyst warns.
Sugary pumps of syrups, extra espresso shots, and sauces are a $1 billion business for Starbucks.
But relying on those add-ons, known as modifiers, might spell doom for the company in 2023 as consumers bracing for a recession are expected to trade down to smaller drink sizes and "less expensive add-ons," Jefferies analyst Andy Barish told Insider.
Though inflation is starting to decline, including gas prices, restaurant industry analysts are still predicting a rough 2023 for chains as sales and foot traffic are slowing down.
As such, Jefferies downgraded Starbucks from buy to hold on Wednesday.
Jefferies is "baking into our forecast" that a recession will lower US same-store sales at Starbucks due to negative traffic growth, Barish said. Additionally, he said sales could be hit by "softer" average checks, which have seen significant increases in previous quarters due to higher prices, premiumization, and consumer splurging on modifiers.
"We are concerned about the potential incremental risk to recession in the [second half of 2023 and first of 2024] impacting Starbucks discretionary spend from some customers," Barish wrote in a Wednesday note.
In its fourth-quarter earnings call in November, Starbucks said demand for customized cold beverage drinks is especially strong.
"Today, cold coffee beverages account for 76% of total beverage sales in our US company-operated stores," interim CEO Howard Schultz told investors. "And customers are increasingly further customizing their cold coffee beverages by adding high-margin beverage flavor modifiers to create unique beverages tailored to their own particular taste preferences."
Those modifiers are big business for Starbucks, according to Sara Trilling, president of Starbucks North America.
During the call, she told investors that more than 60% of beverages sold in the US company-operated stores were customized with modifiers like syrups, extra shots, and sauces. Add-ons are a $1 billion "high margin" business for Starbucks that has doubled since 2019, the company said during the November call.
Industry data supports Jefferies' traffic forecast.
According to market research firm Black Box Intelligence, restaurant traffic in November dropped 4.3%. The firm called it "the worst outcome for the industry since July."
"November seems to be a good preview of what trends could lie ahead, as traffic softens, bringing moderation in sales growth as a result," BlackBox wrote in a report published in Nation's Restaurant News. "Once the very high menu price increases start abating, as is expected, it will be increasingly harder to post strong positive same-store sales growth as was the case for most of 2022."
Schultz, who will step down as interim CEO in April, remains optimistic about 2023.
"In our history, we had the biggest sales week in September," he told investors in November. "The strength of our business as we exited September, coupled with a fantastic holiday lineup kicking off today, with our stores turning red, holiday favorites on the menu, and the return of our iconic red cups, gives us tremendous confidence heading into holiday and 2023."
Incoming CEO Laxman Narasimhan, who started in October, will assume the role of CEO in April.