- Starbucks is hiring a new CEO, and analysts hope he'll get the coffee chain back on track.
- Comparable sales are down in its two biggest markets: the US and China.
After two consecutive quarters of slumping comparable sales, Starbucks has a new CEO coming in.
It's out with Laxman Narasimhan, who spent 17 months at the helm of the coffee chain and in with Brian Niccol, the burrito executive who spearheaded Chipotle's turnaround.
But Niccol is set for a rocky start at Starbucks.
"Not only is Starbucks more than three times Chipotle's size in revenue with a footprint spanning myriad countries, but current trends are also more challenged than when Niccol joined Chipotle," William Blair analyst Sharon Zackfia wrote in a note, citing Starbucks' boycotts, customers' doubts about its value, and concerns about its speed of service.
One major concern: Fewer customers are placing orders.
Overall comparable sales are down
Starbucks just posted two consecutive quarters of falling global comparable sales — a key metric for the restaurant industry, which looks at how year-over-year sales have changed at continuously-operating company-operated locations. It means that recent store openings and closures aren't taken into account.
Starbucks' global comparable store sales dropped 4% and 3% in the two most recent quarters.
Starbucks last posted a drop in global comparable store sales in late 2020, during the height of COVID.
Starbucks has given numerous reasons for its poor performance. In various markets, some customers have boycotted the chain related to the conflict in the Middle East, which Narasimhan told investors last month was "driven by widely discussed misperceptions about our brand."
US consumers are visiting less often
Comparable store sales are made up of two measures — the number of transactions and the average ticket size.
In the past two quarters, Starbucks' comparable transaction count — meaning the number of orders placed at comparable stores, also known as traffic — has declined in the US compared to the same periods the prior year. This means fewer customers are placing orders at Starbucks stores, or they're visiting less frequently.
In some cases, like during the height of the pandemic in 2020, the huge drop in comparable transaction count was partly offset by a 25% jump in average ticket size, likely because more people were placing group delivery orders during waves of lockdown.
Average ticket size increases because of several factors: People could be ordering more items per transaction, like purchasing for a group or adding food; they could be opting for pricier items, like beverages with costly modifications; or Starbucks could simply have put prices up.
Starbucks' average US ticket size keeps rising, but in the last two quarters, it has not been enough to offset the drop in orders, as the graph below shows.
The US is Starbucks's biggest market by far. The Seattle-based coffee chain has more than 16,700 stores in the US, or over 40% of its total store count.
Jefferies restaurant analyst Andy Barish told Business Insider that there was a "pretty long list" of reasons for Starbucks' decline in comparable store sales, including a drop in occasional consumers who visit in the afternoon.
Customers are getting fed up with rising prices, which Edward Jones analyst Brian Yarbrough told BI Starbucks needs to address: "As we all know, Starbucks isn't known for value."
In a July survey by Deutsche Bank, nearly half of respondents who reported stopping going to Starbucks or cutting down their number of visits said this was because it had "become too expensive."
Barish pointed out that many Starbucks promotions are only available to app users. Occasional customers, which the chain says it's been struggling to retain, are less likely to have its app.
"Recognizing the premium position of our brand, we've been measured in our use of offers," Narasimhan told investors last month. He said that only 14% of transactions were driven by offers — 10% for Starbucks Rewards star-based offers and 4% for price-based offers — compared to an average of 29% at competitors.
Plus, its menu could be alienating some customers. Recent innovations, like lavender beverages, energy drinks, and popping pearls, likely didn't resonate with Starbucks' core customers, Barish said. Starbucks, however, said drinks with the boba-inspired popping pearls have sold well.
What's happening in China?
China, the world's second-biggest country by population, is a huge market for Starbucks. The coffee giant has more than 7,300 stores there, nearly 20% of its global locations.
Starbucks' comparable store sales in China have been incredibly volatile over the past five years.
This has largely been caused by changes in the number of orders, but the average ticket size has also been steadily declining over the past two years. In the most recent quarter, both the comparable transaction count and average ticket size were down 7% year-over-year.
Sales were massively affected by China's strict zero-COVID policy. But in recent months, they've been hit by cautious consumer spending and increased competition, Narasimhan told investors in July.
Luckin Coffee, its biggest rival in China, has nearly three times as many stores as Starbucks in China after monumental unit growth. But it's struggling, too, with same-store sales down more than 20% in its two most recent quarters.
"China's obviously a tough market, and it's not just Starbucks," Yarbrough said.
Starbucks added more than 800 new Chinese stores in the year to June 30. The chain has continued to grow in China "in the hope that there's some market shakeout," but in the short term, "it's a pretty tough road that they're going through right now," Barish told BI.
"They would probably be best served by slowing down the growth there and waiting for some of the shakeout that may or may not occur," he said.