Last week, reports indicated that an activist investor, Elliott Investment Management, has bought up shares in Starbucks and is talking with company management.
The news isn’t terribly surprising. Speculation has run rampant for weeks that Starbucks could attract some activist attention, given its size and the poor overall performance of its stock price.
But what kind of changes can we expect the activist to push? Let’s take a look.
Slower unit growth
I would bet large amounts of money that this will be at or near the top of any activist request, along with the corollary that any savings be used on share buybacks. Investors are allergic to capital spending and they love themselves some share buybacks. This is also an idea floated by William Blair analyst Sharon Zackfia, who estimates that Starbucks will spend as much as $1.5 billion to open new locations this year.
I tend to be skeptical of such ideas when activists make them but there are some legitimate arguments right now. It is building more locations than any other U.S. restaurant chain, at least domestically, including 1,000 over the past two years. It is also building a lot of locations in China.
But when brands are losing traffic, as Starbucks has over the past several months, it may make sense to slow unit growth to get a better handle on demand. Share buybacks, meanwhile, are not bad when stock prices are down, as they mean the company is buying stock at a low point.
Sell or slow the China business
This is another one worth betting on. Starbucks owns its China business, but that business has struggled more than it’s thrived in recent years. Starbucks is losing ground to rapidly growing competitors there, notably Luckin Coffee.
Both BTIG analyst Peter Saleh and Zackfia suggested that Elliott could push for an outright sale, or perhaps a spinoff. That worked for Yum Brands, for instance. But Saleh believes that slowing down development there—which he estimates costs Starbucks $400 million per year—makes more sense because Starbucks’ company-owned model in China is still the better option.
Restaurant chains play with all kinds of operating models in China, both franchised and company-run. Both strategies work, but they require strong management in place and a lot of patience given the market’s volatility.
Get the Siren System in more restaurants
Saleh mentioned this idea, and it makes plenty of sense.
One of the chief problems with Starbucks, one dating back years, is that its stores are too busy. Baristas deal with an ever-growing number of beverages and ingredients and serve them in several different ordering formats. With mobile order, delivery and drive-thru, Starbucks has a ton of different drinks and a bunch of different ordering formats, all of which can get exceedingly busy.
The Siren System was supposed to help with all that, cutting the time to make a Frappuccino in half, for instance. Yet Saleh noted that the system is expected to be in just about 10% of U.S. locations by the end of this fiscal year.
An activist could push to speed that implementation, given its apparent benefits.
Franchising and other ideas
Zackfia mentioned a “left-field idea” of franchising the business. But that’s a crazy idea and Starbucks should not do that.
Starbucks doesn’t franchise, but it licenses a good number of stores in some international markets and via nontraditional operators. But the company has already built its locations and the direct oversight it has over its stores gives Starbucks far more control over the brand.
Saleh mentioned that an activist could push Starbucks to reverse course on its decision to engage with unions. And he suggested that perhaps the company could increase leverage.
Exactly what the activist pushes remains to be seen, as a lot of it is happening behind the scenes. But we should know more when the company reports earnings next week.