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Financing

Starbucks is making a big bet on a post-pandemic recovery

The company says the wage increases it is planning to make next year will hurt margins. But executives say the investments are important as it expects customer count to return.
Starbucks employee raises margins
Photo courtesy of Starbucks

Starbucks expects that the raises it is planning to give its more experienced workers starting in January will take a bite out of its margins, even with higher prices, improved efficiencies and sales increases.

Yet company executives insisted on Thursday that this is the time to take these steps, arguing that they represent important investments in employees before an expected increase in customer counts as the pandemic eases.

“The most important investment we can make is in our partners,” CEO Kevin Johnson said. “We’ve proven time and time again that when we take care of our partners, they always rise to the occasion and take care of our customers.

“Not only is it the right thing to do for them, it is also the right thing to do for all our stakeholders.”

On Wednesday, Starbucks said it plans to give raises of up to 5% for workers who’ve been with the company two or more years, and 10% if they’ve been with the company five years. In addition, it expects starting wages to hit $15 an hour by next summer, earlier than expected.

The combination will lower the chain’s operating margin. Starbucks executives said they expect operating margin in the next fiscal year, which started Oct. 4, to be 17%. That’s below the chain’s long-term target of at least 18%.

Rachel Ruggeri, Starbucks CFO, said that the wage increases will hurt profits by 400 basis points, while additional inflationary pressures, investments and fewer government subsidies will also hurt profits.

The company expects to take some pricing while sales and productivity also offset the lower profits.

Yet executives say they consider 2022 to be a “pivotal year” for the company and believe that the wages will pay dividends down the line.

Starbucks is coming off what it said was a record quarter. Revenues in the quarter hit a record $8.1 billion, the company said. Same-store sales in the U.S., its biggest market, rose 11% on a two-year basis.

Johnson told analysts that the company is also expecting a strong holiday season. For instance, the company said that it expects $3 billion to be loaded onto Starbucks cards before the end of the year. “We are ready for this holiday,” he said.

Yet the company is also predicting that an easing of pandemic restrictions will bring more customers back into its cafes—particularly after the chain shifted its strategy last year by building more drive-thru locations while shifting away from the walk-in shops for which it had been known.

When the pandemic hit last year, customers generally reduced frequency, choosing to order more items at a time when they did.

As markets reopen, however, Starbucks is getting more customers. Transaction count in the U.S. increased 19% last quarter. And executives believe customers will continue to return as the pandemic fades and people return to normal. 

Johnson said that Starbucks won market share in recent months, saying that its sales are growing faster than the overall market for coffee. He believes the market share gains are permanent, but the company needs to staff up to handle the increased traffic to its locations.

“We’re on the front foot right now,” Johnson said. “And we have this opportunity to accelerate by investing into the growth curve. With this investment, we predict higher market share gains as consumers return to our stores, and these share gains will be permanent.”

To buttress its argument, Starbucks said it would return $20 billion to shareholders over the next three years in the form of dividends and share buybacks.

“We just believe this is the absolute right thing to do at this moment in time,” Johnson said. Executives believe that as sales return and the efficiencies the chain is working on take hold that operating margins will return to the 18% to 19% range by 2023.

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