Everybody has an opinion about Starbucks’ bad first quarter. If you ask Howard Schultz, the answer lies in the quality of the experience on the chain’s and on the company’s mobile app. “The answer does not lie in data,” he wrote on LinkedIn, “but in the stores.”
Much of the prevailing opinion, one I’ve echoed on multiple occasions, is price. Consumers are value conscious right now. Starbucks is losing occasional customers. Starbucks also sells expensive beverages. Thus, consumers are protesting said prices with their feet.
Both explanations can be right at the same time. Starbucks is a premium experience. But if consumers don’t feel that experience is premium right now, then it’s not worth the price the chain charges, given the way people are cutting back.
Yet it’s also difficult to get away from the idea that something else is going on with Starbucks. Its sales have fallen too much, too fast, to simply blame this on prices. Instead, Starbucks may have a social media problem. The apparent backlash over its perceived stance in the Middle East may be playing a bigger role in its results than people really understand.
Starbucks was doing great through October of last year. And then, in November, the wheels fell off.
Same-store sales were up 19% on a two-year basis in the company’s fiscal fourth quarter ended in September 2023. They dropped to 15% in the last three months of 2023 and then to 9% in the first three months of 2024. That’s a quick, 1,000-basis-point decline on a two-year basis.
That decline might actually be less than it is in reality because Starbucks introduced an apparently popular line of lavender-flavored beverages that drew traffic to rival the Pumpkin Spice Latte. (That might be a deeper concern about the quarter, that not even a highly successful introduction of a new product line could not save its results.)
Bank of America analyst Sara Senatore likened the problem at Starbucks to another famous social media backlash: “The closest parallel is around [Chipotle’s] e-coli outbreak.”
You might recall that outbreak, which hit Chipotle stores in the fall of 2015. It ended a run of remarkable sales and wiped out a sense of invulnerability surrounding the chain, its stock and business model.
The media uproar took an enormous toll on sales. Same-store sales in the third quarter of 2015 increased 22.4% on a two-year stacked basis. By the fourth quarter, that two-year number was down 1.5%. That’s a mind-boggling, 2,100-basis-point slowdown. Not even Jack in the Box slowed down that much after its own e-coli outbreak in the early 1990s.
Starbucks’ current sales problem is not in the same league. But it may be more mindful of another chain slowdown over a social media backlash: Papa Johns in 2017.
Papa Johns was doing OK in 2017. Same-store sales were up 6.5% on a two-year basis in the third quarter that year. Then, in November, company founder John Schnatter complained about national anthem protests by NFL players and the social media backlash hurt sales. By the first quarter of 2018, same-store sales was down 3.3% on a two-year basis, a 9.8 percentage point slowdown. That is more comparable to Starbucks’ 10 percentage point slowdown.
Value concerns about restaurant chains typically do not show up this quickly. People didn’t simply realize Starbucks’ beverages were expensive all at the same time in mid-November and stopped coming in.
For that, we go to McDonald’s, which is facing traffic challenges over its value equation, far more, arguably, than any other fast-food chain in the U.S. It actually improved its two-year sales number in the first quarter.
Starbucks customers, at least financially, are similar to those of Chipotle. Yet the burrito chain generated 5% traffic growth in the first quarter. Chipotle is dealing with price-value concerns of its own on social media, yet there is no clear indication that consumers are actually cutting back on the chain.
That means the sales slowdown at Starbucks is more due to a social media backlash for reasons other than the cost of a venti Shaken Iced Espresso.
CEO Laxman Narasimhan in December denounced violence and decried “misinformation” on the chain’s standing on the Israel-Palestine conflict. The chain has been subject to boycotts from those on both sides of that issue, starting not long after the conflict began in October.
Starbucks has also faced protests from union activists, who targeted the chain’s Red Cup Day. Coincidentally or not, the combination of the two issues may be hurting the chain’s reputation among many of the younger consumers that Starbucks has worked so hard for so long to court.
Starbucks, for its part, has focused more on the value issue. Narasimhan told analysts that the company was not making excuses and detailed several steps it plans to make to improve operations and reverse its slide with those occasional customers. It should keep working to ensure that its beverages are worth the price people are paying.
But its real issue may be out of its control, at least in the short term. And recovery from that could take some time.
While Chipotle and Papa John’s ultimately recovered and then thrived, it took a while for them to do so.