Why Starbucks is suddenly struggling

The chain has too many stores and has raised prices too aggressively, and bad PR hasn’t helped, says RB’s The Bottom Line.
Jonathan Maze

The Bottom Line

On Tuesday, Starbucks announced plans to triple its typical number of store closures next year, to 150, focusing on its biggest markets while it shifts development toward company locations in underpenetrated markets, as my colleague Heather Lalley reported.

But it also said that its same-store sales are projected to grow just 1% this quarter, which would be its worst since 2009, which also happened to be a recessionary year.

The chain has raised prices and has convinced customers to buy more of its food. But its stores are generating fewer transactions, continuing a slowdown that began more than two years ago. That’s a problem for a chain that is adding locations and requires people to come with a certain frequency, as all coffee chains do.

The company’s stock plunged more than 9% on Wednesday, and the credit rating agency Fitch Ratings downgraded Starbucks’ debt rating. “Further deceleration in comps and traffic and cannibalization from new stores would be viewed as credit negative,” Fitch said.

So what’s the problem? Here are a few explanations.

It has too many locations

This year, Starbucks surpassed McDonald’s in terms of U.S. location count, at more than 14,000, making it the country’s second-most-prevalent chain behind top dog Subway. But much like Subway, Starbucks is finding that more isn’t always better.

Starbucks has added stores at an aggressive rate in recent years. Since 2013, according to Technomic data, the chain has grown unit count by nearly 22%.

The company has spread itself too thin in too many markets. That has hurt traffic in the afternoons, when its customers are less loyal.

And some of its locations are spread inefficiently. The photo above shows a location in suburban Minneapolis. On the other side of the highway just behind the shop is another Starbucks.

While that covers both sides of a commuter pattern, it is an inefficient strategy. Starbucks would be better off moving one of those locations down the freeway.  

There’s too much competition

Starbucks can take some solace in this fact: It is not alone. Rival Dunkin’ Donuts has had some similar challenges and has all but said it is in revitalization mode.

And many of those challenges are at similar parts of the day, in the afternoons, when customers are less loyal.

It doesn’t take a rocket scientist to figure out why. Heavy competition for the beverage business is clearly luring some of the customers from these coffee concepts. McDonald’s, for instance, is a major player in the beverage business and has been working hard to bolster its own coffee shop credentials. It’s hard to see how that’s not having an impact on Starbucks and Dunkin’.

Retail problems

Starbucks has said in the past that some of its weakest locations are in malls and other shopping areas that are struggling with declining retail traffic.

The chain has worked feverishly to overcome that challenge. But Starbucks, like just about any other concept that has put stores near retail trade areas, has to devise strategies to evolve past its dependency on foot traffic.

Technology is no savior

Starbucks has done as good a job as any company at applying technology to its locations. And that has helped it generate sales growth in recent years. But apparently the company is finding there are limits.

The chain has 15 million loyalty club members and another 5 million “digital relationships,” numbers every other chain would drool over. It has better mobile and pay capabilities than just about any other restaurant company on the planet.

But only so many customers are going to use them. In addition, the heavy use of the company’s online and mobile ordering have generated problems by driving away some less loyal customers.

Higher costs

Earlier this month, we wrote about Starbucks’ price increases, and I said they were not necessarily a good idea for a chain struggling with weak traffic.

But it’s easy to see why the company has raised those prices. It has to, with labor costs going up, especially in the chain’s more urban markets. Again, price increases tend to drive away less loyal traffic the most, and that’s been Starbucks’ biggest problem.

Bad public relations

I don’t think it’s much of a coincidence that Starbucks’ same-store sales are slowing further in a quarter in which the chain had to close 8,000 locations for diversity training after a manager called police on a pair of African-Americans waiting for someone.

Even without that incident, Starbucks has become something of a lightning rod. Conservatives don’t like it because the chain’s founder, Howard Schultz, is apparently a Democrat. Liberals don’t like Starbucks because it is a big corporation. Oddly, both groups load my Twitter notifications with criticisms of the chain and stories of how they make their own coffee at home.

To be sure, that comes with the territory when a chain grows that large. But Starbucks certainly didn’t need the incident in Philadelphia.

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