4 big roadblocks that lie ahead for Starbucks

There’s no denying Starbucks has had a rough patch in recent months.

The chain last week announced that it plans to shutter three times as many underperforming stores in 2019 as it typically does in a year. And it lowered its projections for the current quarter, saying it anticipates same-store sales growth of 1% globally. That would be its worst quarter since 2009.  

Earlier this month, the man most closely associated with Starbucks’ leadership—Chairman and former CEO Howard Schultz—gave his notice. And the chain was mired in controversy in April and May after workers in a Philadelphia store called the police on two African-American men, whom they accused of trespassing, leading the coffee giant to close all 8,000 of its company-owned U.S. stores for a half-day training session on racial bias.

But the chain’s challenges are far from over. Here’s a look at some of the potential roadblocks identified by Starbucks President Kevin Johnson and other company executives, who spoke last week at an e-commerce conference sponsored by Oppenheimer.

Schultz has been with the company since its earliest days, steering it through rocky times to growth in more than 70 countries and cementing the notion of Starbucks as the “third place,” a community hangout, in America. His departure at the end of this month ushers in a new regime, currently headed by Johnson. “I tend to be much more data-driven and analytical, and I’m bringing that to Starbucks,” Johnson said at the conference. “But I'm also very appreciative and respectful of the creative and the emotional aspects of the brand. Certainly, I tend to bring a much more disciplined approach to picking the priorities, and that's because in my experience, at scale, if you pick the right priorities and you put the resources and energy behind them, you move the needle.”

Johnson said he plans to move the company from a “hub-and-spoke” leadership model to a “distributed” style of leadership.

In 2015, Frappuccino-category revenue grew 17%. By this May, it was at -3% growth, Johnson said. He attributes the decline in slushie coffee drinks to growing consumer interest in drinks with less sugar and fat. As a result, Starbucks is ramping up its iced tea programs to capture some of that lost revenue. Furthermore, the brand is expanding its plant-based offerings to appeal to a broader base of customers. Later this summer, Starbucks will introduce a “blended protein cold brew” made with nondairy milks, Johnson said.

Starbucks boasted its addition of 5 million new digitally registered customers since April, thanks in large part to a new program in which consumers must submit their email addresses to use the in-store Wi-Fi. Converting those “digital relationships” into regular customers will be a major challenge for Starbucks in the months and years to come. “Expanding the breadth of digital relationships is the No. 1 thing we can do in the U.S. to drive comps,” Johnson said.

Starbucks also recently expanded mobile ordering and payments to all customers—not just those in the rewards program. This spring, the company will launch a Stars for Everyone initiative that allows any customer who registers a credit or debit card with Starbucks to begin earning rewards. “They'll earn stars at a lower rate than Rewards customers, but they will earn stars,” Johnson said. “It's a way to now attract customers who want to benefit from the Rewards program simply by using their credit card and debit card.” The expanded rewards program will coincide with the launch of a tiered-redemption program that will allow customers to earn less-expensive products for fewer stars than higher-priced ones. “Those two events will create another wave of customer acquisition,” Johnson said.

Starbucks is undertaking a massive effort to improve margins by making operations more efficient. “This is looking at every aspect of the business,” Johnson said. The brand dumped Tazo teas and closed its Teavana stores to focus on selling Teavana-brand teas in Starbucks units. In addition, Starbucks plans to hire an outside consultant to identify areas to trim in its general and administrative expenses. Company leadership is also “being thoughtful about how we optimize the store portfolio,” said Johnson, and will close 150 company-owned stores, along with 100 licensed stores, during fiscal 2019.