Does Starbucks Still Have More Upside Potential? Howard: We Don't Want to Run a Business with an Aging Customer Base

Starbucks' Challenging Year: Leadership Changes and Strategic Shifts

It has been a turbulent year for Starbucks. Even before interim CEO Howard Schultz's return, both the company's internal operations and external business were struggling to varying degrees. Add in the pandemic's economic drag, and Starbucks stock had been in steady decline since January of this year.

Only after Howard Schultz returned as interim CEO this April and began tackling several long-standing, unresolved issues did the stock start to recover. Since mid-June it has regained roughly 25% of its value - slow but steady growth.

Despite that recovery, many financial reports still rank Starbucks among the worst-performing multinational restaurant chains on Wall Street this year. Just days ago (August 2nd, local time), Starbucks' third-quarter report showed that despite the price increases implemented last year to offset rising costs, North American sales still trended upward.

Though the financials suggest Starbucks' worst stretch may be behind it, sales in its second-largest market, China, are declining, and its largest market, the United States, still has plenty of unresolved problems.

Leadership Challenges and Store Operations

Some American industry analysts argue that despite the recent rebound, the many uncertainties across Starbucks' directly-operated stores cap the company's upside. The biggest issues: management uncertainty, labor disputes, and the still-unsettled direction of the pandemic.

To put Starbucks on better footing, Howard has been visiting stores and roasting plants across the United States since his April return, studying sales and operations on the ground. Sales have improved, but store-level problems can't be ignored.

Store designs, for instance, no longer meet current consumer expectations, making it hard to fully retain customers through environment and service. Since the pandemic, Starbucks also failed to adapt to shifting customer needs and draw in new, younger customers.

So on his very first day back, Howard halted the stock buyback plan and redirected the money to partners (employees). He then reshuffled part of the management team and attempted to weaken unionization efforts in the United States - an effort that remains in a difficult position, with issues not yet resolved to either side's satisfaction.

Controversial Policy Changes

Next came the announcement closing all Starbucks restrooms to the public. They remain available to paying customers, but with inflation running high, some consumers are especially sensitive about spending. So even though the restrooms still serve those who've made a purchase, many customers are unhappy with the current experience - and the brand has lost plenty of patrons because of it.

Even so, Howard has insisted on keeping the restrooms closed. Media analysis suggests that while open restrooms may attract new customers, they don't create many loyal ones - and with hygiene and safety problems that can't be resolved, closing them serves Starbucks' long-term development.

Cultural Transformation and Future Strategy

Beyond these moves, Howard announced last month that he would reshape Starbucks' corporate culture - a series of changes including redefining the company-employee relationship, improving partner benefits, and delivering new in-store experiences. Plans for "redefining partner relationships" are already detailed, with other initiatives to be unveiled on September 13th of this year.

Meanwhile, with consumer demand for cold beverages running strong, Starbucks' beverage R&D team has been hard at work on more innovative cold drinks and will gradually update the store equipment used to make them. Howard has said he cares deeply about Starbucks' connection with young people, and the shifting composition of Starbucks' customer base is among the indicators he tracks each year. Starbucks, he declared, doesn't want to run a business with an aging customer base - so the changes need to happen now.

Conclusion

In short, Starbucks still faces a challenging business environment. Unless it can resolve its current issues quickly, its upward potential will remain limited.

Image source: Internet InvestingPro

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