Starbucks Corp. (SBUX, Financial) has had a rocky start this year, having fallen around 20% so far. However, it does have an opportunity to turn things around.
One key area of focus for the company is its operations in China. The company has been investing heavily in this market, with plans to open 3,000 more stores by 2025. Starbucks has also been buying back shares and paying dividends. This capital allocation strategy should help to support the stock price in the long run.
Starbucks, however, has been facing a few challenges lately, most notably slower sales growth and the entrance of new, smaller chains. In response, the company has begun renovating its stores, introducing new menu items and partnering with delivery services. As an established company, it can bank on its successful track record to sustain growth in the coming years. Although there are some headwinds it faces, Starbucks has the experience and resources to overcome these challenges and remain a leading coffee chain.
The Chinese market is key for Starbucks
Starbucks has a huge presence in the Chinese market with 6,000 stores in over 200 cities. This market is essential to the company's future success, but the Chinese government's zero-tolerance policy toward Covid-19 cases has caused issues. Starbucks was forced to close all its stores in China for a brief period and is still struggling to recover.
The coffee chain's financial performance in China for the third quarter was below par. There was a 43% decline in visits and a 1% decline in average spending from the year-ago period. Woes in China translated into a less-than-impressive performance globally for Starbucks during the quarter.
However, the company has laid out a strategy to keep growing in China while waiting for the country to return online. It has partnerships with Meituan (MPNGF, Financial), China's largest food delivery platform, and e-commerce giant Alibaba (BABA, Financial) to expand its offerings and delivery services.
The partnerships are helping Starbucks to expand its reach and grow its exposure beyond the core customer base, which should ensure success in this lucrative market where customers are accustomed to mobile payments and digital orders.
Overall, Starbucks remains optimistic about the future of its business in China. The country's rapidly growing middle class presents a major opportunity for the coffee giant, so it is well positioned to capitalize on this trend. In the years to come, it should continue to dominate the Chinese coffee market.
New California minimum wages can hurt Starbucks
Starbucks has over 3,000 locations in California, amounting to almost a fifth of its stores in the U.S. Under the new California law, any fast-food chain with 100 or more locations in the state has to pay a minimum wage of $22 per hour.
The coffee giant has a minimum wage of $17 at the moment. It should be able to turn over some of the costs to consumers and benefit from online sales. However, the company will likely still feel the sting of rising inflation with the possibility of lower coffee consumption by the masses.
Going digital
Pandemic-related lockdowns affected the service industry with physical locations the most. Since Starbucks offers coffee in its stores, it naturally suffered from some decline in sales. However, the company avoided serious revenue drops due to its online and mobile app-generated sales. During the third quarter, Starbucks reported that 26% of its U.S. store sales came through its app. This pivot in sales channels has forced the company to look for more innovative options to lower costs and increase its sales revenue.
Despite the many hurdles, Starbucks continues to grow as people consume more coffee. The $8.2 billion in sales reported for the recent quarter are a record for the company. The number of stores has risen despite the pandemic. The company plans to have 55,000 stores worldwide by 2030. It currently has nearly 34,000 locations globally.
Takeaway
Starbucks struggles, as any large company does now and then. However, it has the management, solid brand and customer service in place to easily manage any issues that come up.
The management team is experienced and has a good track record of running the company effectively. So while Starbucks may face some challenges in the future, it is well-positioned to overcome them and continue to be a successful business.
