Starbucks chief bullish as crisis engulfs smaller coffee shops

If housebound consumers have discovered how much they can save by skipping their morning lattes, nobody told the chief executive of Starbucks.

The global pandemic will only briefly interrupt Starbucks' industry-beating growth, Kevin Johnson said, as he overhauls cafés, deploys artificial intelligence and raises wages to sharpen the competitive advantage of the world's biggest coffee chain.

“People will be back in Starbucks stores at a rate far beyond what they were pre-pandemic,” he said in an interview on the eve of a biennial investor day.

Covid-19 hit Starbucks hard, cutting sales by 40 per cent year on year in the three months to June. However, Mr Johnson expects its business in China to recover fully in the current quarter and, with the rest of the world also improving, the group’s earnings for the year to next September to approach or beat 2019’s figure.

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He will detail how he plans to stage such a rapid recovery at Wednesday’s event – where even the coffee tasting will be virtual, using samples of its holiday blend sent in advance to analysts.

Yet his confidence contrasts with the crisis engulfing smaller rivals. The US alone will lose almost 2,000 coffee shops this year, Euromonitor forecasts, ending years of expansion.

“Smaller speciality chains, the mom and pop coffee shops ... don’t have the balance sheets that Starbucks has,” said RJ Hottovy, consumer equity strategist at Morningstar.

Larger groups have also struggled: Caffè Nero, the UK's third-biggest chain, has been forced into a financial restructuring, while Pret A Manger, again in the UK, has axed 3,000 people.

“There’s going to be a lot fewer coffee shops,” Mr Hottovy noted. “Starbucks stands to benefit from that.”

Mr Johnson strikes a sympathetic tone, saying he favours further government stimulus “to help small businesses of all kinds, even independent coffee shops”.

But he added: “We have line of sight to grow faster than the addressable market, which means we’re going to be taking market share.”

Even more dominant

Wall Street expects Starbucks to emerge from the pandemic in an even more dominant position. Its market value has risen 80 per cent from March’s lows and 13 per cent since the start of the year to a near-record $119 billion (€98 billion).

RBC analysts now see Starbucks as one of only a handful of large consumer companies that can deliver double-digit earnings growth in 2022 and beyond.

To do so, Mr Johnson is counting on a sweeping reappraisal of Starbucks’s almost 33,000 outlets. The pandemic highlighted its reliance on foot traffic in downtown business districts and transport hubs, prompting him to rethink the locations and formats of his stores.

In the US in particular, he is now gearing its outlets more towards drive-through in the suburbs and pick-up in city centres. And while Mr Johnson plans to open about 2,150 outlets this fiscal year – about 150 more than last year - he is also closing 1,050 branches, up from 600 in 2019. The effect will be fewer net new stores this year, with only 50 for the US.

That contrasts with Starbucks’s continued expansion in China, its second-largest market, where its outlet count rose 14 per cent in the year to September to more than 4,700. The US total, including those operated by licensees, crept up 2 per cent over the same period, to 15,300.

The company had continued to pay landlords through the pandemic, Mr Johnson said, but it was looking to renegotiate some rental arrangements. With lease costs of $2.44 billion in the year to September, the savings could be considerable.

Yet Mr Johnson is not abandoning the sit-down café format that his predecessor Howard Schultz called the "third place" – neither home nor work. "That 'third place' experience that Starbucks was founded on will be more in demand than ever coming out of this pandemic," he predicted.

Mr Johnson has been going into work only about two days a week, but he is convinced that talk about the end of the office is overblown.

“You can have connections digitally but ... you want to have those in-person connections,” he said. “That is just an inherent part of being human.”

Even so, the former Microsoft and Juniper Networks executive is also counting on Starbucks's technology investments, touting a package of artificial intelligence tools it calls Deep Brew.

It has used AI software to turn data feeds on Covid-19 cases into recommendations of how its stores need to adapt, and to make more personalised offers to users of its mobile app and loyalty programme.

Starbucks’s digital push has been particularly aggressive in China, where the proportion of orders made on mobile phones more than doubled in the year to September to account for more than a quarter of the total.

“China is kind of a leading indicator of where the digital consumer is going,” Mr Johnson said.

He stresses that he wants Starbucks to become “world class” in its use of technology not to replace staff “but to free them up” to concentrate on customer service. Handing inventory management, staffing schedules and other administrative tasks to Deep Brew has improved both customer loyalty scores and sales, he said.

It is part of a carefully calibrated message to investors that Starbucks can prioritise its people and environmental initiatives without sacrificing long-term financial returns.

Keep paying wages

As Covid-19 outbreaks closed stores from Shanghai to Seattle this spring, Mr Johnson resolved to keep paying employees’ wages and benefits and avoid furloughs or job cuts. That contributed to a $678 million loss in the three months to June, he noted, but “by putting people over profit I believe we built trust with our partners and our customers [and] with our shareholders as well”.

Starbucks announced last month that wages for baristas and other employees in the US would rise by at least 10 per cent. The move positions Starbucks for the prospect of higher minimum wages across the country, but Mr Johnson described it as “one of the most significant investments” the company will make this decade.

Despite the cost, he got no pushback from investors, he added. “We had our largest shareholders say ‘we fully support what you’re doing’. They understand the importance of our culture.”

Mr Johnson’s juggling of purpose and profits has helped to lift its market value by $36 billion in the two years since its last investor day as Starbucks delivered on that meeting’s promise of streamlining and generating what he called “growth at scale”.

His task at this year’s meeting is more challenging. While Starbucks increased its quarterly dividend by a tenth in September, it has put stock buybacks on hold. After issuing about $4.75 billion worth of debt to help tide the company over the pandemic, Mr Johnson said he needed to reduce its leverage before resuming buybacks.

In the meantime, Starbucks faces new surges in coronavirus cases that are prompting authorities to implement tougher restrictions in California and other big markets. Mr Johnson said his company had learned to “monitor and adapt”, but he was counting on widespread vaccination to provide the more stable conditions on which his plans depended.

“The vaccine’s going to inject a sense of optimism to humanity, even if we have to be careful over the next several months while the vaccine is administered,” he said. “That’s only a few months ... I’m very optimistic.” – Copyright The Financial Times Limited 2020