Howard Schultz seeks to bring Starbucks back up to full strength

When Howard Schultz took Starbucks into the UK in 1998, he hailed it as a beachhead for expansion into Europe, where the baristas of Milan had once inspired the caffeine-fuelled vision that made him a billionaire.

A generation later, there are more than 1,000 Starbucks stores across the UK. But Schultz is now thinking about whether to pull out of a market where his brand trails behind Costa Coffee, the rival Coca-Cola bought in 2018.

Alex Rayner, Starbucks’ UK general manager, responded to news that the company was evaluating “strategic options”, by reassuring staff that it remained committed to the UK and was “not in a formal sale process”. Investment bank Houlihan Lokey has however been hired to advise on what the possibilities are.

Starbucks has declined to comment further, but the question mark hanging over the UK business is a rare moment of uncertainty for one of corporate America’s most successful global exports.

This April, after a five-year absence in which he flirted with a run for the US presidency, Schultz returned to the company he built into the world’s largest coffee chain, taking his third turn as its chief executive.

“Love and responsibility brought me back to Starbucks,” he told analysts in May. At the same time he warned that major changes in customer behavior during the coronavirus pandemic had put the business under “significant pressure”.

That earnings call made it clear that the UK is no longer the strategic market it once was, with Schultz barely mentioning operations outside the US and China, the two markets on which it has pinned its growth hopes.

Problems that need tackling in those markets may also explain why Starbucks might want fewer distractions elsewhere.

In the US, some 195 Starbucks locations have voted to unionize since Decemberin what has become the most concerted labor campaign in fast food since the 1980s.

The company long had a reputation as one of the best places to work in food service, with industry-leading pay and generous benefits. But since the start of the pandemic, workers have complained that a lack of safety measures and understaffing made their jobs untenable.

Executives have fought the fledgling union hard and drawn the ire of federal labor officials in the process.

In China, which Schultz believes will one day overtake his home market, Covid lockdowns have left the company unable to forecast its performance for the rest of the year.

The US and Chinese markets are what Starbucks has “bet their entire future on”, said Nick Setyan, a restaurant industry analyst at Wedbush, who called the other countries where it owns stores, from Canada to Japan, “a distraction”.

“All the other company-owned markets can go,” he added. “I wouldn’t be surprised that if they manage to sell the UK, Japan will be next.”

The UK — its biggest operation in Europe — “was an anomaly from the start”, according to one former Starbucks executive.

While other large European markets — France, Germany, Spain, Turkey and the Netherlands — have always been run by licensed operating partners, Starbucks still owns about 30 percent of its UK stores.

“I’m surprised they’ve held on to the UK business for as long as this,” said Setyan, pointing out that the majority of its stores in the Emea region are licensed and not company-operated. In May, Starbucks pulled out of Russia, where a franchisee ran its 130 coffee shops.

The UK coffee market has also become crowded in recent years. In 2017 Citigroup analysts said the industry had just “four to five years of structural growth” left. Now, with more people working from home and spending less time in city centers during the week, that saturation point may have arrived.

Over the past three years, the number of coffee shops in the UK increased by 2.5 per cent, compared with a 22 per cent increase between 2016 and 2019, according to market research company Allegra World Coffee Portal. Starbucks managed 9 percent growth between 2019 and 2022, but that was just half its growth rate over the previous three years.

A sale now would reflect “the maturing of the market and the maturing of Starbucks’ place in that market”, said Jeffrey Young, chief executive of Allegra Strategies.

Column chart of Total branded chain outlets showing The crowded UK coffee market

“It makes sense to look for an operating partner to operate the brand, especially as the cost of doing business rises and demand slows,” he added, citing the rising costs of everything from energy to milk.

A former Starbucks executive, who was involved in establishing the UK business in 1998, said that reviewing it was a “pragmatic move” by Schultz.

“You’ve got to give [the divisions] the space to make sure they can operate locally,” he said, adding that Schultz’s biggest issue was reinventing the larger and faster-growing US operation. “He’s trying to get control over the company, so that the ship is righted,” he said.

Schultz’s first move on returning was to suspend Starbucks’ share buyback program to fund another $200mn of investments in equipment, wages and staff-pleasing innovations such as digital tipping.

In the US “we have demand everywhere”, he told analysts, but he conceded this month that the stores — which he conceived as a “third place” where customers could linger over coffee between work and home — were “not set up” for the age of working from home, mobile ordering and consumers’ preference for cold drinks that are now almost 80 percent of its business.

Having beaten the market after the start of the pandemic, Starbucks’ stock has lagged for most of the past year, putting pressure on the new old boss to show progress by the investor day he has scheduled for September.

He has told Wall Street to expect “industry game-changer” ideas to increase productivity in US stores, as well as a “big, breakthrough” plan for web 3.0 — the blockchain-based next iteration of the internet — and a platform to sell NFT digital collectibles. And he has promised to name a new, external chief executive some time this autumn before stepping back from executive duties in March.

But having walked away twice before — once in 2000 and then again in 2017 — this time he plans to stay on the board. Starbucks is still in growth mode, he explained to the Wall Street analysts: “Is it glass half full? You bet it is.”

Additional reporting by Taylor Nicole Rogers in London

Source link

Leave a Reply

Your email address will not be published.