On October 22, Starbucks Corporation announced a 7% decline in global comparable store sales for its fourth fiscal quarter, deepening concerns about the coffee giant’s ability to regain its footing amid a challenging business environment and mounting legal and ethical challenges.
The preliminary Q4 results, released Tuesday, underscore a pronounced decline in customer traffic, particularly in the U.S., where comparable store sales dipped 6% due to a 10% drop in comparable transactions. The report revealed a global comparable store sales decline of 7%, with consolidated net revenues declining 3% to $9.1 billion. In the U.S., comparable store sales decreased by 6% due to a 10% drop in comparable transactions, offset slightly by a 4% increase in average ticket.
Investments in new products, in-app promotions, and marketing did not effectively improve customer behavior, particularly in attracting traffic, and led to lower-than-expected performance. This suggests that Starbucks' current strategies are not resonating with customers, leading to a drop in visits and sales.
The decline in traffic has significantly impacted both the top and bottom lines of the company. Efficiency efforts, while successful, were insufficient to compensate for the decrease in customer visits. This indicates that while operational improvements may be happening within the company, they are not enough to offset the losses caused by reduced customer traffic.
In China, comparable store sales declined by 14% due to an 8% decline in average ticket and a 6% decline in comparable transactions. Increased competition and a challenging macroeconomic environment impacting consumer spending were cited as contributing factors.
Starbucks CEO Brian Niccol, who took the helm in September following the abrupt exit of his predecessor Laxman Narasimhan, acknowledged the need for a strategic overhaul.
“Our fourth-quarter performance makes it clear that we need to fundamentally change our strategy so we can get back to growth,” Niccol said in a statement accompanying the preliminary results.
Niccol has outlined a “Back to Starbucks” plan aimed at returning the company to its roots, emphasizing a welcoming coffeehouse experience centered on high-quality coffee and skilled baristas. He has indicated that the company will simplify its menu, address pricing concerns, and enhance in-store amenities.
However, the company’s struggles extend beyond its financial performance. Former employees and customers have been vocal about their concerns, expressing dissatisfaction with the company’s direction and the erosion of its core values.
“As a former Starbucks manager of almost 10 years, the culture of quality, consistency, and customer focus doesn’t exist anymore,” Chantell Forbes, a former manager, wrote on LinkedIn. “The advancement of technology in the stores hasn’t helped things to improve. Drinks are inconsistent, 3/5 drinks that I would order from my local shop would be not drinkable. At $8 per latte, that’s completely unacceptable.”
Other comments echoed Forbes’ concerns about inconsistent quality, high prices, and a decline in the in-store experience.
Adding to Starbucks’ woes is a series of legal challenges, including a class-action lawsuit by investors alleging that the company misled them about its financial outlook. The lawsuit, filed in August, claims that Starbucks executives concealed critical information related to the company's reinvention strategy, artificially inflating its stock price.
Another legal battle involves a long-time supplier, Bodum, which has sued Starbucks for allegedly selling a French press coffeemaker that infringes on Bodum’s patented design and violates an exclusive seller agreement. The lawsuit, filed in June, claims Starbucks is profiting from a product that is nearly identical to Bodum’s own.
Jorgen Bodum, CEO of Bodum USA, said the legal dispute stems from a breakdown in the relationship between the two companies after Howard Schultz, the former CEO who fostered a strong partnership with Bodum, stepped down.
“Once he left, Starbucks leadership continually sought to cut costs at the expense of quality – and also in direct contradiction to our existing contract," Bodum said in a statement to Globe Banner.
Beyond the Bodum lawsuit, Starbucks has been embroiled in numerous breach of contract disputes over the years, raising concerns about the company’s ethical practices. One notable case involved a $2.76 billion payment to Kraft Foods and Mondelez International in 2013 for terminating a distribution agreement.
The company has also faced criticism for its supply chain practices, particularly its claims of ethical sourcing. The National Consumers League filed a lawsuit in January accusing Starbucks of falsely claiming “100% ethical” coffee and tea sourcing. The lawsuit alleges that Starbucks relies on suppliers involved in severe labor and human rights abuses, including child labor and forced labor.
Starbucks has denied the allegations and vowed to defend itself in court. However, the company’s ethical practices have been called into question by independent watchdog groups which recently gave Starbucks the lowest possible rating due to concerns about child labor, worker exploitation, and inadequate wages.
Amidst declining sales, customer angst, and legal troubles, Starbucks’ new CEO acknowledged the need for a ‘reset.'
“Our fourth quarter performance makes it clear that we need to fundamentally change our strategy so we can get back to growth,” Niccol said.