Starbucks posts slower third quarter amid US price sensitivity and competition in China

Cold drinks now comprise 76% of Starbucks’ total US beverage sales | Photo credit: Grigorii Shcheglov

Starbucks is under growing pressure from price-sensitivity in the US and fierce competition in China, the coffee chain’s third quarter results show. 
 

The US coffee giant saw total net revenue fall 1% year-on-year in the three months ended 30 June 2024 to $9.1bn – albeit a 6% increase on the previous quarter. Global like-for-like sales declined 3%, while footfall fell 5%. 

Revenues in the US, Starbucks’ largest market with 16,730 stores, grew 2% year-on-year and 7% quarter-on-quarter to $6.3bn. However, price rises contributed to a 2% fall in like-for-like sales and a 6% decline in transactions, with Starbucks also facing stronger competition in the US coffee to-go segment, particularly from fast-growing drive-thru coffee operators.  

In an earnings call with investors, Starbucks CEO Laxman Narasimhan said he was “not satisfied” with the results but added the coffee chain was tracking ahead of schedule with initiatives to unlock growth and drive cost efficiencies across its company-owned US stores. 

These include the rollout of new Siren System equipment designed to simplify ordering and speed up beverage preparation time. With cold drinks now comprising 76% of total US beverage sales, Starbucks has also launched new Iced Energy and bubble tea ranges – the latter of which Narasimhan hailed as one of the most successful product launches in the coffee chain’s history.  

Additionally, Starbucks has signed an agreement with delivery platform Gopuff to open 100 delivery-only kitchens across the US to cater to rising demand for the increasingly important channel and streamline order processing at existing stores. 

Net revenues for Starbucks’ International segment declined 7% year-on-year to $1.8bn, a marginal increase on the previous quarter, as competition from domestic chains and an increasingly fierce price war in its key growth market, China, continued to create challenging trading conditions. 

Sales in China fell 11% to $733.8m following a 14% decline in like-for-like sales and 7% falls in both transactions and average ticket price. 

“We’ve continued to face more cautious consumer spending and intensified competition. In the past year, unprecedented store expansion and a mass segment price war at the expense of comp and profitability have also caused significant disruptions to the operating environment,” Narasimhan said.  

Starbucks is also “in the early stages of exploring strategic partnerships to further enhance our competitive position to accelerate growth and innovate to win in the long term in China”, Narasimhan added.  

Seattle-based Starbucks also noted headwinds in the Middle East, Southeast Asia and parts of Europe, driven by ‘widely discussed misperceptions’ about the brand. However, trade was positive in Japan and Latin America – markets described as displaying ‘significant strength’. 

Despite lagging sales, Starbucks continued to expand globally, adding 526 net new stores to reach 39,477 sites across 86 markets. The coffee chain opened 130 and 213 net new stores in the US and China respectively – with the markets comprising 61% of its total global store footprint.  

Starbucks now operates 7,306 stores in China but faces an uphill task to reach its planned 9,000 outlets in the world’s largest branded coffee shop market by 2025.  

The gap between the US coffee chain and China’s market leader, Luckin Coffee, has also widened. Beijing-based Luckin achieved 35% year-on-year sales growth in the three months ended 30 June 2024 to reach RMB 8.4bn ($1.1bn) and reached 20,000 stores in July 2024. 

Starbucks third quarter earnings come amid reports that activist investor Elliott Investment Management is reportedly pushing for representation on the chain’s 10-person board after taking a sizeable stake in the company.  

Narasimhan confirmed that Elliott Management had become a shareholder in the business and that ‘conversations to date have been constructive’.