Starbucks Sales Decline Despite New Menu Items and Promotions: Challenges in US and China

Starbucks is expected to report weak sales, with same-store sales projected to decline for the second consecutive quarter by 2.71%, and overall foot traffic likely to drop by 4.27%. Despite a rise in the average check size by 1.98% due to menu price increases and new items like popping pearls and iced energy drinks, the overall performance may not be enough to offset declining sales.

Promotional Efforts and New Menu Items

In an attempt to boost sales, Starbucks launched a limited-time “pairing menu” offering a small iced or hot coffee with a butter croissant or breakfast sandwich for $5 or $6. However, this initiative appears insufficient to reverse the downward trend. Deutsche Bank analyst Lauren Silberman notes that despite increased promotional activity and new product launches, U.S. same-store sales remained weak in Q3.

Market Sentiment and Analyst Insights

Analysts are cautious about Starbucks' outlook. David Tarantino of Baird attributes the sales softness to "cyclical macro issues," as consumers reduce discretionary spending, including afternoon visits to Starbucks. Additionally, activist investor Elliott Investment Management has taken an undisclosed stake in the company, potentially influencing future strategic decisions. Bernstein analyst Danilo Gargiulo suggests that external pressure could prompt bold decisions, offering potential long-term opportunities despite the time needed for a turnaround.

Struggles in the Chinese Market

Starbucks is also grappling with challenges in China, its second-largest market. Last quarter, China saw a significant drop in performance, with same-store sales down 11%, foot traffic down 8%, and the average ticket size down 4%. This quarter, sales in China are expected to decline by approximately 10.58%. CEO Laxman Narasimhan attributes the decline to changes in customer behavior, holiday patterns, and a highly promotional environment.

Bank of America analyst Sara Senatore highlights that Starbucks' struggles in China are reflective of broader industry trends, with intense competition and macroeconomic factors playing significant roles. McDonald's also reported declining sales growth in China, underscoring the challenging environment.

Potential Franchise Expansion in China

To mitigate risks, some analysts suggest franchising could be a viable strategy for Starbucks in China. Franchising could help leverage market opportunities without heavy capital investment and reduce exposure to economic fluctuations. The company aims to have 9,000 locations in China by 2025, emphasizing its long-term commitment to the market.

Earnings Expectations

For the upcoming earnings report, Starbucks is expected to post:

• Revenue: $9.20 billion (up from $9.17 billion)

• Adjusted earnings per share: $0.92 (down from $1.00)

• Same-store sales: -2.71% (down from +10%)

• Foot traffic: -4.27% (down from 5.00%)

Following Q2, Starbucks revised its 2024 outlook, now expecting low-single-digit global revenue growth, down from previous estimates of 7% to 10%. Global and U.S. same-store sales are anticipated to either decline slightly or remain flat, while China's same-store sales are projected to see a single-digit decline.

Also Read: Starbucks Accused of Closing Stores to Stop Unions: Latest News