24/7 Wall St. Insights
- New Starbucks Corp. (NASDAQ: SBUX) CEO Brian Niccol has his work cut out for him.
- Challenges include consumers who want to pay less for their orders and fierce competition in China.
- Also: 2 Dividend Legends to Hold Forever.
A week before Chipotle Mexican Grill Inc. (NASDAQ: CMG) CEO Brian Niccol left for Starbucks Corp. (NASDAQ: SBUX), the Mexican fast-food chain’s stock sold off sharply. Despite it posting a strong second quarter, Wall Street was disappointed. According to Yahoo Finance, that disappointment was, “because management put out weak comparable sales growth guidance.” Perhaps the slowdown hitting most of the fast-food industry has caught up with Chipotle. At Starbucks, Niccol faces an even more challenging version of that trend.
In the second quarter, Chipotle’s same-store sales rose 11.1%. The Starbucks figure was a negative 3%. It indicated that its food and coffee prices had risen enough to hurt store traffic. The company may also be overextended. It has 39,477 stores. Additionally, the flood of store traffic in the morning has slowed the amount of time it takes customers to get their orders filled.
Finally, and perhaps most difficult for management, is its fierce competition in China. Local chain Luckin has 18,590 locations in the country, while Starbucks has 7,093. For the most part, Luckin sells coffee for less than Starbucks.
Luckin and other local competition have also dropped prices to gain market share from Starbucks. Reuters has said, “As Starbucks faces stiff competition for its brew in China from fast-growing, low-cost rivals who have chipped into its market share, the coffee chain is increasingly being dragged into a price war it says it wants to avoid.”
Niccol can improve service at Starbucks stores and through its app. He may also be able to slow the expansion of locations. However, the challenges of consumers who want to pay less for their orders and the vast Chinese competition are two issues he cannot solve.
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