Starbucks Cannot Be Fixed

By Douglas A. McIntyre Published Aug 14, 10:10AM EDT

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Starbucks Cannot Be Fixed — © starbucks spill (CC BY 2.0) by Eric

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New Starbucks Corp. (NASDAQ: SBUX | SBUX Price Prediction) 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.
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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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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.