24/7 Wall St. Insights

• Starbucks Corp. (NASDAQ: SBUX) is eliminating promotions and discounts.
• Will that make customers and investors happy?
• Also: 2 Dividend Legends to Hold Forever.

Several media outlets reported that Brian Niccol, the new CEO of Starbucks Corp. (NASDAQ: SBUX), has decided to reduce promotions and discounts. The apparent reason is that the baristas become overwhelmed with work when many customers hit stores to use those benefits. Additionally, Niccol believes a “premium” brand should be able to charge higher prices. It is fair to assume it could also raise revenue and margins. It does not, however, answer investor concerns based on poor service.

High prices and a slow in-store experience could drive customers away and reduce loyalty program use. Niccol admitted that the customer experience at many stores is less than perfect. In a letter to employees and the public, he wrote, “People start their day with us, and we need to meet their expectations. This means delivering outstanding drinks and food, on time, every time.”

Earlier this year, the Financial Times described what has become a widely held opinion of the media based on customer perception: “Starbucks needs faster service, not more complicated drinks.” (This reporter recently went to a Manhattan store that opens at 5:30 AM to find it was not open at 6:15. It is not the only time this has happened.)

Niccol has few options to improve the financial picture at Starbucks. Global comparable store sales fell 3% in the most recently reported quarter. U.S. comparable store sales dropped by 2%. In both cases, traffic fell and the amount people spent per visit dropped.

Another challenge Niccol has is that comparable store sales in China dropped 14% year over year in the last reported quarter. China is supposed to be Starbucks’ major growth market. The Chinese local coffee shop company Luckin Coffee has over 20,000 locations and topped Starbucks revenue in the country in 2023.

In the most recent quarter, revenue dropped slightly to $9.1 billion and per-share earnings fell 6% to $0.93. When Niccol arrived, the shares rose, but they are still down 1% this year, while the S&P 500 is 20% higher. Niccol needs to improve customer loyalty and foot traffic. Raising prices is not a likely path to hit those goals.

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