MCD - The Worst Is Yet to Come for Starbucks
Last week, we got to see how will the outlook impact perhaps the two major players in fast-casual, namely Starbucks (NASDAQ:SBUX) and McDonalds (NYSE:MCD) who are fierce competitors at one of the largest growing markets for the coffee shop industry, namely China. And they also have Dunkin’ (NASDAQ:DNKN) and Luckin Coffee Inc (NASDAQ:LK) to play the field with. While facing the same difficulties, unlike McDonalds which saw earnings fall 17% and a 6% drop in sales due to changed consumer behaviour, Starbucks’ coffee to-go strategy is making it ‘to-go place’ during the lockdown. By target upper-scale of the coffee market, competing on comfort and amenity rather than speed and convenience, which is the case with Mc Café, it seems that Starbucks has positioned itself well on the coffee throne. It learned from the outbreak in China and will be using that knowledge on other fronts.
Starbucks fiscal Q2
Net sales dropped 5% to $6 billion resulting in net income of $328.4 million, or 28 cents per share. Due to store closures, overall transactions were trimmed by 13% as global same-store sales sank 10%. But despite the miss, this wasn’t such a surprise as the company has been diligent in communicating with investors at least weekly about navigating its business through the relentless march of COVID-19 across the globe. Let’s not forget that the coronavirus is hurting two of its biggest markets: US and China. Starbucks closed 80%of its stores in China by early February, 90% of which have been reopened, but then the epicentre moved to Europe and the US. Nevertheless, the company is confident it will achieve a full recovery over time as this is a temporary impact.
The worst is yet to come
But things are going to get even worse in the near term because the U.S.is Starbucks’ home and biggest market and the COVID-19 harm will persist throughout the third quarter of its fiscal year and all 13 weeks of it – unlike only the last three weeks of the second quarter.
As a result, the effect on revenue and operating income will be “much more substantial” in the next quarter and will likely extend into the fourth quarter.
Social distancing framework ahead
As for the US alone, drive-throughs helped to cushion revenues to a certain degree during the lockdown. Even better, the company laid the groundwork for the reopening stage, which clearly will involve a lot of drive-thru, takeout, curbside deliver, even home delivery and other options of contactless orders. Starbucks has adopted a strategy “monitor and adapt.” Using digital tools, it will assess the situation and tailor its services accordingly. Investors should be pleased that the company is proactive and ready to adapt to new consumer behavior . Even in the previous quarter, the company reached a 15% increase in active members of its loyalty program, showing its customer-focused approach even before this nightmare began.
Luckin Scandal to Its Advantage
On a brighter note, Chinese coffee provider Luckin Coffee that fascinated Wall Street with its growth is no longer on the pedestal after admitting in early April that its executives had fabricated hundreds of millions of dollars of sales last year. And its main problem isn’t shady accounting which crushed its shares earlier this month and severely stung Credit Suisse Group AG (OTC:CSGKF), being its poster child. Rather, it’s the company’s business model whose success was made by the number of new store openings, free cups of coffee and use of technology. Starbucks has one concern off the table at least as Luckin ended up not being a new (and improved) version of the Seattle-coffee giant.
Outlook
Starbucks has reported annual revenue growth for the past decade with the latest holiday season being its strongest holiday season ever. There will certainly be significant revenue declines in the near term, but once the coronavirus impact is fully felt, recovery won’t be far off. Despite the likely weak third-quarter and maybe even fourth-quarter earnings report, the measures the company has taken to manage the crisis, along with its pre-crisis strengths are likely to eventually outweigh this year’s problems.
Moreover, Starbucks has provided valuable insight for the path the restaurant industry and society will need to take battle these unforeseen circumstances. The coffee giant has been at the forefront of the pandemic and it is doing a great job while hoping things improve throughout May as more stores reopen. We know we will still love coffee once all this is over but we also know even this experience will become more “digital”.
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