Starbucks: revamp may not provide the buzz needed

Millions of coffee drinkers go to Starbucks for their daily caffeine fix. But with its once-high octane shares down more than a fifth this year, the world’s biggest coffee chain desperately needs a fresh jolt of its own.

Howard Schultz, Starbucks’ founder who in April returned as interim chief executive, thinks more automation in the US and further China expansion are the answer. The stock’s still rich valuation of 29 times forward earnings leaves little room for error.

Under the sweeping “Reinvention Plan” unveiled last week, Starbucks expects adjusted earnings to grow between 15 to 20 per cent in each of the next three fiscal years. Comparable sales should rise between 7 to 9 annually over the period. Both forecasts are significantly higher than the previous guidance.

Starbucks’ plan to meet these bold new financial targets rests on two pillars: the US, where the company faces a restless workforce, and China, where business remains severely disrupted by Beijing’s strict zero-Covid policy.

In America, Starbucks already operates 9,000 stores. The company will invest an additional $450mn in new technology. This comes on top of $1bn it has committed this year to improving employee pay and benefits. New machines and systems should cut the time needed to make increasingly complicated drinks and food items. Harried baristas may welcome assistance, but are unlikely to stop pushing for improvements in training and treatment.

This US productivity investment makes sense. Expanding in China does not. Plans to increase its store count there by 50 per cent to 9,000 over the next three years is a risky gambit.

Starbucks generated 13 per cent of its fiscal 2021 revenue from China, making the country its second-largest market after the US. But repeated Covid lockdowns across the country have hit turnover hard. Revenue from China fell 40 per cent year-on-year in the latest quarter.

The Chinese economy is faltering. As long as Beijing insists on its zero-Covid policy, including curfews and mass quarantines even if patients are asymptomatic, Starbucks will struggle to swallow such a rapid expansion.