By Neil Saunders
The ongoing remodeling and refurbishment of Starbucks stores are encouraging consumers to linger. This stimulates them to spend more, including on food items.
Starbucks has ended its fiscal year on a high note, at least in terms of revenue. Total sales rose by 10.6% for the fourth quarter, supported by a healthy uplift of 7.9% in the Americas. Same-store sales growth in the U.S. was similarly robust, rising by 4%—the best outcome in over a year. On the bottom line, things were not quite so healthy; operating income fell by 6.4% and net earnings by 4.1%. Much of this was due to higher salary costs and some organizational changes related to the deal with Nestlé and the ownership change in East China.
3 factors boosting U.S. growth
We are particularly encouraged by the acceleration of growth in the U.S. market, which we attribute to a number of factors.
Firstly, the healthy consumer economy has stimulated higher spend on small treats and indulgences, including coffee and snacks. This has encouraged existing customers to trade up or to buy more while in store. It seems to have had less of an impact in terms of the number of people visiting Starbucks, which has not moved by as much as might be expected, especially among less-mature consumers. This reflects the growing influence of independent coffee shops and their tightening grip on younger demographics looking for exciting and modern venues in which to relax.
Secondly, the ongoing remodeling and refurbishment of Starbucks stores are encouraging consumers to linger. This stimulates them to spend more, including on food items. Starbucks still has more work to do on refining its foodservice proposition, but the store changes are a necessary first step that will give the company a platform to offer a more premium and comprehensive food offer.
The final piece of the jigsaw comes from pushing the afternoon daypart much harder, primarily from loyalty-based discounts and offers. This has stimulated more purchasing, especially from larger groups wanting to take advantage of the ‘happy hour’ deals. More work is needed to bolster afternoon and early evening dayparts, but for now, this is a good first step that appears to be paying dividends.
Impressive growth in China
Growth in China is impressive overall—revenues expanded by 41% over the same quarter last year. However, comparable store growth was less impressive, coming in at just 1%. This is a modest improvement on last quarter’s 1% decline, but it underlines the fact that rapid store growth across this year has created some cannibalization. A more considered and careful approach to expansion is now needed—something which will hopefully come as the new partnership with Alibaba develops.
European growth was also fairly sluggish with just 2% comparable growth. Economic headwinds and heavy competition across many markets were unhelpful. We support the plans to fully license out operations in a number of European markets; this should allow more focus and prove less distracting as Starbucks focuses more on new markets and ventures.
Overall, we are pleased with Starbucks performance. We maintain our concerns about the maturity of the U.S. market over the longer term. However, with a strong holiday offering and some growth from the CPG side, the business is doing enough to keep itself moving forward for now.
Neil Saunders is managing director of research firm GlobalData Retail.