When a recession hits, luxury brands tend to take a hit. Consumers need to buy food, pay for a place to live, and buy other necessities. But nobody really needs fancy clothes, spa services, designer handbags, expensive watches, or jewelry. That type of discretionary spending generally gets cut back or eliminated entirely when shoppers feel the economy tightening.
Based on that reasoning, fancy coffee would seem a likely casualty in any potential recession. That would put Starbucks (NASDAQ:SBUX) at risk if the United States economy were to contract.
But here's a case for why that's not necessarily how things will actually play out.
Will a recession hurt Starbucks?
Starbucks sells coffee that's expensive compared to that of many convenience stores and fast-food chains. The chain also has to compete with the fact that most consumers can make themselves a pot or cup of coffee at home for a fraction of the cost of one Starbuck's drink. Many can get their morning cup at the office where it's freely available for some.
It's actually fairly impressive that Starbucks has consumers paying between $3 and $7 for a product they could get for free (or at least make themselves cheaply). And that may actually help the company if the U.S. economy sinks into a recession.
A negative economic downturn will leave some consumers unable to spend cash on any sort of coffee. It may also make others reconsider how they spend every dollar, and that won't be good for the pricey coffee chain. In a recession, however, some subset of consumers will sacrifice bigger things (or put off major purchases) but see Starbucks as an affordable luxury -- something they can still purchase even when the things they really want are less attainable.
It's possible that Starbucks would lose some customers to economics, but gain visits from others who still want to pamper themselves in small ways. The chain could also leverage its digital user base to incentivize lapsed customers back with deals while marketing to occasional visitors who may be looking for a comparatively cheap way to indulge.
Starbucks understands growth and consumers
Comparable store sales grew by 6% in the U.S. in the fourth quarter. That was driven by a mix of new customers and 3% transaction growth. CEO Kevin Johnson spoke about what was driving the increases during the company's Q4 earnings call.
"I'm very proud of the progress the team has made against our three focused initiatives to accelerate growth in our U.S. business. Enhancing the in-store experience, delivering relevant beverage innovation and driving digital relationships. We have strong evidence that our approach is working as demonstrated by the fact that we are seeing traffic growth across all dayparts [sic] and we intend to build on this momentum in the year ahead."
Johnson noted that increased communication between employees and consumers leads to increased visits. To make that happen, the coffee chain has taken some clear steps.
"Throughout fiscal '19 in the U.S., we invested in our partners by allocating additional store labor, increasing store level training and simplifying in-store tasks often with new technology," Johnson said. "... These investments in our partners collectively elevated customer connections as evidenced by an all-time high-end customer connection scores in Q4, and we will build on this momentum with incremental partner investments in fiscal year '20."
Increased interaction was not the only growth driver. New beverages -- specifically growth in cold-drink sales -- also helped the company. In theory, should a recession hit, Starbucks would have levers to pull to keep consumers buying. Relationships matter, and if dropping your coffee expense means not interacting with a barista you enjoy talking to, consumers may find the money to indulge.
Some pain likely, no matter what
A recession will still affect Starbucks, as consumers may spend less, opt for cheaper choices, or skip the store altogether. But the chain can fight back by positioning itself as a luxury people can still afford, and a way to take care of yourself in a difficult world.
Starbucks did see its global store count briefly shrink during the 2008-09 financial crisis. It’s hard to judge whether that would happen again in the next recession because the company, at least in the U.S., has become such an integral part of many of its customers' lives over the past decade. At the low point of that recession, however, Starbucks shares did lose roughly half their value before recovering all its losses by the time the recession had officially ended.
It's hard to know exactly how a recession would impact the chain, but it's fair to say that it would not be devastating. An economic downturn may slow growth or even cause a dip in sales, but the company should be able to weather the storm.