The ongoing impacts of the coronavirus pandemic are still taking a toll on Starbucks (SBUX 1.55%). At the onset of the crisis, its sales decreased significantly after it closed its restaurants to in-person customers. Now, with economies on the rebound, it's getting hit with a different set of side effects -- primarily, inflation and labor shortages.
The omicron variant of COVID-19 is far more infectious than previous variants, which has sent case counts surging to peaks far above those seen during previous waves. That has led to further disruptions of already-stressed supply chains worldwide. What's more, while case numbers are falling from their new peaks, the potentially deadly virus is still widespread, so many workers are out sick, and fewer are willing to work under the riskier conditions.
While some of these effects may be short lived, others, like the need to pay higher wages to staff its coffee shops in a tight labor market, may be longer lasting. To counter the impact that these pressures and others will have on its bottom line, Starbucks is now focusing on new store growth in international markets.
Expenses are higher for Starbucks in North America
In Starbucks' fiscal first quarter, which ended on Jan. 2, total net revenue increased by 19.3% year over year. Meanwhile, product and distribution costs increased by 23.3%, and store operating expenses increased by 18.6%.
On the conference call that followed the earnings release, CEO Kevin Johnson discussed the inflationary pressure the chain was under.
"Prior to the emergence of the omicron variant, we were experiencing some inflationary pressures and staffing issues resulting from the broader pandemic, he said. "When the omicron surge began, inflationary costs and staffing shortages were amplified, well in excess of our expectations. As I mentioned, three primary factors -- high inflation, COVID-related pay, and training and onboarding of new partners -- impacted our profitability to approximately the same degree, even while customer demand remained strong."
Under current conditions, it's certainly understandable why Starbucks is having difficulty keeping its locations fully staffed. Yes, the company has increased wages for its front-line workers, but only by a couple of dollars per hour. And in a time when widespread labor shortages are opening up more options for workers, a raise of a few dollars an hour may not be enough to compensate people for accepting the elevated health risks involved with a high-customer-contact job.
In addition, Starbucks faced rising costs due to labor shortages even before the pandemic, although they were not nearly as pronounced. And those problems are more acute in North America, where the labor force is smaller in relation to consumer demand. As a longer-term strategy for hedging against this issue, Starbucks has more aggressively focused on adding stores in international markets over the last several years.
In the past 12 months, the total number of Starbucks stores in the U.S. has decreased by two. In contrast, its net international store count has grown by 1,381. Those overseas stores are, on average, less expensive to operate. In fiscal Q1, store operating expenses as a percentage of revenue were 51.8% in North America, but 46.3% in its international segment.
What this could mean for Starbucks shareholders
Now Starbucks has more stores internationally (17,429) than it does in North America (16,888). As this shift continues and its store base becomes more skewed toward foreign markets, it will be interesting to observe if operating profit margins improve. The pandemic and the ensuing economic ripple effects continue to put a wrench in its financials, so it may be hard to discern any positive impacts in the near term. That said, when the dust settles, Starbucks may have an inherently more profitable business than it does now.