Beloved coffee chain Starbucks (SBUX -0.41%) is facing a brewing conflict with its workers, who are slowly starting to unionize throughout the company.
It hasn't impacted business yet, but it could at some point. Here is why investors should remain cautious about the coffee giant's increasingly hot labor situation.
Union momentum is picking up
Time has flown by since the first Starbucks store voted to unionize last December. Things have progressed; approximately 182 stores have successfully formed unions, 35 failed, and 96 votes remain open.
The movement to unionize was isolated at first but has now spread throughout the U.S., and it now seems like most stores could eventually hold votes.
As more stores form unions, things have become increasingly tense between the corporate office and workers. Starbucks announced pay raises in May, but only for non-unionized stores, citing a requirement to bargain before the company can make any compensation or benefits changes at unionized stores. The union has permitted corporate to extend the pay raise to organized stores, but it remains at a standstill.
Meanwhile, the National Labor Relations Board has accused Starbucks of retaliating against organizing stores, including terminating organizing employees and attempting to dissuade stores from holding union votes. Starbucks has firmly denied the allegations, issuing a statement underlining its willingness to defend itself in court.
How unions could impact business
Why does Starbucks care so much about its workers organizing into unions? Unions allow workers to collectively bargain with their employers to obtain higher pay and better benefits.
The U.S. Bureau of Labor Statistics has shown that compensation is generally higher for unionized workers; non-union workers only make an average of $0.81 for every dollar union workers earn.
Starbucks employs roughly 383,000 workers, and a unionized workforce could create higher operating costs that pressure profit margins. Starbucks already relies on price increases to help drive growth and offset rising costs; for example, the company's sales grew by 9% year over year in the third quarter of 2022, with 1% of that attributed to increased customer traffic and the other 8% through price increases.
A unionized Starbucks could face the dilemma of having to raise prices more aggressively and risk putting off customers or absorbing the higher labor costs.
What does the share price say?
Starbucks has had a great decade, growing sales by an average of 9% annually and earnings per share (EPS) by nearly 15%. The stock has enjoyed a premium valuation with a median price-to-earnings (P/E) ratio of 30 over that time -- and it has outperformed the S&P 500.
Despite the stock's long-term success, the recent worries have weighed on the shares, sending them down more than 25% since January; the stock now trades at a P/E of 24, well below its long-term norm.
Despite its union headaches, Starbucks remains a great brand, and analysts are optimistic about the company's outlook, projecting annual EPS growth of 11% over the next three to five years.
The union problem might not disappear for a while, and the stock may continue trading at a discount. But Starbucks can still put out solid investment returns as long as the bottom line continues growing.