Starbucks (SBUX 0.80%), the largest coffee shop chain in the world, has been facing new challenges as the world shifts in the age of a global pandemic. In his third stint as CEO, Howard Schultz and the company announced a sweeping reinvention plan last week to tackle these challenges. Really, it's meant to radically alter the company to operate in this new age.
Investor enthusiasm lifted the shares last week. Is now the time to buy Starbucks stock?
Why the need to reinvent itself?
Starbucks has been posting impressive results as it rebounds from pandemic closures. But prior to the pandemic, sales growth -- specifically, comparable sales growth -- was already slowing to mid-single-digit quarterly rate. As the pandemic closed dining room doors, Starbucks accelerated investments in digital programs and other services to generate sales under pressure.
As it begins to emerge from this phase, management has recognized that it needs a new way to maximize growth opportunities. When sales began to falter after the market bust in 2008, Howard Schultz returned for his second stint as CEO to evaluate the business and forge a growth strategy. That's when Starbucks launched its "third place" concept -- viewing its stores as a place between home and work -- which was overwhelmingly successful.
But it's now run its course as customers lean on Starbucks more for pickups than meeting places. There are several issues that emerge from this change in consumer behavior. Starbucks' stores seem outdated, created for needs of another time; not enough of them have drive-thrus; and perhaps key, the customized drink process takes too much time, and employees are working hard to meet demand while lines get longer.
These factors prompted Schultz, in his third time at the steering wheel, to develop a new plan. It was introduced on the heels of Starbucks' announcement that it has hired Laxman Narasimhan to take over as CEO. He will join as co-CEO with Schultz starting in October and take the reins solo in April.
How Starbucks is going to do it
Starbucks laid out a three-year financial roadmap, with the goals of delivering 7% to 9% comparable sales growth annually, 10% to 12% revenue growth, and 15% to 20% growth in non-GAAP earnings per share (EPS). It means to do that through increased store count, disciplined capital allocation, and expanding its margins.
A large chunk of the investments will be in its workers. It will increase wages and offer more benefits, as well as develop opportunities for advancement. This is meant to head off unionization efforts as well as stem employee turnover.
The rest of the investments will focus on "purpose-built store concepts." This will include drive-thru only, pickup only, and delivery only, as well as enhancements of regular stores. These will connect with the digital upgrades, such as expanded mobile order and pay, and a larger delivery rollout.
Starbucks will also offer more features in its loyalty program for an omnichannel experience, and it's specifically targeting its international customers. The U.S. loyalty program, rooted in digital, is strong, and Starbucks will build out an international digital rewards system it's calling Starbucks Digital Solutions.
Finally, it's committed to beverage innovation, which includes setting up a quicker beverage creation system that it's calling the "siren system." It's also investing in improved equipment and technology to speed up the process.
As for store count, Starbucks expects to expand at a rapid pace. It plans to grow its store count in China by 50% over the next three years to reach 9,000 stores.
Where does this leave Starbucks stock?
I think it's great that management has recognized the need to change before it affects sales, unlike last time, when things were going downhill before it changed course. No one knows Starbucks as well as Howard Schultz, and his astute business sense has led it down the right path more than once already.
However, as with all new plans, we won't know the results for a while. Starbucks looks like it's in good hands with the experienced Laxman Narasimhan at the helm, and Schultz isn't going anywhere; he'll be around to help the company move forward, even if he's not in the CEO role.
Starbucks' stock was up slightly on the news of the reinvention plan, but investors may want to wait and watch while the company is still in change mode.