Starbucks (SBUX 0.53%) has a new rebound plan. Just a few months after outgoing CEO Howard Schultz said that management had some ideas to "reinvent the company," investors now have clarity on those initiatives.
The coffee titan just outlined a three-year recovery plan that aims to push annual sales growth to as high as 12% while boosting profitability. Those targets represent increases from the prior outlook executives had issued.
That raises the risk that Starbucks will miss them, especially if economic growth keeps slowing. The goals also assume the chain can pivot to a new operating model without alienating too many of its core customers.
The numbers
Starbucks is aiming to adjust to evolving demand trends that are increasingly favoring on-the-go coffee consumption. Its rebound plan leans on launching more drive-thru stores and small-format locations, especially outside densely populated city centers.
Those moves represent big shifts away from the traditional Starbucks value proposition that centered on a place to hang out and linger over drinks. Executives are now aiming to meet customers, "wherever and whenever they want," whether that's in a drive-thru line or a delivery to their home.
The more mobile approach should help sales growth accelerate to between 7% and 9% in each of the next two fiscal years, compared to the prior range of 4% to 5%.
What could go wrong
A big part of that acceleration will come from a rebound in the China market, which Starbucks is expecting to return to normal growth patterns soon following the pandemic lockdowns. But demand shifted quickly in the U.S. lately as shoppers' priorities changed, and those moves pressured Starbucks' traffic. There's no guarantee that a similar shift won't hurt the China segment over the next year or so.
And Starbucks will face more competition from fast-food chains that are more established in the on-the-go space. McDonald's has the biggest national network of drive-thru locations, for one, and has been pouring resources into its mobile ordering, pick-up, and delivery platforms. Starbucks might be surprised by the market share battle it has as it shifts more into areas that are dominated by companies like Domino's Pizza.
Patience is key
Still, even if Starbucks comes up short on its ambiguous rebound targets, the chain would likely beat the prior outlook that the company issued in early 2022. And management isn't likely to stray so far away from Starbucks' key competitive advantages that it harms the brand.
As long as the company keeps leading in the restaurant industry, including by making bold shifts like these in response to changing consumer priorities, investor returns should be impressive. The latest rebound plan is bad news in the sense that it confirms that Starbucks is losing some of its premium market position. But it is encouraging to see the company making the pivot toward what management sees as the best path forward to return to an offensive posture.
If it works out, investors should see faster growth starting in the next fiscal year, plus rising operating profit margin. The resulting earnings spike would help the stock recover some of the losses that shareholders have endured in the past year.
