Given Starbucks' (SBUX 3.41%) disappointing fiscal second-quarter results, it would be easy to presume the worst for the entire prepared-beverage business. The coffeehouse chain's overall revenue for the recently ended quarter was down 2% year over year, while same-store sales slumped 4%. Total comparable transactions were down 6%. All these numbers fell short of estimates.
Be careful of drawing broad conclusions based on one company's numbers, though. Consumers are still drinking plenty of coffee (as well as the other beverages Starbucks offers). They're just buying them elsewhere. Rivals like up-and-comer Dutch Bros. (BROS -2.86%) and established chains like Dunkin' Donuts are as busy as they've ever been.
The underlying dynamic is one that current or prospective shareholders of either outfit will want to understand, since it could remain in place for a while.
Spending on coffee is shifting, but not drying up
As was noted, Starbucks' top line fell 2% last quarter, all but ending a long but consistently slowing growth streak. CEO Laxman Narasimhan chalked it up to the "highly challenged environment." And he's not wrong. The average consumer is feeling the clear pinch of inflation these days.
If this were the first time the chain bumped into a headwind, it might be dismissible. It's not the first time, though; Starbucks' draw has been fading since late last year. Data from consumer market research outfit Placer.ai indicates the company's foot-traffic growth has essentially stagnated between then and March of this year. In a similar vein, numbers from Earnest Analytics say Starbucks' share of consumers' spending on prepared coffee deteriorated in 2023, in step with shrinking ticket sizes and transactions -- weakness that wasn't always apparent in the recent quarterly numbers.
But these consumers aren't necessarily spending less on coffee and other beverages. As already noted, they're just purchasing their drinks somewhere else.
One of the chief beneficiaries of this spending shift is the aforementioned Dutch Bros. While the growth of Starbucks' foot traffic has been shrinking since last year, Dutch Bros' growth in traffic has actually been accelerating, according to data from Placer.ai:
Data source: Placer.ai. Chart by author.
As of the end of last year, Earnest Analytics reports, Dutch Bros. accounted for 6% of U.S. consumer spending on coffee and other premium drinks. That's up from just 4% as of the end of 2020. Dutch Bros' quarterly results during that period show corresponding growth. Last year's revenue was up nearly 31%, for perspective, while its same-store sales improved nearly 3%:
BROS Revenue (Quarterly) data by YCharts.
What gives?
Consumers are tightening budgets without sacrificing splurges
Your likely gut instinct isn't misleading you: People are in some palpable financial pain right now. They're not giving up treats like prepared coffee, but they are willing to try something that's not quite as pricey as the typical Starbucks beverage. Coffee and other drinks from a Dutch Bros. drive-thru are an affordable compromise.
And it's not Dutch Bros. saying so, for the record. It's not just Starbucks, either (despite Narasimhan's acknowledgement that the current environment is a tough one for the average consumer). We're hearing a similar message from lots of consumer-facing companies.
Take McDonald's as an example. While it's usually a place for an affordable meal, McDonald's CEO Chris Kempczinski explains that "Consumers continue to be even more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending, which is putting pressure on the industry." This discrimination ultimately led the fast-food chain to a shortfall from its first-quarter earnings estimates, with modest U.S. same-store sales growth of 2.5% still missing expectations of 2.6%.
The Kraft Heinz Company is seeing similar caution. Although its first-quarter revenue was more or less in line with estimates, those sales still fell 1.2% year over year, while organic sales slipped 0.5%. Total volume of food sold during the quarter was down 3.2%, with many consumers rejecting the food giant's most recent round of price increases. Kraft Heinz CEO Carlos Abrams-Rivera commented on the headwind:
"[L]ower-income consumers are challenged with interest rates remaining high, gas prices elevated and savings dwindling. So there's a clear pullback of restaurant spend by these lower-earning households, especially in restaurants and convenience stores. These consumers instead are looking for value as they prepare more meals at home."
People are counting their pennies. Inflation is changing how they spend even if it's not preventing them from spending. Premium is out. Value is in.
It's of course a dynamic that plays right into the hand Dutch Bros. is holding.
What about Dutch Bros. and Starbucks stock?
This theory will be put to the test on Tuesday, May 7, after the market closes. That's when Dutch Bros. is scheduled to post its first-quarter results. Analysts are calling for revenue of $255.7 million and earnings of $0.02 per share, up from the year-ago comparisons of $197.3 million and a breakeven, respectively. This growth outlook jibes with the data and trends highlighted by Earnest Analytics and Placer.ai, boding well for Dutch Bros. stock.
Just as its Q1 numbers could underscore Dutch Bros. stock's potential upside, though, they may also indirectly affirm that Starbucks stock remains a tough one to own for the indefinite future.
See, despite last quarter's weakness, Starbucks CFO Rachel Ruggeri says the company currently has no plans to lower prices. It instead intends to address the challenge by inducing more sales from consumers who aren't exactly regular customers. Investors are understandably worried that that's not quite the right plan for an inflation-riddled environment that could linger for at least a few more quarters.
