INTRO: Starbucks isn’t doing that great. In fact,
it’s down 40% year to date and it’s currently the 474th worst performing stock in the S&P
500. This correlates to a total market cap loss of $66.4 billion. Given how the overall
market is doing though, I bet a lot of you guys aren’t even surprised. The NASDAQ and
Russell 2000 are officially in bear markets, and the S&P 500 is teetering between correction
and bear market territory. But, while it’s easy to just write off Starbucks’ sell off
as a result of a weak market, there’s actually a lot of background factors that are prompting
this sell of. And if you don’t believe me, just take a look at this. Last month, the
retired father of Starbucks, Howard Shultz, returned to Starbucks to change the direction
of the company. This isn’t the first time Howard is leaving retirement to run Starbucks
either. Back in 2008, during the height of the financial recession, Howard returned to
Starbucks as CEO and he led the company up until 2017. During this time period, Starbucks
stock grew an impressive 17X from the 2008 bottom, but the company hasn’t down all
that much since Howard left. In fact, the stock is almost back to the same prices that
he left it. This has caused many investors to question if anybody can run Starbucks other
than Howard. But, before we get into that, we have to look into whether Howard can even
save Starbucks again in the first place. So, what even happened to Starbucks?
SHORTAGES: One of the top factors driving down Starbucks
is worldwide shortages in almost everything starting with labor. If you haven’t heard
already, a significant number of employees especially in the US have been quitting their
jobs over the past few years. In fact, in 2021, 47 million Americans voluntarily quit
their jobs. And, if you didn’t notice, that’s literally ¼ of the entire US labor force.
Given that the unemployment rate isn’t skryrocketing though, it’s clear that these guys aren’t
just leaving the corporate world altogether. Rather, they’re switching over to companies
and jobs where they feel more respected and appreciated. Naturally, you would think that
compensation plays a big factor in this decision as well, but this is actually not the case.
In fact, dissatisfaction with one’s salary does not even rank in the top ten reasons
that people are leaving the jobs. Salary dissatisfaction actually comes in at rank 16. Some of the
reasons that people are really switching jobs is a toxic corporate culture and underappreciated
work. And there’s no question that these issues are especially prevalent within service
oriented industries like Starbucks. This trend has made it extremely difficult for Starbucks
to fill positions and keep them filled. And it’s not just a case of oh we’re missing
a cashier today or we’re missing a barista today. No, Starbucks is literally missing
half of their workforce. You see, when the pandemic hit, Starbucks laid off the vast
majority of their employees. Their employee count fell from 349,000 employees to 138,000
employees. Meanwhile, the number of stores Starbucks was operating never went down, it
actually kept going up. We don’t yet know how many of these positions Starbucks has
filled since last September, but I think it’s pretty safe to assume that it’s not the
full 211,000 positions. This means that the remaining employees are having to do even
more work which is just further motivating them to switch jobs. The staffing shortage
has actually gotten so bad that some Starbucks locations have starting reducing store hours,
and as a business, that’s usually the last thing you want to do especially if there’s
sufficient demand. Aside from facing a severe staffing shortage, Starbucks is also having
to deal with a supply shortage. If you go to your local Starbucks, it’s more than
likely that atleast a few of their menu items are unavailable due to a lack of ingredients.
Some of the hardest hit ingredients include oat milk, flavored syrups, and tea bags, but
the shortage also extends to some of Starbuck’s most popular offerings as well. Some locations
don’t even have frappuccino mix or breakfast sandwiches. And just a few months, the entire
region of upstate New York ran out of mocha. So, not only are Starbuck’s employees having
to do more work, but they’re also having to constantly deal with customers that are
upset that they can’t even get what they came for. And the longer these shortages keep
up, it’s just gonna become harder and harder for Starbucks to recover.
INFLATION: The supply shortage isn’t the only reason
that customers are upset either. Another issue that is driving customer dissatisfaction is
rising prices. Now, it’s no secret that Starbucks is already a premium brand with
expensive offerings. Many people have looked past these prices for years due to convenience
and taste. However, as Starbucks continues to raise prices, it’s becoming harder and
harder for customers to justify going to Starbucks. The worst part is that this is not something
that Starbucks even has that much control over. Prices across the board are simply skyrocketing,
and they have to raise prices to keep up. For example, the price of coffee has doubled
since 2019 from $100 a pound to over $200 per pound. Similarly, I’m sure all of the
equipment at Starbuck’s locations along with their cups and spoons and straws have
also risen in price due to out of control inflation. And on top of all this, Starbucks
is having to raise wages to retain the employees that they do have. Last October, they committed
to increasing minimum wage across the country to $15 per hour. Now, I’m not trying argue
whether such wage hikes are justified or not. But, one thing that’s certain is that someone
has to pay for these higher wages, and more times than not, that someone is the customer.
Meanwhile, from the customers’ perspective, it’s not just Starbucks where they’re
having to spend more money. Over the past year, their cost of living across the board
has skyrocketed. Everything from gas and energy bills to groceries and housing costs have
gone to the moon while wages haven’t. And there’s only so many prices increases that
consumers can afford before they start to decrease their consumption. Necessities like
gas and groceries are something you can’t avoid, but something you can avoid is overpriced
Starbucks coffee. And as inflation continues to remain high, we’ll likely just see more
and more people cut back on such purchases.
BOTCHED ONLINE SYSTEM: Something else that’s also leading to customer
and employee dissatisfaction is Starbuck’s mobile/online order system. Embracing a mobile
order system was a no brainer during the pandemic, but long term it seems to have caused more
headaches than solutions. Here’s the thing, when people come to the store and order in
person, there’s a natural limit to how long the line will get. I mean if there’s already
20 people in line, people who come after are more likely to just skip Starbucks for the
day. But, when a significant number of people are ordering online and there’s a long line
at the store, fulfilling all these orders quickly becomes overwhelming especially during
rush hours with a staffing shortage. And when these online customers show up at the store,
they’re often upset that their order isn’t ready yet. Something else to note is that
when people order online, they’re way more likely to make more complex orders because
it’s easier to click buttons than to verbally communicate such an order. This has made fulfilling
online orders more time consuming which has just made it even harder to keep up with rush
hour demand. To make things worse, their online system often doesn’t reflect missing ingredients
meaning that customers are often allowed put in orders that can’t be made. This leaves
the employees with two options. Either they can inform the customer that their order can’t
be completed when they show up at the store which is probably not the most fun thing to
do. Or, they can substitute the missing ingredient with an alternative that is available. But,
this doesn’t necessarily lead to the happiest of customers either. The straightforward solution
to this conundrum is for Starbucks to revamp their online system and implement two features.
First of all, their online system should limit online orders to a manageable volume, and
secondly, their online system should accurately represent shortages. If they don’t revamp
their online system, we’ll likely just continue to see more misunderstandings between customers
and employees causing Starbucks to lose customers over the long term.
UNIONS: While all of the factors that we’ve discussed
so far are definitely weighing down on Starbucks’ business. Likely the biggest reason behind
Howard’s return is Starbucks employees unionizing. For service based businesses with hundreds
of thousands of minimum wage workers, unions are often their biggest fear. Here’s the
thing, while Starbucks charges a ridiculous amount for their beverages, they don’t actually
take much of this to the bottom line. Historically, Starbucks’ net margin has hovered at just
under 15%. And while this a solid amount for a restaurant business, this doesn’t give
them much leeway in terms of raising wages. So, Starbucks and other low margin companies
like Amazon are extremely anti union. But, despite their attempts to stifle unions, we’ve
seen Starbucks employees put up quite a fight over the past year. For example, remember
how Starbucks committed to increasing their minimum wage to $15 per hour. Well, this was
a last ditch effort to try to stifle union participation. Before they hiked wages, they
were attempting to terminate every union member they could find. They even sent managers to
Starbucks locations to try to dissuade union participation. And it looks like Starbuck’s
is simply doubling down on crushing unions. At the beginning of May, Howard announced
a set of raises that will only benefit non unionized workers. And he justified this decision
with likely the most garbage reason you have ever heard. Howard suggested that he couldn’t
raise wages for unionized workers because that would be imposing new wages without the
union’s approval. Starbucks Workers United has fired back by filing charges against Howard
for discriminating against Union workers. This is still a very fluid situation, so we’ll
have to wait and see how this battle plays out. But honestly, I think Howard’s best
choice is to simply give in to the Unions. Here’s the thing, Howard can play this game
as much as he wants and he might even win against Unions, but I think Howard’s victory
would actually be a loss for Starbucks. Over the years, Starbucks has maintained a pretty
respectable image when it comes to employee benefits and treatment. But, pushing vigorously
against unions can easily destroy that image and I don’t think that’s in Starbucks’
best interest. Given that this is the primary reason that Howard has returned though, I
suspect that this is going to be bloody battle.
THE STATE OF STARBUCKS: At the end of the day, Starbucks is a mess
both internally and externally. They’re plagued with staff and supply shortages while
having to deal with insane inflation and bad software which is leading to pretty unhappy
customers. On top of this, Starbucks is ferociously fighting against internal unionization efforts
which have thus far proven quite successful. Howard returning to Starbucks simply enunciates
how critical the situation is. And unfortunately, there is no easy solution. If Howard gives
into the union, Starbucks will likely have to deal with even higher operating expenses
which will just make even harder for them to retain customers. On the other hand, if
Howard doesn’t give in, Starbucks will not only continue to face a staffing shortage
but they’ll probably tarnish their reputation. And in my opinion, their long term reputation
is worth a lot more than short term profits. But with that being said, if anyone can get
Starbucks back on track, it’s Howard. So, we’ll have to wait and see what he does.
Do you guys believe Howard can turn Starbucks around? Comment that down below. Also, drop
a like if you think Starbucks is overrated. And of course, consider checking out our international
channels to watch our videos in other languages and consider subscribing to see more questions
logically answered.