Starbucks same-store sales continued to fall in its two biggest markets amid economic and competitive challenges in both countries.
The Seattle-based coffee shop chain said its U.S. same-store sales declined 2%, due to a 6% decline in transactions. The company has been shedding customers domestically since mid-November.
But it is also losing ground in China, a key growth market for the chain. Same-store sales there declined 14% in the quarter as customers spent less money reduced their visits. China’s economic challenges have created major headaches for U.S.-based chains that have established the country as a major beachhead for international growth.
In the U.S., the company’s problem is with its more occasional customer, notably those not on the Starbucks Rewards mobile app. Starbucks has focused on building loyalty membership, which increased 7% last quarter to 33.8 million. They represent about 60% of spending at company locations. And those members increased the frequency of their visits.
But that implies a severe decline in the number of transactions from those non-loyalty members.
CEO Laxman Narasimhan blamed the state of the consumer for that decline. ‘We are operating in a challenging consumer environment,” he told analysts. “I think that is a statement around the overall environment.”
That said, the company’s goal is to convince more of those non-loyal customers that there is value to be had at Starbucks. The company recently introduced its first true value offer, its $5 to $7 Pairings menu. And it is opening its mobile order and pay technology to non-loyal members.
The goal of the latter is to convince more non-loyal members to become loyalty members, who spend more over the longer term.
“We know there are things we can do to communicate value better to our customers,” Narasimhan said. “That’s why we opened up the app for all starting this quarter.”
Still, the company is working to improve the efficiency of its stores, which the company said is leading to better turnover and ultimately better profits. It is improving speed and reducing complaints about orders taking too long. Executives said those efforts are starting to bear fruit. “We're seeing green shoots in the U.S.,” Narasimhan said. Still, on a two-year basis Starbucks' same-store sales slowed by 400 basis points last quarter.
Starbucks also wants to expand its use of delivery and said it has a deal with GoPuff to open 100 delivery-only kitchens in the U.S. It also wants to build more stores in smaller cities where there is more population growth but which are underserved by Starbucks locations.
China is a more complex problem. The company blamed its weak same-store sales there on a difficult economy and growing competition from other chains that are rapidly building new stores and that are engaged in a price war to generate traffic. “China is one of our most notable international challenges,” Narasimhan said.
“We continue to face more cautious consumer spending and intensified competition in the past year, unprecedented store expansion and a price war at the expense of comp and profitability.”
Narasimhan said the company is “exploring strategic partnerships to further enhance our competitive position, to accelerate and innovate to win in the long-term in China.”
That could be a nod to the activist Elliott Investment Management, the activist investor that Narasimhan acknowledged has a position in Starbucks and with whom the company has had “constructive” dialogue. Analysts have speculated that the company could consider some sort of local partner in China.
On the call, Narasimhan said the company has looked at various types of strategic partnerships, including joint ventures, real estate, supply chain and technology. “We’re frankly at the very early stages of this,” he said. “We want to be sure that is where we are further strengthening our advantage in the market.”
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