Consumers have reached their breaking point with $6 iced coffees and lemonades at Starbucks. As per reports, the specialty coffee brand’s sales dropped 3% globally at stores open for at least a year, including a 2% drop in its home North America market. And that masked how steep the decline was for Starbucks last quarter: Total transactions at North American stores open at least a year fell 6% in the quarter. That was offset, in part, by higher prices. In other words – fewer people are going to Starbucks and buying drinks and food.
With a second-straight quarter of sales declines, the coffee retailer’s struggles reflect consumer fatigue with high prices at food chains, restaurants and stores after years of price hikes. They also reveal cracks in Starbucks’ business model, which has changed in response to customer demand from a predominately sit-down coffee shop to a mostly drive-thru and mobile takeout chain.
Consumers are showing their limits at Starbucks and other chains like McDonald’s. McDonald’s this week reported that sales at stores open at least a year fell 1% last quarter, its first sales decline since 2020.
Starbucks also faces increased pressure from rival drive-thru coffee chains — and from people opting to make their morning cup of coffee at home. Prices surged over the past few years, but this year, grocery store costs have moderated, while the cost of eating away from home continued to rise. “Your more cost-conscious consumer, they’re finding other places or just doing things at home. There’s also more competition from some of the drive-thru coffee chains, like a Dutch Bros,” said RJ Hottovy, an analyst at Placer.ai. While the shares of Starbucks (SBUX) rose more than 2% in afterhours trading, Starbucks’ stock has dropped 19% this year.
Drastic Transformation
The Starbucks’ model has radically changed since its start as a sit-down coffee shop. Mobile app and drive-thru orders make up more than 70% of Starbucks’ sales at its approximately 9,500 company-operated stores in the United States. Cold coffees, teas and lemonades make up a higher percentage of sales than hot coffee.
Starbucks has several initiatives to turn business around, including value meals and investments to speed up customer wait times. Starbucks, using a play from fast food chains, is trying to win back customers with value menus. The chain recently rolled out a new ‘Pairings Menu’, which combines a drink and a breakfast item for either $5 or $6. The company said that the pairings menu experiment is paying off, and multi-item orders are surging.
The company also rolled out new technology, called the Siren System, which is designed to cut down the amount of time it takes to make cold drinks. Faster blenders and new dispensers for ingredients like milk and ice are set up in a line, so employees can prepare the beverage without bending down to reach for milk or whipped cream tucked under the counter.
“Our plans are beginning to work,” Starbucks CEO Laxman Narasimhan said on a call with analysts. “We are recovering our brand from. We’re rebuilding the operational foundation of our stores and supply chain.”
