Global prices for raw arabica beans are up more than 20% this year after soaring 70% in 2024
[NEW YORK] Starbucks posted on Wednesday (Oct 29) that its first quarter of gains in global comparable sales after nearly a year and a half, led by international markets, though growth still eluded its US operation, and margins came under pressure from the surging cost of wholesale coffee beans.
The results follow several quarters of falling sales that spurred the hiring of Brian Niccol as CEO in August 2024, who embarked on a brand reset known as “Back to Starbucks”. Since taking the top job, Niccol has closed hundreds of stores, simplified the menu and made efforts to speed up service. He told analysts the quarter “marks a turn” for the coffee chain’s US operations.
However, the high cost of coffee beans will act as a headwind for at least the next two quarters, executives said. Global prices for raw arabica beans are up more than 20 per cent this year after soaring 70 per cent in 2024. That, along with hefty tariffs on imported goods and the cost of its revamp, squeezed margins.
Global comparable sales rose 1 per cent, but in the United States, its largest market, comparable sales were flat and the average spending per customer fell.
US consumers are increasingly watchful about spending on dining out, as economic uncertainty and inflation squeeze budgets. Burrito chain Chipotle Mexican Grill cut its annual targets for the third time this year, and said households earning below US$100,000 have pulled back sharply.
Niccol said that Starbucks would be judicious with price increases next year and said he did not expect any broad menu price hikes.
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CFO Cathy Smith said that the chain’s turn away from discounts last year increased average transaction amounts. “Turnarounds are difficult to forecast, and while we have good reason to believe that our US company-operated comparable sales should build through the year, we know recoveries are not linear,” Smith said on a post-earnings call.
The company said in July that it would invest more than half a billion US dollars of additional labour hours into its US company-operated stores over the next year. While Starbucks hedges against a rise in coffee prices, the commodity has faced supply snags due to geopolitical volatility, including US President Donald Trump’s 50 per cent tariffs on top grower Brazil, and climate issues.
“Their cost structure – with rent, labour, and coffee – is challenging. There are so many competitors, whether in coffee or other caffeinated drinks, that they don’t have the pricing power they used to. At least management is realistic about the challenges ahead of them,” said Brian Jacobsen, chief economist at Annex Wealth Management.
Starbucks’ shares edged lower in extended trading after its fourth-quarter earnings of 52 US cents a share missed estimates of 56 US cents, according to LSEG data. Its operating income margin fell to 2.9 per cent, down from 14.4 per cent at the same time a year ago.
Restructuring continues
The company expanded its restructuring efforts in September to close underperforming stores, including its flagship, unionised Seattle roastery. It said on Friday that it had closed 627 stores in the fourth quarter as part of that plan.
CFO Smith said that the company expects to provide a financial outlook at an investor event in January. Starbucks suspended guidance shortly after Niccol took the helm. Starbucks is also in a stalemate with the union representing baristas at about 550 stores in the US, with talks hitting an impasse last year, and the union planning to vote this week on whether to authorise an unfair labour practice strike.
Both sides blame the other for ending talks late last year and say they are ready to return to discussions.
In China, Starbucks’ second-largest market outside of the United States, the company reported a 2 per cent rise in comparable sales, after a return to growth in the metric last quarter.
Starbucks has lowered prices for non-coffee products in China, and has been trying to offer more customisation and local flavours.
The company is nearing a sale of a majority stake in its China business, as its market share has declined in recent years due to fierce competition from local coffee chains that offer cheaper products amid an economic slowdown that has changed consumer habits. REUTERS
