Most companies would be thrilled to "struggle" like Starbucks (SBUX) -) has struggled. The chain reported a relatively modest 9% increase in United States same-store sales in its 2023 fiscal year, with 5% of that growth coming from higher average transactions which likely comes from price increases.
The chain, however, has shown some signs that it's losing some of its audience. Customer traffic has been weaker in November, according to data from Placer.ai.
In 2020, 2021, and 2022, daily visits during Red Cup Day jumped by 74.4%, 65.0%, and 81.0%, respectively, compared to the daily visit average during the five weeks preceding Red Cup Day each year. But in 2023, the Red Cup Day visit bump relative to the previous five-week daily average stood at 31.7% – still a noteworthy increase, but not as impressive a jump as in previous years.
Related: Coca-Cola, PepsiCo rival creates a new beverage category
Taken as a single day, the results don't mean much, but they do appear to be part of a trend.
"Visits between November 13 and 19 – the week of Red Cup Day – were 16.1% lower when compared to the equivalent week in 2022. And visits during the previous week – the first full week following the release of the Holiday Menu – were down 3.4% YoY, indicating the demand for the special holiday beverages may have been slightly lower this year," according to Placer.ai's report.
You can blame inflation, the economy, and increased competition but that's not why Starbucks shareholders should be worried. Yes, all of those things could play a factor, but Starbucks' problem is CEO Laxman Narasimhan.
Image source: Starbucks
Starbucks CEO misses what people love
While people have some criticisms of how Starbucks' long-time CEO Howard Schultz handled the company's labor issues, you can't question his coffee bona fides. Schultz did not found Starbucks, but, when he took it over, the company was just roasting coffee and selling beans.
Schultz brought to the brand the idea of being a U.S. version of an Italian coffee house with locations serving as a third place between work and home for customers. The company's former leader always put coffee at forefront of the chain's experience.
Narasimhan does not have any coffee experience in his background. That's much like Kevin Johnson, the former Microsoft executive who had previously taken over as CEO during one of Schultz's periods away from the company. Both Johnson and Narasimhan have impressive operations experience, but the magic of the coffeehouse experience isn't just about efficient ordering or fast production.
Instead, coffee and the overall experience must connect with customers so they want to make Starbucks part of their routine. Yes, operations matter, but that's not what makes people come back. And that may explain why the shares are down about 2.5% in 2023, compared with, say, the 52% gain for the Nasdaq-100 Index (^NDX) -), of which Starbucks is a component.
Forget McDonald's, focus on coffee
McDonald's (MCD) -) entree into the beverage space, CosMc's may someday challenge for non-coffee-drinking Starbucks customers, but that's likely to take many years if it happens at all.
In the immediate future, Starbucks' biggest problem is that its CEO has spearheaded a new revitalization strategy that pretty much never mentions coffee. It's a passionless creed that feels like it was the product of consultants, not a CEO who keeps track of coffee culture around the world.
"Triple Shot Reinvention will focus on three priorities: elevating the Starbucks brand; strengthening the company’s digital capabilities; and becoming truly global; customized with 'two pumps' unlocking efficiency and reinvigorating partner culture," the company shared on its website.
While Schultz was introducing the chain's Oleato line of olive-oil infused coffees, his successor was working on this cliched word salad that does not address the unique connection the chain has with its customers. Starbucks needs a leader who prizes innovation while quietly making sure stores operate well and labor issues get solved.
History has shown that it's a company not well served by making operations, not coffee, its chief focus.
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