Commentary

Starbucks Blames Global Turmoil, Marketing Gaffe For Streak's End

Starbucks saw sales increase by less than 5% for the first time after 25 successive quarters of hitting that target but CEO Howard Schultz offered both external and internal reasons for the stall in what he proclaimed to be “an anomaly.”

First, there’s “political and social unrest at home and abroad,” as the Wall Street Journal’s Maria Armental ledes with. “Company executives [cited] terror concerns around the world along with civil unrest and political uncertainty in the U.S. and a ‘profound weakening in consumer confidence,’” she writes. 

“In Starbucks’s 24 years of public life, I can’t recall a quarter quite like” it, Shultz said during the Q3 earnings call, which is transcribed by Seeking Alpha, and he asserted that “we have clear line of sight to returning our business to historic levels of comp growth.”

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Then there was the “change to the coffee giant’s rewards program [that] hurt a popular Frappuccino promotion,” which Fortune’s John Kell focuses on.

“Very early in the quarter, and after months of planning, we began executing against what I am convinced will prove to be among our boldest and most strategic moves ever, the strategic shift of our tremendously successful loyalty program from a frequency-based to a spend-based model,” Shultz said. “The shift was a one-time event, a once-in-a-decade change built on carefully vetted analysis that showed that a spend-based program would best reward our most loyal customers and encourage all of our customers to visit us more often and spend more on each visit, and it would be more fair for all of our customers as well.”

But as Kell points out, “the change angered some, and led to some noise about how the loyalty program wasn’t as generous.” And three weeks after it rolled out, Starbucks launched a Frappuccino Happy Hour promotion that last year had resulted in a 30% jump in revenue. But the “noise” over the changes and its own underestimation of the “interdependence of Starbucks Rewards and Happy Hour” led to disruption in the usually well-thought-out scheme of things at Starbucks.

“In hindsight, what we should have done was build customer awareness anticipation for the Frappuccino Happy Hour promotion as we have done so successfully in the past and given the promotion the breathing room it needed,” Schultz maintained.

In other words, as Starbucks’ president and COO Kevin Johnson indicated, “having marketing messages about the rewards and Frappuccino happy-hour programs out at the same time hurt sales,” Janet I. Tu reports for the Seattle Times.

“We didn't get as much social media buzz and that translated into not as many transactions,” Johnson said.

All this added up to disappointing results just about everywhere. 

“The coffee chain said it saw global same-store sales increase by 4% during the quarter, below Wall Street expectations of 5.7%, according to FactSet,” CNBC’s Christine Wang reports. Its shares dropped as much as 4% in late trading after the results were made public, even if the headline on the release painted a cheery picture: “Starbucks Reports Record Q3 Financial and Operating Results.”

“Starbucks saw comparable store sales increase by 4% in the Americas region, 3% in the China/Asia Pacific region and decrease by 1% in the Europe/Middle East/Africa region. Analysts had expected sales growth of 6.2% in the Americas, 4.6% in China/Asia Pacific, and 2.8% in Europe/Middle East/Africa,” Wang continues.

It also continues to innovate and reinvent the definition of what a coffeehouse should be. 

“The company has been making a big push to expand its appeal both in new markets and at new times of the day beyond the morning pick-me-up it's known for,” Hadley Malcolm reports for USA Today. “Tea and cold coffees are becoming a more prominent part of the menu. Customers craving caffeine but who want to fix it themselves can also find more Starbucks products in grocery.” stores, such as more flavors of Keurig pods and individual bottles of cold brew coffee.”

And, by the way, loyalty membership is up 18% from a year ago, with 12.3 million active users in the U.S.

“The company reiterated its forecast for annual profit, excluding certain items, saying it would be as much as $1.89 a share. That matches the average analyst estimate. But Starbucks pared back its expectations for same-store sales. They are now forecast to rise in the mid-single digits, compared with ‘somewhat above’ that level in its earlier prediction,” Bloomberg’s Leslie Patton reports.

It also expects U.S. comparable-store sales to improve in the fourth quarter, compared with last quarter’s results, writes Patton. Hopefully, the political and social climate at home and abroad will, too.

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