Starbucks (SBUX +4%) is seeing a boost after reports that activist investor Starboard Value has taken a stake in the coffee chain. This follows news that Elliott Management has also accumulated a stake worth up to $2 billion. These firms are likely to push Starbucks' board for changes, especially as SBUX shares have dropped 30% since their mid-November 2023 highs.
- Starbucks' premium pricing has been a challenge as consumers seek value. The company has missed revenue targets in four of the past five quarters and earnings in two. Competitors like McDonald's McCafe, Dunkin' Donuts, and Wendy's breakfast offerings have intensified the competition.
- In Q3, global comparable store sales declined by 3%, with North America down 2% and China down 14%. Japan offset some of these losses with strong performance. Starbucks aims to improve U.S. operations and supply chain, and is introducing new drinks, including energy beverages.
- New menu offerings are expected to drive demand. Cold beverages, which made up 76% of its mix, saw a 1% year-over-year increase in Q3. New products like Summer-Berry Starbucks Refreshers and beverages with Pearls had the highest week-one product launch in company history.
- Starbucks is focusing on the energy drink category, launching Handcrafted Iced Energy beverages across U.S. stores in three months. However, competitors like Dunkin' have been quicker to capitalize on this trend. The company is also excited about the return of Pumpkin Spice in Q4.
- China remains a significant challenge with cautious consumer spending and intense competition. The company has seen rapid store expansion and price wars, affecting profitability. Starbucks is exploring strategic partnerships to accelerate growth and innovation in China.
Activist investors are known for their value research, and their involvement is often a positive sign. While Starbucks remains a strong global brand, inflation has pushed consumers towards value, an area where SBUX struggles. Additionally, the company has been slow to capitalize on energy drinks and boba trends, and faces challenges in China.
Activist investors might push for changes to Starbucks' ambitious new store plans. Despite having over 16,700 stores in the U.S. and 7,300 in China, the company sees potential in Tier 2 and Tier 3 cities. These firms may also pressure Starbucks to improve its value offerings. While these changes could be beneficial, turning the company around will be challenging.
