Yahoo Finance Trouble brews at Starbucks as its caffeine high finally fades
When Starbucks first set its sights on Britain, the Seattle coffee shop aimed to become the new local.
"We hope to benefit from the pub culture in the UK to make Starbucks a natural meeting place for people," then-international president Howard Behar said.
More than 20 years after the first branch opened on these shores, the chain now has more than 1,000 cafes across Britain.
Yet after years of rapid growth, trouble is brewing.
The world’s biggest coffee chain is facing growing competition from cheaper rivals such as Greggs and a squeeze on profits as a result of inflation. Last year it considered selling off its British business here altogether.
Complaints about long wait times for its increasingly pricey drinks are more and more common.
And at head office, the company faces charges of illegally cracking down on efforts by baristas to unionise in the US.
Starbucks shareholders have since approved an independent assessment of its commitment to workers’ rights, including whether the coffee company adheres to freedom of association and collective bargaining standards.
New chief Laxman Narasimhan, who took on the role last week, is tasked with reinvigorating the business and reviving a share price that has dwindled over the last two years.
It is a tough task in more ways than one: Narasimhan, who was chief of Durex maker Reckitt Benckiser before taking over at the coffee chain, is succeeding legendary Starbucks chief Howard Schultz.
Billionaire Schultz is credited with growing Starbucks from a small Seattle business into a coffee behemoth with more than 36,000 stores globally. The chain “truly has been my life‘s work”, he wrote in a recent open letter.
However, he has proved a tough act to follow: the 69-year-old has had three stints in charge of the company, returning at key junctures to help revive Starbucks’ fortunes.
One of Schultz’s final acts during his latest spell in charge was to redouble Starbucks’ commitment to Britain.
Last year executives had been considering a sale of the division after rising costs ate into its profits.
UK profits dropped by a fifth to £10.4m, driven by more expensive coffee beans and higher wages for staff.
That came despite inflation-busting price rises: the price of a Starbucks flat white rose by more than 12pc and faster than rivals such as Pret and Costa, according to figures from UCC Coffee.
However, Starbucks has now shelved plans to sell the UK business. Instead, it plans to open 100 new stores in the UK and spend £30m doing up existing cafes.
Experts believe it will need to go further to recapture momentum.
“Starbucks’ weakness has always been its food,” says Jonathan De Mello, founder of JDM Retail. “The coffee offer, yeah, it's great, but food is pretty terrible.”
He adds: “The lunchtime spike that other businesses get, like Pret and Greggs in particular, they don’t get. They get people buying their coffee in the morning and in the late afternoon, but they don’t get this big increase in sales at lunchtime.”
Sales of well-known Starbucks products, such as its frappuccinos, have also taken a hit in recent years because of growing demand for healthier options.
Jeffrey Young, managing director of coffee experts Allegra Strategies, says property companies looking to rent space to food and drink brands want something new that Starbucks may not offer.
“Progressive developers are looking for young fresh brands,” he says.
Narasimhan has pledged to work four hours a month as a barista in branches of Starbucks to stay connected to frontline issues like wait times, customer tastes and more. Last week he called out the wide variety of cup and lid sizes as a problem he wanted to address.
“We have got to find ways to ensure that we do listen and stay connected,” the new chief told the Wall Street Journal.
However, DeMello says: “Underlying all these comments about being a barista for four hours in a month and all the rest of it is heavy dissatisfaction with the state of things from a staff perspective.”
In the US, Starbucks is being raked over the coals over its treatment of employees. The company has been accused of creating a “climate of intimidation” by union chiefs.
Schultz, who until a week ago was in charge, appeared before a US Senate committee on Wednesday where he was accused of breaking labour laws at Starbucks by blocking efforts by baristas to unionise.
Senator Bernie Sanders, the far left Democrat who ran for the Presidential nomination in 2020, said: “The fundamental issue we are confronting today is whether we have a system of justice that applies to all, or whether billionaires and large corporations can break the law with impunity.”
Schultz pushed back strongly, saying Starbucks had “done everything that we possibly can to respect the right under the law of our partners' ability to join a union”.
But perhaps the biggest challenge facing Narasimhan is China, where Starbucks has 6,000 shops.
“Half of Starbucks’ future growth is predicated on China,” says Nick Setyan, restaurant industry analyst at Wedbush Securities. “The politics of it have to be managed by someone that has the gravitas of a Schultz.”
Escalating tension between China and the US, if not managed correctly, could hinder American business’ interests in the country over the years.
Schultz has promised to act as a mentor to Narasimhan to help him navigate these sorts of challenges.
For Indian-born Narasimhan, the Starbucks job is the most high profile position of his career.
Before a two-year stint in charge of Reckitt, Narasimhan was chief commercial officer at Pepsico and spent 19 years at McKinsey.
Setyan says: “I think the most important thing here is that he has an operations background, he's managed a complicated multinational business as the chief operating officer. He knows how to handle geopolitics.”
Schultz appears to have handpicked Narasimhan as his replacement, referring to him as “the future of Starbucks” in a recent open letter.
Reflecting on his third stint and decision to leave, Schultz told the Wall Street Journal: “It’s not as good as it will be, and it’s not as bad as it was.”
Clearly, the billionaire is hoping he is not called upon to return to Starbucks for a fourth time.
Asked about allegations of clashes with workers and efforts to block unions, AJ Jones, Starbucks’ chief public affairs officer, said: “Starbucks has set itself apart as a different kind of company that lives its mission and values, every day, balancing profitability with social conscience.”
