Starbucks (SBUX) might have just wedged itself between a rock and a hard place of its own making: Its controversial loyalty rewards program overhaul and Dunkin’ Donuts’ (DNKN) new loyalty program which is set to poach the the coffee giant’s customers.
Starbucks’ new loyalty rewards program rolled out Tuesday to quite a bit of social media outrage, as it would require consumers in some cases to dole out more dough for a free cup of joe.
And that could drag down store traffic in the coming quarters at a time when competitor Dunkin’ Donuts is launching an assault in the form of its own loyalty program targeting Starbucks’ customers, wrote Deutsche Bank analyst Brett Levy. Dunkin’ has scheduled an aggressive promotion that gives new consumers enrolling in their loyalty program between April 14 to April 21 extra perks.
Levy downgraded Starbucks, which has been a favorite stock and shown consistent sales growth in past quarters, to a Hold. He also reduced its target price from $70 to $64 a share, leading the stock down nearly 3% in trading Tuesday.
“We believe the combination of lofty near-term investors’ expectations, operational changes (the new rewards program) and a premium valuation creates a less favorable risk-reward on the shares,” Levy wrote. He continued that while the coffee shop has shown great sales, that has “not always translated into meaningful earnings upside (as the company often reinvests in its business) or share price appreciation.”
He added that investors have been Starbucks investors shares are largely at “fair value” now, and the new rewards program adds unwelcome risk. While Starbuck’s high stock price has been largely driven by the coffee company’s stellar and consistent growth in average per store sales, that key metric could could be disrupted in the near-term by Starbucks’ loyalty program overhaul. The changes implemented Tuesday could led to lower store traffic as some consumers become disenfranchised by the program, Levy wrote. The loss in customers could also be exacerbated by Dunkin’ Donuts’ new loyalty rewards program.
That said, Starbucks still has solid operations and long-term strategy, Levy wrote. Secondly, Starbucks executives believe that the new rewards program would increase the amount more loyal customers are willing to pay, but also encourage consumers who are buying items with a lower price tag.
But it will still take some time for any of those upsides to show up in Starbucks’ share price.
The stock has risen nearly 23% in the past 12 months.