Even Starbucks can’t fully escape the restaurant industry’s persistent malaise.
For months now, the outlook for the industry has been a bit bearish. Higher prices because of increased labor costs and other expenses have led some consumers to turn to more at-home cooking. Grocery stores, benefiting from lower costs for the goods they sell, have been passing along the savings to consumers. Consumers are buying more goods online, pressuring demand for locations that are closely associated with malls and other shopping destinations where restaurants also operate stores.
As a result, U.S. eateries are seeing a slowdown in traffic. Research firm NPD Group earlier this month warned much of the same would continue in 2017: it sees stalled growth and says those cutting back on restaurant visits are doing so because they think prices are too high.
Starbucks (SBUX) remains a stronger performer in the sector, continuing to report growth as existing stores in the U.S. while also continuing to expand. On Thursday, the coffee giant reported total net revenue grew 7% to $5.7 billion for the fiscal first quarter ending Jan. 1. Comparable sales—an important metric that measures demand at locations open 13 months or longer—grew 3% in the U.S., 5% in China/Asia Pacific, and dropped 1% in Europe, the Middle East and Africa. Those figures were all a weaker performance than Wall Street analysts had projected.
Shares of Starbucks (SBUX) slipped by about 4% in after-hours trading on the news.
Starbucks has seen the writing on the wall for a while now. Outgoing CEO Howard Schultz, who will step down from that role in April, has called it the “Amazon effect.” He argues increased e-commerce spending has hurt foot traffic in malls and other brick-and-mortar stores, not only domestically but also abroad. That’s had an impact on Starbucks, which operates many locations in those shopping areas too. McDonald’s (MCD) earlier this week also reported softer U.S. sales than analysts had anticipated—and the fast-food operator promised it would focus on improving traffic in 2017.
“Restaurant retailers have not been—and are not—immune,” Schultz told analysts during an investor presentation. He said the evolving shift in consumer behavior that tilts in favor of online and digital retail is today “a foregone conclusion.”
To compete, Starbucks has aimed to invest heavily in a strong mobile experience. During the latest quarter, Starbucks recorded $2.1 billion that was loaded onto Starbucks cards in the U.S. and Canada, up 15% from a year ago. Card transactions reached 40% of domestic transactions at company-operated locations. And mobile order and pay represented 7% of transactions at that store, up sharply from 3% in the prior year. Mobile payments now account for more than one out of every four transactions.
But that big shift to mobile has resulted in some new challenges. At the times when mobile order and pay is most popular, some walk-in visitors end up leaving a Starbucks without making a purchase because they’ve seen a big crowd waiting for orders they already placed on their phones. Starbucks executives say that this is an operational issue that will need to be addressed—though they promised to solve it as they have with past order flow issues in the past.
Schultz said that Starbucks has consistently said it would achieve mid-single digit comparable sales for the full fiscal year—and on Thursday he again maintained that expectation. He said comparable sales would be stronger in the back half of the year.