Starbucks’ New CEO Raises Alarm About Retail Disruption

Kevin Johnson minced no words when he kicked off his first quarterly results presentation as the chief executive of Starbucks. Traditional brick-and-mortar retailers are facing dire prospects.

He specifically referenced a recent Wall Street Journal story that said through April 6, physical store closures have been announced for 2,880 locations this year and the pace looks poised to exceed the closings that were notched during the Great Recession.

“The article illuminated once again the seismic shift in consumer behavior underway and the devastating impact that this sea change in behavior is having on many traditional brick and mortar retailers,” Johnson told analysts during a presentation. He isn’t the only CEO is the sector raising major concerns about the state of retail. Earlier this year, Nike (NKE) CEO Mark Parker said the retail landscape is “not in a steady state” as consumers spend more online and make fewer visits to brick-and-mortar stores. And last month, Urban Outfitters CEO likened the bloated square footage to the housing bubble.

While Starbucks (SBUX) and restaurant chains would at first glance appear to be immune from the consumer-driven shift toward e-commerce spending for electronics, apparel, cleaning products, and other consumer goods, they are suffering from that shift in behavior as well. People visit malls less frequently than they did in years past, and chains like Starbucks have hundreds of locations in malls. More Americans work from home—and eat there too.

“The retail industry is going through a disruption right before our eyes,” Johnson said.

It is amid this backdrop that Starbucks reported fiscal second-quarter sales figures that disappointed investors, sending shares down about 5% in after-hours trading on Thursday. For the 13-week period ending April 2, Starbucks reported total net revenue grew 6% to $5.3 billion while same-stores sales were up 3% both globally and the key Americas market. That growth was not as strong as Wall Street had expected, though per-share earnings of 45 cents exactly matched expectations.

In the U.S., same-store sales benefited from higher average spending, offset by a decline in transactions that was related to changes Starbucks made to the loyalty program to dissuade split ordering as a way to game the old system for more rewards.

Going into the results, some had expressed concerns that the Starbucks brand had taken a hit after the company’s pledge to hire thousands of refugees globally was seen as a politically charged move by some consumers, leading to calls for a boycott. Starbucks has maintained the brand’s perception hasn’t seen any substantial impact from those social-media driven boycotts.

“Starbucks U.S. comp sales accelerated sequentially through the quarter—culminating with a 4% U.S. comp in March,” said CFO Scott Maw in a prepared statement. “And we’re seeing further acceleration into April.”

Amid the tough retail climate, Johnson said Starbucks remains optimistic about the future. “We are quite confident that we have turned the corner on U.S. comps and given the strength we see in the U.S. business in the second half and the beverage, food, and digital innovation we will be rolling out over the next two quarters, we will deliver on the mid-single digit [increase] comp target for the full year,” he said.

To achieve future growth, Starbucks says it will focus on a mix of goals that will boost results both near term and over the longer haul. Those initiatives include a greater focus on the lunch period (Starbucks’ generates a lot of business in the morning commute hours), expansion in China, investing in digital, and elevating the brand through the premium-priced Reserve brand.

“Starbucks Coffee company is playing the long game,” Johnson promised. “And we are paying to win globally.”

One headache that Johnson and his team will have to confront: Teavana’s struggling brick-and-mortar business. With roughly 300 brick-and-mortar locations, Starbucks flagged it was enacting a strategic review of that business as same-store sales have declined and some locations suffer operating losses. Starbucks said that while the namesake brand has held up okay in malls, the Teavana stores haven’t done as well, even after some investments to make those stores more compelling. The underperformance at Teavana will have a greater impact on Starbucks’ results this year than the management team had originally anticipated.

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