I hate to be the bearer of bad news, even on Labor Day, when most of us are enjoying a little peace and quiet from our various labors. But this just needs to be said. Coffee giant Starbucks’ (SBUX) current CEO, Brian Niccol, is making a serious mistake with his “Back to Starbucks” plan. Let’s take a closer look at this plan, and why it may be a noble effort, but one that might not pay off so well.
Elevate Your Investing Strategy:
- Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
The Back to Starbucks Plan, in Summary
So, to start out, we need to consider just what the Back to Starbucks plan is. Starbucks itself defines the plan as a series of enhancements to its in-store experience, incorporating factors like the Green Apron Service plan with some key, if intangible, benefits like friendly, smiling baristas who write names on cups and can produce drinks in four minutes or less from the time of order.
The plan hopes to capitalize on the notion of “third spaces,” a sociological concept that suggests people need a place to go, to congregate, that is not work or home. These become “third spaces,” even if there are five or six of them or more in total.
And while this sounds like a great plan, there are several flaws with it that seem to have gone unconsidered. Also, there are moves Starbucks has made that are either unconnected to the plan or are tangentially connected to the plan that make it less than stable.
Falling Apart on Contact With Reality
This is where the problem begins. First, Starbucks is advancing a plan that comes with built-in logical impossibilities. Starbucks wants service to be fast–to the point where the time to make a drink is standardized to under four minutes–but expects its service providers to be friendly. Expecting service to be friendly while insisting on rushed service is just not likely to happen. It can happen, certainly, and has; Chick-Fil-A serves as a good example of this.
And Niccol is not expecting the same number of baristas to produce fast and friendly at the same time. Starbucks plans to add more baristas, which would help; one could focus on friendliness while the other rapidly makes a drink. But even this strains reason, especially with multiple orders in queue. It also increases Starbucks’ labor costs substantially. By how much is unclear as yet; Starbucks has not made the hires yet. But hiring more workers, without cutting wages, universally means more expense.
That is where the next problem comes in. Starbucks is closing its pickup-only stores in a bid to make its order-in stores friendlier and more inviting. Yes, closing those stores will cut costs, and free up resources to improve the order-in stores. But it will also cut revenue. Reports suggest that around a third of Starbucks’ orders are placed through apps. Where do those orders go, if not the pickup-only stores? Back into the regular stores. So Starbucks is planning to increase traffic at the in-person stores, where the baristas are being tasked with speed and friendliness at the same time.
Keep in mind, Starbucks launched the pickup-only stores to begin with when mobile orders got so heavy they were forcing people to wait in line, sometimes with empty stores. People left Starbucks empty-handed back when real-time and online orders had to share store space; there is no reason to believe anything has changed here. Starbucks will undoubtedly not lose the entire third of orders, but Starbucks is actively taking away the relief valve that it specifically set up to accommodate the online market. Forcing that flow back into stores will have at least some impact.
Finally, we have the matter of the third-space concept. Several studies have pointed out that the third space is in decline. With more of the world operating online-only, the real-world equivalents have fallen by the wayside. For Niccol to try and bring back the third space is admirable, but is it profitable? Niccol is putting a lot more strain on the physical-only stores, spending a great deal of money to revamp said stores, hiring new baristas to fill in the gaps, and doing so at a time when sales are in decline.
Niccol likely believes that those who congregate at Starbucks will buy food and drink while they are there. Being able to effectively monetize the third-space concept could be a winner for Starbucks. The only downside is that Starbucks is not really in a position to capitalize on it. Remember, Starbucks locations have frequently experienced stock-outs on food and drink. Thus, Starbucks runs the risk of creating a market–the third-space denizen–and not even being able to meet it. This could be addressed with operational changes, but those changes would have to be much clearer than they are now.
Niccol is cutting out the apparatus that accommodated the mobile ordering concept in favor of building real-world physical connections. This sounds less like a bold new plan for Starbucks–whose revenue has been in open decline for months now–and more like a great way to fight a war that was over 10 years ago.
Is Starbucks Stock a Good Buy?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on SBUX stock based on 14 Buys, eight Holds and two Sells assigned in the past three months, as indicated by the graphic below. After a 5.36% loss in its share price over the past year, the average SBUX price target of $100.68 per share implies 14.16% upside potential.
