Q3 2024 Earnings Summary
- Strong International Growth, Particularly in Japan: Starbucks' business in Japan is growing at double-digit rates, driven by terrific innovation, great execution in stores, and a strengthened digital presence, celebrating the coffee house experience. This success highlights Starbucks' potential to replicate such growth globally.
- Successful Product Innovations Driving Strong Demand: New product launches like "Pearls" have seen demand significantly ahead of expectations, even leading to supply shortages. The introduction of new platforms, including a zero-calorie energy platform and food innovations like the Egg Mozzarella Pesto sandwich, are building momentum and enhancing customer engagement.
- High Returns from Expansion in Underpenetrated Markets: By focusing on Tier 2 and Tier 3 markets in the U.S., where Starbucks is underpenetrated, the company is achieving strong cash-on-cash returns. Similar positive returns are observed in China's lower-tier cities. Starbucks emphasizes investing based on incremental returns rather than merely increasing store count, supporting their long-term growth ambitions.
- U.S. customer traffic declined by 6%, mainly due to a double-digit decline among non-Rewards customers who represent 40% of the business.
- Operational challenges, including supply chain issues, led to product shortages, causing Starbucks to pull back marketing efforts on new product launches due to inability to meet demand.
- Despite efforts to improve operations, Starbucks anticipates flat to declining comparable store sales in the U.S. for the year, reflecting ongoing difficulties in driving sales growth amid a challenging consumer environment.
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China Strategy and Headwinds
Q: Will you consider licensing China operations amid headwinds?
A: Laxman acknowledged significant challenges in China due to increased competition and macro issues. They are exploring strategic partnerships to strengthen their advantage but are in early stages and not ready to comment specifically. They remain committed to China, seeing it as a market with significant long-term potential, with 60,000 partners and a distinctive premium brand. -
U.S. Traffic Decline
Q: Why is non-Rewards customer traffic declining sharply?
A: Laxman attributed the decline in non-Rewards customer traffic to a challenging consumer environment impacting away-from-home consumption. While their at-home brands are seeing volume and share increases, they plan to better communicate value to non-Rewards customers by opening up the app to all and targeting price investments funded by efficiency efforts. -
Global Store Expansion Commitment
Q: Are you still committed to store expansion amid weak comps?
A: Laxman stated they are not chasing a number but are driven by ROI. They see strong cash-on-cash returns, especially in underpenetrated Tier 2 and Tier 3 markets. With rigorous site selection and monitoring, they are confident that ongoing expansion supports long-term growth. -
U.S. Sales Guidance
Q: Will U.S. comps improve in Q4 versus Q3?
A: Laxman discussed progress on fixing stores, product innovations, and Rewards program engagement. However, they are seeing shifts in routines and disruptions due to broader issues. Their guidance reflects the challenging environment, expecting comps to be a low single-digit decline to flat for the year. -
$4 Billion Savings Plan and Siren Rollout
Q: Is the $4B savings gross or net? Can Siren rollout accelerate?
A: Rachel confirmed the $4 billion in savings over the next four years is a net number. On the Siren system, Laxman said they're matching equipment rollouts with store renovations to optimize costs and manage CapEx. They are targeting high-impact stores first and accelerating parts of the rollout where possible. -
Average Check and Pricing
Q: What drove average check growth and pricing impact?
A: Rachel explained that the U.S. ticket comp increased by 4%, with 25% driven by multi-beverage orders due to promotional offers. The remaining 75% was net pricing, including pricing moves and promotional impacts. They've been measured in promotions, focusing on Starbucks Rewards growth. -
G&A Leverage and Margins
Q: Is G&A still a source of leverage into FY'25?
A: Rachel noted that G&A declined year-over-year by about 5% due to lower performance-based compensation and cost efficiencies. They expect to continue driving leverage in G&A as part of overall efficiency efforts into FY'25. -
Product Innovations and Supply Challenges
Q: What's working in new products and value strategies?
A: Laxman highlighted growth in core coffee, with cold beverages now 76% of sales and espresso drinks up 4%. New platforms like Pearls exceeded expectations but faced supply constraints. They're building energy and food platforms over time but acknowledge supply chain work is needed for stability. -
International Best Practices
Q: Any international successes to apply elsewhere?
A: Laxman pointed to Japan's double-digit growth driven by innovation, execution, and digital presence. They're leveraging best practices globally as part of their strategy to truly go global. -
Partner Investments and Efficiencies
Q: How do you balance cost efficiencies with partner experience?
A: Laxman is pleased with progress on partner experience, with average hours per partner at a historic high. They focus on simplifying operations and ensuring consistency, with initiatives like the Siren system improving partner reception and customer experience.