(Bloomberg) – In his first week at Starbucks Corp. Howard Schultz made a series of moves that indicated major shifts in store design, employee relations and marketing — and suggested that profit margins would be squeezed.
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The man credited with inventing Starbucks culture as the “third place” for people to spend time away from home and work doesn’t take his new role as interim CEO lightly. He has already frozen stock buybacks that were part of a $20 billion package and said the money would be better spent on employees and cafe improvements. And he fired the company’s top attorney while vowing to offer better benefits to workers to discourage them from unionizing.
Shareholders welcomed Schultz’s plans by selling the stock, which is down 10% every day this week. It’s a tricky time as Starbucks is already facing a spate of spending. In February, the chain said it was seeing a surge in the cost of isolation payments and training its employees, as well as supply chain hiccups related to the pandemic. Project operating margin compiled by Bloomberg will narrow to 16.3% this fiscal year, down from 16.8% last year.
“He’s coming back and making bold moves,” said Ivan Feinseth, an analyst at Tigress Financial Partners who has a buy rating on the stock. Feinseth thinks long-term investing is the right idea, even if there are short-term pains.
“That will absolutely weigh on margin, but I don’t think that’s a factor. He knows it.”
Feinseth said Schultz’s changes could include expansion into selling food and wine into the evening hours — a move the company has experimented with in the past. “They will still try to address things that drive traffic at night,” the analyst said. “He wants to push the premium experience.”
The story goes on
Schultz led Starbucks’ aggressive expansion through the 1980s and 1990s before stepping down as CEO in 2000. He returned again as CEO from 2008 to 2017. In his third breakthrough, the 68-year-old is also rejoining the board and taking charge of day-to-day operations – up to day-to-day operations as the company searches for a new head – a process that is expected to be completed by the fall.
latte or gas?
Earnings estimates are down about 3% year-to-date as inflation picked up and Russia’s invasion of Ukraine rattled commodity markets. A large latte for $4.25 plus tax now costs less than a gallon of gas in Seattle, where Starbucks is based.
Inflationary pressures are also hitting core commodities like coffee and dairy. Starbucks is less protected from price hikes because it owns and operates individual restaurants, unlike the franchise model used by other chains like McDonald’s and Dunkin’.
Starbucks is raising wages in the US this year to keep employees. Schultz also told employees that the company would move into non-fungible tokens before the end of 2022 to capitalize on its “treasury” of collectibles and rich heritage. He met with workers this week in China, a key market for growth that has been under heavy selling pressure lately due to virus resurgence.
More changes like cafe remodels, new menu items and additional technology could be on the way for the company, which pioneered mobile ordering and payments in the restaurant industry, said Ben Silverman, director of research at Verity, which advises institutional investors.
Silverman said Schultz’s biggest moves could be changing the company’s plans for new locations. “Commercial real estate has changed a lot because people are working from home and not really commuting to the office,” he said. “That changes the equation.”
Schultz said he will not make every decision based on stock price or the impact on earnings. Year-to-date, the stock is now down nearly 30%.
All of these moves underscore Schultz’s “longstanding stance as an advocate for change,” said Brett Levy, an analyst at MKM Partners. While the strategy could squeeze margins, it could also help Starbucks refocus on organic growth and shareholder returns, he said.
“These next two quarters shouldn’t expect him to sit idly by as a placeholder, waiting for a permanent replacement,” Levy said in a research note.
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