Spread the love

Starbucks’ quarterly sales decline in China was four times worse than the coffee chain expected and it has no “line of sight” into when business there will fully recover, the company said this week, driving shares down 2.2 per cent in extended trading.

Starbucks Corp’s comparable sales in China fell 29 per cent in its first fiscal quarter ended January 1, pulling international comparable sales 13 per cent lower.

Even so, traffic started recovering in January and was “fantastic” during Chinese New Year, Starbucks China CEO Belinda Wong told investors on an earnings call.

“We do have short-term uncertainties, and we need to be cautious and the recovery may remain nonlinear,” she said, adding that people were returning to offices and social gatherings.

Starbucks posted a profit of 75 cents per share on an adjusted basis versus the 77 cents that analystspredicted.

While China has largely abandoned its zero-Covid policy and began reopening in early December, customer traffic at Starbucks remained weak owing to widespread Covid-19 outbreaks in the country.

Global brands with significant exposure to China are under the microscope as investors worry about the lingering financial impact of the pandemic there.

The steep losses in China “took us by surprise by a huge margin because we were expecting trends to improve compared to the last quarter,” said Edward Jones analyst Brian Yarbrough.

Seattle, Washington-based Starbucks does not have “clear line of sight into the timing of recovery” and believes negative sales will continue through this quarter, Chief Financial Officer Rachel Ruggeri said during the call.

China has been Starbucks’ fastest-growing market. It added a net 69 stores there over the quarter for a total of 6090 locations.

The chain still plans for 9000 total outlets there by the end of 2025, executives said. Ruggeri reiterated the company’s overall guidance for global comparable sales growth of 7 per cent to 9 per cent for its fiscal 2023.

Cold brews and rewards

Losses in China were offset by North American sales, which jumped 10 per cent as a younger and wealthier coffee-loving crowd shrugged off inflationary pressures and continued to buy customised cold drinks and snacks.

Global comparable sales at Starbucks rose 5 per cent, while active membership in the brand’s recently revamped Starbucks Rewards loyalty program grew 15 per cent to 30.4 million in the US.

Promotions and seasonal menu items like its Irish Cream Cold Brew and Peppermint Mocha drove increased US traffic on some weeks in November and December. But overall, monthly visits to Starbucks were consistently lower than last year, according to location analytics firm

Starbucks is also facing more US competition, with Dutch Bros Inc building thousands of new locations. Visits to US Starbucks cafes fell 16 per cent in the last quarter of 2022, a bigger dip than rivals Dunkin’ and Peet’s Coffee, according to data from Gravy Analytics.

Starbucks reported an operating margin of 14.4 per cent for the quarter, down from 14.6 per cent a year earlier, pinched by heavy investments to modernise its stores through technology as well as elevated labour and raw material costs.

  • Reporting by Deborah Sophia in Bengaluru and Hilary Russ in New York; Editing by Josie Kao, of Reuters.