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Starbucks Earnings Suggest It Is Unfazed by New Competition

Danni Santana
Starbucks Earnings Suggest It Is Unfazed by New Competition

For at least one financial quarter, Starbucks has quieted the naysayers wondering how the coffee maker will grow its U.S. business and cope with new overseas competition.

The chain reported global comparable store sales growth of 4 percent for the fiscal first quarter, ending Dec. 30.

Same-store sales in the Americas increased by 4 percent, on the back of higher average checks. Meanwhile, comparable sales in China, Starbucks’ fastest-growing market, also increased by 1 percent amid competition from startups like Luckin Coffee.

The company additionally disclosed revenue of $6.6 billion in the period, up 9.9 percent, which along with comparable sales easily topped analysts’ estimates.

“We continue to execute against our ‘Growth at Scale’ strategy that we outlined at last month’s investor conference,” said CEO Kevin Johnson. “And I think the results that we just posted demonstrate that the strategy is working”

U.S. Growth

Johnson echoed the company’s message from its investor day in mid-December about its U.S. strategy, telling analysts that Starbucks is focused on enhancing the in-store experience, delivering beverage innovation and driving digital relationships in its home market.

In the latter half of 2018, Starbucks began moving non-customer related tasks, such as cleaning, to after hours, which freed up approximately 40 percent of employees’ time to mingle with guests.

Starbucks has also found, similar to rival Dunkin’, that there is a strong appetite for cold beverages in the U.S. In fact, iced espresso, cold brew, and nitro delivered the highest contribution to comparable sales growth in more than two years, according to the company. The segment is predicted to grow thanks to the company’s expanding partnership with Uber Eats.

Still High on China

Starbucks has now been in China for exactly two decades. But the company has hardly faced the competition that is now in the market. This month, Luckin Coffee announced plans to open an additional 2,500 stores this year, according to Reuters. The news followed news from Starbucks last month that it would grow to 6,000 stores in 230 Chinese cities by 2022.

“We recognize the tremendous opportunity ahead requires navigating a rapidly evolving competitive landscape, changing consumer behaviors, and a dynamic economy,” said Johnson. “With a large and growing addressable market around coffee, we expect competition to remain highly promotional and disruptive.”

Johnson did not mention any competitors by name, but added that Starbucks’ competition in the region is highly dependent on using lower prices, free coffee, and buy one get one free promotions to steal its customers. “For us, clearly, the top line metric for competitiveness is total transaction growth in China,” he said.

Starbucks’ China stores helped contribute to a 45 percent boost in revenue in Asia, driven by 3 percent ticket growth, its loyalty program, and Alibaba delivery partnership. Key markets, such as Beijing and Shanghai also contributed mid-single percentage sales. The company said it grew its footprint by 18 percent in the quarter to nearly 3,700 stores in 158 cities.

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