New CEO Brian Niccol calls for simplifying menu. But company warns turnaround ‘will take time,’ and an analyst says a ‘reality check’ is needed.
Shares of Starbucks Corp. fell in extended trading Tuesday after the coffee chain offered fresh signs of its struggle to stay relevant to consumers, saying its turnaround efforts “will take time” as its new chief executive settles in.
CEO Brian Niccol, who joined Starbucks SBUX 0.38% from Chipotle Mexican Grill Inc.CMG 0.30% last month, said in a video presentation that the company had lost track of its identity as a coffee chain, and called for simplifying an “overly complex” menu and the way the company does business overall.
“People love Starbucks,” Niccol said. “But I’ve heard from some customers that we’ve drifted from our core, that we’ve made it harder to be a customer than it should be, and that we’ve stopped communicating with them.
“As a result, some are visiting less often, and I think today’s results tell that same story,” he added.
Starbucks on Tuesday said it would halt its outlook for fiscal 2025, and offered up preliminary fourth-quarter sales that disappointed investors — citing sluggishness in the U.S. and China, and noting that investments in new menu items and more frequent promotions didn’t restore enthusiasm among customers. In an effort to shore up investor confidence, the company said its board had approved a dividend increase.
Still, shares of Starbucks SBUX 0.38% fell 4.2% after hours on Tuesday. As of market close Tuesday, the stock had only eked out a 0.8% gain so far this year. Starbucks reports quarterly results on Oct. 30.
Starbucks made the announcement as Niccol tries to recharge customer demand after the chain, under its previous chief executive, Laxman Narasimhan, warned of more cautious consumers and steeper competition in China. The company ramped up discounts and other promotions in response.
“Despite our heightened investments, we were unable to change the trajectory of our traffic decline, resulting in pressures in both our top-line and bottom-line,” Chief Financial Officer Rachel Ruggeri said in a statement on Tuesday.
“While our efficiency efforts continued to produce according to plan, they were not enough to outpace the impact of the decline in traffic,” she added. “We are developing a plan to turn around our business, but it will take time.”
Starbucks said that suspending its 2025 outlook would give Niccol more time to diagnose the current problems and develop a plan.
The coffee chain said that for its fiscal fourth quarter, same-store sales fell 7% year over year, with revenue down 3% to $9.1 billion and adjusted earnings per share coming in at 80 cents — all worse than what Wall Street analysts expected. Executives said weaker trends in North America weighed on the results, as did a shaky economy and competition in China.
In the video presentation, Niccol called for a deeper focus on coffee, and said the chain’s baristas needed more time and support to do their jobs. He added that the company needed to “refine” mobile ordering, so as not to jam up traffic in stores. He also said that customers expected Starbucks stores to “look and feel like the community coffee house they remember.”
Such changes would come after Starbucks spent years offering an array of customizable drinks and food items, and building out its drive-through business. In late 2022, company founder Howard Schultz, then serving as its interim chief executive, described Starbucks as an “affordable luxury.” And the company said that higher prices, combined with younger customers and customizable drinks, were the right recipe to hit financial targets.
But some customers have shown signs of missing the more comfortable vibe of its stores in the past. A jump in costs of living over the past two years has made people rethink their spending. And Schultz, after handing off CEO duties to Narasimhan last year, said this year that Starbucks needed to have a “maniacal focus on the customer experience.”
Under Niccol, Starbucks has begun pulling back on recent discounting efforts, the Wall Street Journal reported this month. In the video on Tuesday, he said that staying true to Starbucks’s “core identity” was the way to bringing customers back.
“They will visit more often, and we will return this company to strong growth,” he said.
William Blair analyst Sharon Zackfia said that following Starbucks’ announcement, the focus during next week’s earnings would be on Niccol’s turnaround plans and the timeline for the results. She said the biggest issues revolved around how to improve service times, particularly during the chain’s busier morning hours — a problem the company could attack with more staffing hours and reduced limited-time offers.
“While we remain optimistic that Starbucks can return to positive comps as fiscal 2025 progresses under Niccol’s leadership, we suspect a reality check is needed on the timeline to reinvigorate profitability, which we suspect is a fiscal 2026 dynamic,” she said.