Starbucks strategy: What are its options for falling UK sales?
By Jenal Mehta
13:28, 18 July 2022
Starbucks (SBUX) might be considering selling its UK business as traffic to its locations continues to reduce amid falling margins. For the moment, the company has denied being in formal talks for any sales, but a good private equity offer may be hard to pass up for the struggling area of the business.
Inflation has caused consumers to become more cautious of their budgets, negatively affecting almost all global food brands including McDonald's (MCD), Domino's Pizza (DPZ), and Papa John's International (PZZA).
For Starbucks (SBUX), shifting consumer behaviour has also become a challenge, with their urban flagship stores seeing less footfall and more people preferring to make coffee at home since the lockdowns.
Starbucks (SBUX) Price Chart
Furthermore, in an increasingly crowded coffee shop market, the Starbucks brand may not hold as much weight for coffee lovers as it once did.
The company has stated it continues to “evaluate strategic options”, according to Reuters. Although no formal talks have begun as of yet, an offer might be a good way out for the struggling area of the business.
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Starbucks losses
In the latest earnings for the first quarter of 2022, Starbucks (SBUX) reported a 10% fall in its net profit margin, showcasing the effects that inflation has been having on the company. Budget-conscious consumers are not buying as many daily coffees.
Danni Hewson, financial analyst at AJ Bell, says this issue is especially heightened post lockdown.
“Ditching the daily caffeine hit is an easy money saver especially as lots of people bought fancy equipment during lockdowns when they had to DIY it,” Hewson said.
Work-from-home measures also changed the dynamics by which stores do well. Starbucks largely relied on income from its unban stores, Hewson says:
“The high street is one of the issues facing Starbucks, its city centre locations just haven’t bounced back in the same way its suburban stores have and with much of its business really embedded in urban areas the continued switch to hybrid working is nibbling away at footfall.”
Increased competition has made it difficult for Starbucks to grab the little footfall that remains. Hewson says “there are a whole load of businesses from coffee shops to fast food outlets offering a cup of joe and right now."
The 'strategic options'
The coffee maker has shown interest in focusing on its business stateside, according to Hewson.
This is possible due to how different the market is in the UK for Starbucks (SBUX). "Seventy percent of Starbucks UK is run by franchisees, and it could decide to tap up a specialist franchising firm to spin out the remaining 297 stores. Its name carries weight but it’s clear the business doesn’t want the day-to-day headache or cost of running UK coffee shops itself," Hewson said.
The company spokesperson has said they are not in any formal talks to sell their UK arm, but Hewson believes there is a chance that they may get an offer from private equity. “There has been plenty of interest in UK plc over the last couple of years as its looked relatively cheap and the current socio-economic situation coupled with market volatility is likely to create an intriguing opportunity as long as the price is really right because as the Boots deal demonstrated, there are concerns about the future of the UK high street.”
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The sector outlook
The current economic climate is likely to force other businesses in the sector to reconsider its business model in order to protect margins.
Global food outlet brands such as McDonald's (MCD), Domino's Pizza (DPZ), and Papa John's International (PZZA) have all reported reduced margins in the recent months.
According to Hewson, all businesses will have to seek out ways to reduce costs in the coming months.
“Times are tough and likely to get tougher with this set of earnings updates delivering slashed revenue outlooks. The Covid savings cushion will only go so far, people are cutting back and making tough choices and businesses are now faced with their own choices about passing on further price hikes to consumers or swallowing them in a bid to keep sales up,” she said.
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