Starbucks Faces Growth-Negating Hurdles

Key Takeaways

• Starbucks has heavily invested in new leadership, pushing for a turnaround by hiring former Chipotle's CEO Brian Niccol.
• Niccol's plan simplifies the offering, reduces costs through operational efficiencies, and raises employee satisfaction.
• Starbucks faces high competition in key growth markets overseas while rising coffee prices pose margin risks.
• The company also faces domestic labor risks as the threat of unionization looms over multiple locations. However, bottoming unemployment mitigates this risk.
• Starbucks's opportunities and risks balance each other out, so the company will most likely stay put through this decade.

Rising Coffee Prices and Cost Pressures

The coffee industry has faced considerable cost inflation as coffee bean prices surged due to supply chain disruptions and climate-related production issues. As of March 12, 2025, the price of coffee has surged over 100% year over year.

Meanwhile, labor costs have risen across the food service sector, forcing the firm to absorb or pass them on to consumers. Starbucks has already raised prices multiple times recently, but despite its strong brand, continued increases risk alienating price-sensitive consumers. Pricing strategies require a careful balance between maintaining brand positioning and keeping the products accessible to a broad enough customer base.

Growing Consumption, Shifting Preferences

Global coffee consumption continues to grow, particularly in emerging markets like China and India. However, competition in those markets remains fierce.

Companies also have to adjust to evolving consumer preferences regarding order types or special preferences. For example, consumers increasingly prioritize convenience, favoring drive-thrus and mobile order pick-ups over traditional in-store experiences.

Furthermore, the market has also shifted in favor of specialty coffee, set for 7.7% CAGR growth until 2032, as consumers look for high-quality, locally sourced options. Consumers are also increasingly conscious of sustainability, leading to higher demand for plant-based milk alternatives and ethically sourced coffee.

Company Catalysts

New CEO's Turnaround Plan

Starbucks's hiring of Brian Niccol made a big splash. The company delivered one of the largest CEO compensation packages ever seen in the industry. Niccol initiated a turnaround plan dubbed “Back to Starbucks,“ aiming to restore the company's brand essence.

His strategy revolves around four key points:

1.    Enhancing Customer Experience: Revamping store layouts to create a more inviting atmosphere and improve in-store efficiency. By reducing clutter and making locations more aesthetically appealing, Niccol plans to reduce costs and increase revenues.

2.    Operational Efficiencies: Starbucks has streamlined its management, eliminated certain corporate roles, and reduced overhead costs. Management sees in-store automation and AI-driven inventory management as ways of improving service speed without sacrificing quality, thus potentially selling more with the same resources and improving the top line.

3.    Menu Simplification: Niccol believes the company's menu has become too complex. By reducing it to focus on core offerings, he believes costs would be lower, and customer satisfaction would be higher.

4.    Employee Satisfaction: Starbucks faced issues with worker satisfaction, which was best seen through unionization efforts gaining momentum in some regions. By investing in employee benefits and training, management believes employee retention would be higher, resulting in better service quality.

It is an ambitious strategy, but if Starbucks successfully executes it, it could reverse the company's drop in same-store sales over the last few quarters.

Expansion in Key Markets

Starbucks continues to focus on global expansion, particularly in high-growth markets. Over the next five years, the company plans to open 500 new stores in the Middle East, tapping into a region with a growing coffee culture.

China, however, has proven to be a tough market to crack. The firm identified it as a core growth driver and has an aggressive expansion plan. Still, domestic competitors—such as Luckin Coffee (which has successfully recovered from the 2020 accounting fraud scandal)—have gained market share owing to aggressive pricing strategies and digital-first approaches.

Starbucks has recently pondered selling a stake in its Chinese business. Thus, the firm might find a domestic investor and, with it, potential synergies in the local market to leverage its know-how with a domestic partner.

Risks to My Neutral Narrative

Bearish Risks

• Dependence On Chinese Growth: Relying on China is risky in the current macroeconomic environment. Geopolitical tensions, shifting consumer behavior, and fierce local competition pose risks to expansion efforts. So far, the performance in this market has been weak, with comparable stores declining by 6% in Q1 2025.

Starbucks’s Markets and 2023 Financial Highlights, Source: Investor Presentation

• Failed Turnaround: If Niccol's turnaround strategy doesn't deliver, Starbucks will struggle to regain momentum. In that scenario, his high executive compensation package will unquestionably be scrutinized, potentially damaging the brand.
• Labor Market Disputes: Starbucks has faced increasing labor activism, with unionization efforts spreading across multiple locations. If worker dissatisfaction grows, it could lead to operational disruptions and reputational damage.
• Rising Coffee Prices: Coffee prices have surged, and if the company can’t pass these costs onto consumers, the margin pressure could be considerable.

Bullish Risks

• Successful Turnaround: Niccol’s plan is comprehensive and focuses on controlling costs and improving revenues. Starbucks could trade much higher if the plan delivers than its sector peers despite its already rich valuation.
• Margin Recovery: If coffee prices stabilize and operational efficiencies take hold, Starbucks could see higher-than-expected profitability improvements. Coffee yields highly depend on unpredictable climate factors.
• Digital and AI Integration: Starbucks has invested heavily in digital ordering, AI-driven recommendations, and loyalty programs. Through increased engagement, these programs could provide a notable boost to the company’s top line.

Assumptions

• I expect Starbucks to maintain strong brand loyalty despite increased competition from independent cafes and specialty coffee plans.
• I expect management's turnaround plan to ultimately provide mixed results. While I expect the internal cost control to provide some relief, I believe that relying on foreign markets like China or India for growth is too ambitious. China, in particular, might be a dud, owing to the country's already peaked population growth and strong domestic competition.
• I also expect the external pricing pressures to persist. Coffee is a problematic commodity due to its temperature sensitivity and required rainfall. The plant requires a controlled environment with enough heat and humidity, but not too much. For this reason, Nature magazine expects that by 2050, up to 50% of existing coffee-growing land won't be viable for growth.
• I expect margins to remain in the high single digits, boosted by improved efficiency but negated by external price pressures like commodity and competition pricing.
• I expect revenue to grow at a 6.5% rate, indicating challenges in the foreign market but price resilience from the domestic one. This growth is well below the consensus of 12.5%, as indicated on the platform.
• I expect the company, which is currently trading at a P/E ratio of 32.2x, to revert to its long-term average of 27.5x eventually.

VALUATION

• Using the $42 billion revenue as a starting point, a projected $57.5 revenue in 2030 will result in a $5.75 billion net income.
• Using a terminal P/E ratio of 27.5x, we can calculate that a terminal value in 2030 is $158.1 billion, discounted using the 8.2% rate equals $106.5 billion.
• Assuming around 80% of net income is free cash flow (FCF), this results in $4.60 billion in FCF in 2030. The present value of 2025-2030 cash flows equals around $19.37 billion.
• Adding the present value of FCF and the present value of the terminal value to get the present enterprise value (EV), which equals $125.87 billion.
• If we subtract the present debt ($15.59 billion), we get an equity value of $110.28 billion.
• Divided by the number of outstanding shares (1.13 billion), this gives a price per share of $97.59.