Starbucks issues profits warning and scraps plans as customers stay away

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The Independent Online

Americans are popping into the local Starbucks for their morning pick-me-up in fewer numbers, and the ubiquitous coffee chain is having to scrap some of its most ambitious expansion plans for the coming year.

News of lower customer traffic at its 10,000 US stores – and a warning of lower profit growth next year – sent Starbucks shares plunging 9 per cent in after-hours trading last night.

The company scattered the blame for the bad news: it had scared customers away with price rises meant to compensate for rising milk prices, it said, and many of its managers had spent too much time focusing on expanding the snacks business and failed to focus on the quality of the coffee service. Most of all, executives said, US consumers simply have less money to spend since mortgage payments, petrol prices and the cost of groceries have all gone up this year.

Wall Street analysts, though, suspected another reason, namely that the Seattle chain has expanded to such an extent that new stores are eating into the customer numbers of existing outlets, which might be as close as one block away.

Marc Greenberg, analyst at Deutsche Bank, who predicted Starbucks would post disappointing results this week, said: "Why plant so many flags? Slowing the build-out makes sense. In economics, growth stories have an arc. While painful at first to a store expansion-based story, communicating a more selective expansion strategy and lowering long-term targets is the right thing for returns in our view."

Last night, Starbucks chief executive Jim Donald said the company would open 1,600 stores in the US next year, 100 fewer than previously suggested. This would rectify the fact that the company opened more than originally planned this year, he said, and there was still plenty of room for growth since the company accounts for less than 10 per cent of takeaway coffee sales in the US and less than 1 per cent worldwide.

But Wall Street was sceptical that the cuts would be enough and Starbucks shares dipped $2.05 to $22.05.

In the financial year just ended, the company opened 2,571 new coffee shops, 70 per cent of them in the US. It posted net income of $673m, up from $574m last time, on sales up 21 per cent, but some of the figures for the final quarter disappointed analysts. At outlets open for more than a year, quarterly sales were up just 4 per cent, and in the US, the number of customer transactions fell for the first time since the company began revealing the number three years ago.

Mr Donald revealed that Starbucks would this morning begin its first nationwide television advertising campaign to promote its special Christmas coffees.