Starbucks’ projection for same-store sales to be at the low end of guidance for this year is leading Wall Street analysts to conclude that it’s because of its store expansion strategy and prices that are too high.
According to a report in Reuters, currently Starbucks has more stores in the U.S. than McDonald’s but has been having a hard time drawing more customers to get to the growth levels investors and Wall Street expect out of the leading coffee chain operator. The guidance and a 2 percent same-store sale growth in its fourth quarter, which was short of what Wall Street was looking for, are leading to concerns about its growth. The company also had flat holiday traffic, which didn’t please Wall Street. While Starbucks has said there were a litany of reasons for the slow retail traffic including changing in its rewards program, long wait times due to mobile orders and drink specials that were not well received by customers, Wall Street is pointing to the prices and number of stores.
Reuters pointed to Bernstein analyst Sara Senatore, who wrote in a research report that “excess unit growth, at a time when Starbucks is reaching a more mature stage of growth, is the root cause” of the company’s problems in the U.S. Credit Suisse also pointed to the recent 700 store openings a year in the U.S. as hurting its ability to restart growth. “Rather than a litany of excuses, we believe this is best explained by overcapacity in the industry,” said John Zolidis, president of Quo Vadis Capital, in the Reuters report. “Starbucks is contributing to the problem by opening new units.”
On top of that, Wall Street took issue with Starbucks’ pricing strategy, in which it increases prices one to two percent each year but offers discounts via its rewards program. Maxim Group analyst Stephen Anderson noted that McDonald’s has kept prices flat for two years now. Maxim Group’s Anderson told Reuters that Starbucks increases prices around 3.5 percent each year, differing with what Starbucks says.