Investors anxious over lack of details about Starbucks overhaul

Starbucks is expected to explain plans to redesign cafes. PHOTO: REUTERS

CHICAGO - When Mr Howard Schultz took the helm of Starbucks more than five months ago, he pledged a massive reinvention of one of the world's largest restaurant companies. Until now, the details have been vague.

Starbucks is expected to explain plans to redesign cafes - with analysts saying the company will likely home in on delivery and takeaway-friendly formats. The company is also under pressure to deliver more financial details on what those makeovers will cost in the long term, and what impact kitchen upgrades and higher salaries will have on the bottom line.

"It is a pretty long list of things that need to be sorted out," said Mr Ben Wong, an analyst at Motley Fool Asset Management, which owns about 136,000 shares. "How much are the continued investments in the employees and stores, and how much is that going to impact margins?"

Since becoming interim chief executive officer in April, Mr Schultz has said the company is overhauling the Starbucks experience along five broad points, but there is still uncertainty about what these mean in practical terms over a longer horizon.

The company, which has said it is spending about US$1 billion (S$1.4 billion) in fiscal year 2022 on higher wages and improved stores, suspended its financial guidance for the year amid uncertainty in the key growth market of China.

Starbucks removed one key question mark earlier this month when it announced that Mr Laxman Narasimhan will succeed Mr Schultz as CEO. The 55-year-old, who is coming from British consumer goods maker Reckitt Benckiser Group, will join the Seattle-based company in October and embark on an extended tour of its operations before becoming CEO in April.

The period will be crucial for realising Mr Schultz's vision for the company. Starbucks in the past has closed and relocated less-profitable outlets, and is now closing some stores due to security problems while adding more drive-throughs and delivery-focused stores.

Remodelled cafes are also supposed to make baristas' jobs easier and less stressful. Key hurdles include a unionisation drive that has grown to more than 200 locations in the United States, and uneven performance in China amid ongoing pandemic restrictions.

Mr Wong flagged both China and the labour push as adding layers of uncertainty for investors.

Starbucks' move to raise US barista wages to an average of US$17 an hour and give additional bumps to more tenured staff has not stopped the union drive, which has become increasingly contentious. The company is trying to convince employees that they will be better off if they do not unionise. The pay increases, along with supply chain and commodity inflation, have weighed on Starbucks' profitability despite menu price hikes.

Meanwhile, the lack of specifics around additional equipment and technology expenses is keeping a lid on the share price, according to BTIG analyst Peter Saleh, who expects the company to "provide a lot more detail" at an investor event, including information on capital investment and what that means for long-term profitability.

"They have more cash on the balance sheet than they need," he said in an interview. "And I don't know where they are going to spend it, or how they are going to spend it."

Starbucks had more than US$3.2 billion in cash and short-term investments as at July 3. After returning as interim leader, Mr Schultz's first move was to suspend the company's buy-back programme, saying the money could better be spent on stores and employees.

Thus far, the chain has been deploying new coffee brewers and warming ovens, improving training and experimenting with new types of stores.

Any changes to the store format are of crucial importance for Starbucks, which came up with its concept of the "third place", where customers spend time between work and home. While Starbucks has always said the third place will not go away, it has been building smaller locations geared to pickup and delivery. About 90 per cent of its new stores include car lanes - taking a page from fast-food chains rather than relaxed coffee houses.

Starbucks, which has more than 15,000 stores in the US, is poised to accelerate store growth under the new CEO, Credit Suisse analyst Lauren Silberman said.

She predicts that cafe layouts will be adapted to better accommodate to-go orders. For example, Starbucks could add pickup shelves, such as those used by Chipotle Mexican Grill, to get customers in and out faster.

"I don't see it as much as complete remodels as reconfiguration," she said of the plan to update locations. Ms Silberman also sees a more personalised Starbucks app coming, with features such as text messages and games to engage diners. Starbucks is betting that its presentation can win over sceptical investors who have sold off the stock in recent months amid economic uncertainty and profitability concerns.

Its shares have lost 24 per cent this year, more than the 15 per cent decline of the S&P 500 Index. BLOOMBERG

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