Starbucks sees $4.4b virus hit, plans new cafe format

Starbucks expects to report an adjusted loss of 55 to 70 US cents a share when it next releases earnings.
Starbucks expects to report an adjusted loss of 55 to 70 US cents a share when it next releases earnings.PHOTO: AFP

NEW YORK (BLOOMBERG) - Starbucks expects the coronavirus pandemic to reduce sales this quarter by as much as US$3.2 billion (S$4.4 billion), dragging down the coffee chain's performance as it sees a recovery stretching into next year.

The company, which, like other restaurants, has had a difficult time offering guidance, said on Wednesday (June 10) it expects to report an adjusted loss of 55 to 70 US cents a share when it next releases earnings. Operating income will decline as much as US$2.2 billion in the period, the company said in a statement.

The guidance underscores the depth of the challenges for consumer-facing businesses from the coronavirus outbreak and worldwide lockdowns. The coffee seller, which is exploring new store formats to stimulate demand, is being closely watched as a barometer of customers' willingness to leave their homes and open their wallets as the pandemic subsides.

"These numbers are a lot worse than the Street was expecting," said Mr Michael Halen, senior restaurant analyst at Bloomberg Intelligence.

"People expect some sort of crazy snapback but it's not going to materialise in restaurants."

The shares fell as much as 4.7 per cent on Wednesday, the most intraday loss in more than a month.

Starbucks had declined 6.3 per cent this year through Tuesday's close.

The company's comments also dragged down peers, with an S&P index of restaurant stocks falling as much as 2.7 per cent, the most in almost a month.

Starbucks, due to its size and propensity to give regular updates, is seen as a proxy for the industry. In the United States, its critical home market, comparable sales were down 43 per cent in May, though things have been improving with each passing week, Starbucks said.

About 95 per cent of the company's US stores are operating currently, even as many New York City sites remain shuttered.

That's a contrast to China, its other key market and a country further along the road to post-pandemic recovery, where 99 per cent of stores are open and same-store sales were down just 21 per cent in May.

 
 
 

While sales have fallen, customers who do go to Starbucks are spending more during the pandemic, with the average order including more items, the company said. This is expected to normalise over time.

'EVOLVING' PREFERENCES

Starbucks plans to accelerate the rollout of its "pickup" store concept, with smaller-format locations that don't have customer seating.

"While we had originally planned to execute this strategy over a three- to five-year time frame, rapidly evolving customer preferences hasten the need for this concept."

The pandemic has forced Starbucks to rethink its central concept of being a "third place" away from work and home for customers to relax in, it said.

To make room for the new pickup locations, which will be in cities like New York, Boston and Chicago, Starbucks will be closing about 400 of its traditional cafes in those urban areas over the next 18 months.

Eventually, those shuttered stores - and then some - will be replaced by the new format, which have roughly half the footprint of a normal store.

The company already operates one pickup location near Penn Station in New York and a second in Toronto's Commerce Court. Another one is planned for the Grand Central Station area in Manhattan, with others following quickly behind.

Eighty per cent of Starbucks customers already take their orders to go, Starbucks chief executive Kevin Johnson said in an interview with Bloomberg, so it won't even feel like much of a shift.

"Until there's a vaccine available at scale and treatments for Covid, all of us have to continue to monitor the spread of this virus and adapt appropriately," he said. "And I think that's what we've tried to do."

In China, the company says it is on track to add at least 500 net new stores this fiscal year despite the virus impact.

Starbucks is also examining its Canada operations and plans to restructure its business there over the next two years. The company said it will potentially close 200 additional stores there, with some of these changing locations.

BREAKFAST SALES

Chains dependent on breakfast sales, like Starbucks, have been hit disproportionately hard because there are so many fewer commuters on the road these days.

Starbucks' price point is also higher than rivals like Dunkin', Bloomberg Intelligence's Mr Halen said, making it less well positioned heading into a pandemic-related recession.

On top of that, a smaller share of its stores have drive-throughs than rivals.

Lingering in the café enjoying a coffee was a key part of the "third place" experience, but that concept is "toast right now", Mr Halen said.

"They're really behind here. I don't blame the management team, the management team is excellent - it's just the impact of coronavirus is going to hurt them that much more because it's a café," he said.