Chief Executive Officer & Director, Starbucks Corp
Starbucks CEO on Q2 miss: Didn't communicate the value we provide in a more aggressive manner
Starbucks CEO Laxman Narasimhan joins 'Squawk on the Street' to discuss the company's Q2 results, which reported weaker-than-expected quarterly earnings and revenue, fueled by a surprise decline in same-store sales, news of the company cutting its full-year guidance, state of the consumer, expansion plans, China market competition, economic outlook, and more.
About Laxman Narasimhan
Laxman Narasimhan, CEO of Starbucks, has emphasized work-life balance, stating he is "very disciplined about balance" and rarely works past 6 p.m. when in town, reserving that time for family. He also schedules 150 to 250 minutes of personal exercise per week. Narasimhan has spoken about his leadership approach, which includes focusing on mindsets such as empathy and resilience, and he has described meditation as a tool for centering himself before meetings. In public appearances, Narasimhan has addressed Starbucks' financial performance and strategy. Following a weak Q2 in 2024, he attributed the results to "unexpected pressures on our locational customers," a "more intense price war" in China, and challenges in the Middle East, stating the company needed to better communicate value to occasional customers. He has outlined a "triple shot reinvention" strategy aimed at 5% long-term comparable sales growth and double-digit revenue growth, with a plan to reach 55,000 stores globally over five years, three-quarters of which would be outside the U.S. Narasimhan has also expressed long-term confidence in China, describing the market's potential, and highlighted India as a key growth market, noting a plan to open a store there every three days and to scale up coffee sourcing from the country.
Transcript (16 segments)
J
Jim0:10
Loser today, it's going to be Starbucks, down double digits. Quarterly results substantially below street consensus, cutting its full-year guidance. Joining us now, exclusively, is Starbucks CEO, Laxman Narasimhan. Mr. Narasimhan, good to have you on the show, and I appreciate that you're coming on, despite the fact that the quarter was extremely weak.
L
Laxman Narasimhan0:32
Jim, it was a very tough quarter. Thank you for having me. There were three reasons for this. First, we saw unexpected pressures on our locational customers, more intense than we expected. That impacted their visitation. Second, the choppiness of the...
J
Jim1:10
Now, what I'm trying to figure out, sir, is, why did you not feel the need to preannounce this shortfall, given the fact in the previous quarter, your CFO said that she felt that you could have earnings per share growth in the range of 15 to 20%? This is a substantial decline from that, and given the fact that you said on the call that April did not end well, I would like to know why you did not feel the need to come out and say, our quarter is going to be substantially worse than expected, at least four weeks ago?
L
Laxman Narasimhan1:40
Jim, we have been working on action plans to address these headwinds, and so what we wanted to come back with was not just the announcement but also the action plans that we have in place, which, by the way, are not business as usual. And I'm happy to talk about them.
J
Jim1:55
Well, let's finish, because I... decline in comp stores because of weather, and none of them saw a negative number, except for you. Is it possible that your coffee is just too darn expensive?
L
Laxman Narasimhan2:24
Jim, I think that if I look at the U.S. occasional customer, they have clearly cut back on visits to us. If you look at the value for money scores we have, they're still strong, but there's no question that the occasional customer is cutting back on business to us. We have not been able to communicate to them the value that we provide. So, what we are doing about it is it's not business as usual, but there's an action plan we have in place in order to do that. To reach them and to communicate the value that we are providing. What we're doing for that is we... there are drops that are going to happen every Monday. There are bundles that we're putting in place that are attractive for them. For example, a beverage and a drink at a certain price. And so, what you are seeing there is the effort we're making in order to ensure that our occasional customers get to see the value that we provide. Our loyal customers...
J
Jim3:30
Why did the loyalty program go from 4.3 to 32.8 in late quarter? Those people are not occasional. Those people are hard core. Why did your members... I know your membership was up year over year. I'm not concerned with that. I'm concerned with why you had not the occasional but the hard core drop off.
L
Laxman Narasimhan3:53
If you look at the most loyal customers, they continue to come... occasional customers. We have an action plan in place right now to communicate directly with them, with offers that have gone out, even as recent as this week, in order to ensure that we can reverse the visitation losses that we have seen with them and to bring them back, and yes, you're right, overall, program did grow by 6%.
J
Jim4:28
Right. That's necessary. But what's more important, I think, is the late quarter decline. Before I turn it over to my colleagues, you said it's not business as usual, and I want to make a point here, sir. You are still expanding as if it is business as usual. You had, for instance, on the quarter, you talk about opening stores in Honduras and Ecuador. Is it not time to pause, sir, and figure out what's really going wrong and spend a deep dive and making it so that this decline in comp store numbers does not continue?
L
Laxman Narasimhan5:10
System sales in Latin America expanded double digits. Our sales in Japan expanded double digits. Our business outside of Malaysia and Indonesia in Asia Pacific showed growth. If you look at the fundamentals of the U.S. business, we are holding share in the U.S. We are still the largest player in out-of-home coffee. If you look at some of the metrics...
J
Jim5:36
Dunkin' Donuts and Tim Hortons said you are not holding share, sir. I regard them as being seminal. McDonald's says you are losing share. I can't go against those three companies. They are too good and too honest and too big for me to dismiss.
L
Laxman Narasimhan5:52
We are the leading category player in coffee. Cold grew 1%. So, there are elements in here. If you look at our partner sentiment and what we have inside stores, attrition is down to its lowest levels. So, there's work going on. The thing we didn't do enough of is really attack the occasional customer with delivering and communicating value to them in a more aggressive manner. That's what the plan we have is.
D
David6:37
It's David. China continues to be a not-unimportant part of the growth plan for this company. You cite fierce competition there. Slower than expected recovery. But to Jim's question, again, why not sort of focus on improving things there and/or fighting off the competition? You still are opening many stores. I know the net number was still...
L
Laxman Narasimhan7:11
Stores and the expansion, they're 40% cash on cash returns. We see no reason to change that equation. It does not mean that we're not focused on fixing the challenges we have with the occasional customer and with the fact that they're not visiting us as often.
D
David7:33
Laxman, I noted your language in terms of citing a deteriorating economic outlook weighing on customer traffic. Do you really think that's the case? We talk about it endlessly here, as you well know, and it's far from clear that there is a deteriorating economic outlook, so what is it you're seeing?
L
Laxman Narasimhan7:53
I think what we're seeing is pressures on the wallet for some of our most occasional customers. Hence our action plan, which is about communicating value, which is about ensuring our speed of service improves so we capture the demand that we already have, and thirdly, that we bring in products that they find exciting. What we are doing is products. If you look at the lavender matcha, really appealed to some of these customers. We are bringing in new products as our seasonal launches go that are really appealing to these occasional customers as well. So, it's about price. It's about value. We're bringing those two together to...