Starbucks Reopened 95% of stores in China upon COVID-19 Ease
In 2003, shortly after the “SARS” outbreak, Starbucks ranked the threat of pandemic in the “risk factors” section of the annual report. However, in the performance statement released in early March of this year, Starbucks placed the epidemic risk behind, ranking after a weak economic situation, changing consumer tastes, rising real estate costs, and natural or man-made disasters.
Unexpectedly, in less than a month, the spread of the new coronavirus epidemic (hereinafter referred to as the epidemic) has begun to crazily damage its profits.
01 Multi-country closures are coming
The spread of the epidemic in the United States continues. Starbucks, which has 15,000 stores and franchise stores in the United States, accounts for about 50% of the company’s global volume. As “social alienation” continues to advance, its sales in the United States are facing Under increasing pressure.
According to a Reuters report, on April 8, Starbucks announced that the sales of its two largest markets have fallen sharply due to the epidemic, and revenue in the second quarter of fiscal 2020 will fall by 47%, and pessimistically predicts that the negative impact of the third quarter will exceed In the second quarter, the negative impact may continue until September this year (Starbucks fiscal year starts from the end of September and the beginning of October each year).
Starbucks pointed out that in the second quarter as of March 11, 2020, US same-store sales increased by 8%, but the final settlement of the quarter fell by 3%, mainly due to the rapid spread of the new crown epidemic in the last three weeks in the United States. It is worth mentioning that the Starbucks US business achieved the best record in history in the last quarter of last year, and the strong sales momentum continued until the first quarter of this year.
In addition, because it is impossible to reasonably predict the impact of the epidemic after the second quarter, Starbucks decided to withdraw its 2020 forecast issued on October 30, 2019. Previously, the company expected revenues for fiscal 2020 to grow 6% -8%, and global same-store sales growth is expected to be between 3% -4%.
Starbucks CEO Kevin Johnson and Chief Financial Officer Patrick Grismer said in a letter to shareholders that 44% of Starbucks stores in the US are currently open. This shows that of the approximately 15,000 stores in Starbucks, as many as 8,400 are not open.
Starbucks U.S. same-store sales have begun to decline since March 12. With the temporary closure of stores around the world and the increasing epidemic prevention regulations and social distance, the decline in people has gradually deteriorated. In the last week of March, Starbucks same-store sales in the US market fell by 60–70%.
Like McDonald’s and some other chain stores, Starbucks started well this year. As of March 11, the company’s same-store sales increased by 8%, of which transactions increased by 4%. However, like most other stores, Starbucks also had to close its stores and shift its focus to home delivery services in response to customer concerns and government requirements.
Starbucks said the company is using its experience in China to help the United States respond. Specifically, the company started taking measures in late February, and switched to take-out only mode in March, and closed the dining area completely on March 21.
A Starbucks employee wearing protective gloves handed Starbucks to the customer through the window
Photographer: David Paul Morris / Bloomberg
In fact, as far as Starbucks is concerned, there are more countries and regions facing the risk of closing stores than the United States. For example, after the Japanese government implemented the “Declaration of Emergency”, Starbucks Japan announced on April 8 that from April 9 onwards, there will be approximately 850 branches in 7 cities including Tokyo, Kanagawa, Saitama, Chiba, Osaka, Hyogo and Fukuoka The whole line is temporarily open, and the remaining branches are temporarily shortened until further notice.
Kuai Xiaojun noticed that this news was widely shared on social networking sites. At the same time, some people appeared outside Starbucks branches. Among them, more than 50 people lined up outside the branch of Putian in Tokyo, and the scene was “spectacular”.
02 95% of stores in China restored
While the global business is gradually shrinking, Starbucks China’s business seems to be coming out of the pain period.
Affected by the epidemic, tertiary industries such as tourism, retail and aviation, including the coffee industry, have been greatly affected. The time from the end of the epidemic is still uncertain, which brings more uncertainties to the revenue of Starbucks’ Chinese market.
At the beginning of March this year, Starbucks had estimated that China’s store sales in the second quarter might be “halved in half.” Yesterday, Starbucks announced that it expects to “sit down.” In the second quarter just past, same-store sales fell by 50%. Among them, Starbucks China’s overall same-store sales in March fell by 64%-after seven consecutive weeks of improvement, same-store sales in the last week of March still fell by 42%. In mid-February, Starbucks’ same-store sales in China declined by as much as 90%.
For the sharp decline in performance, the company said that this was mainly due to the temporary closure of stores, reduced business hours and severely reduced customer traffic. Since mid-to-late January, Starbucks stores in China have gradually closed; since the epidemic has developed, Starbucks China ’s revenue has dropped by approximately US $ 400 million compared with expectations.
However, Starbucks is still optimistic about the prospects. “In any case, based on our experience in the Chinese market, we still believe that these impacts are temporary, and the business will gradually recover over time.” The company also said that in April Since then, with the gradual resumption of production in the Chinese market, Starbucks stores have been gradually opened and reopened, and business in China may be fully restored in the next two quarters.
At the same time, Starbucks also stated that it is “confident in maintaining proper cash flow” to weather the crisis, and said that as of the end of the second fiscal quarter, the company held approximately 2.5 billion US dollars in cash and cash equivalents.
In fact, Starbucks China has slowly recovered after experiencing a steep fall in the first quarter.
As of press time, more than 95% of Starbucks China stores have resumed business. Although Starbucks publicly announced its plan to postpone the opening of a new store in the Chinese market, there are still two new stores opening in late March, one of which is the Starbucks Now store in Shenzhen.
In addition, in the last week of February, 80% of all Starbucks orders were mobile phone orders, and in the last week of March, the proportion of Starbucks mobile phone orders fell to 27%, and more and more people returned to the store to consume. Starbucks said that the recovery rate of the Chinese market in March slightly accelerated, and it is expected that all will recover in the next two quarters.
However, Starbucks faces many difficulties in China in the next stage.
On the one hand, although Starbucks’ biggest challenger in China, Ruixing, suffered a bitter “thunderstorm”, new tea drinks represented by “Xicha” and “Nai Xue’s tea” are launching a round-robin attack on Starbucks. Not only that, the two also sold coffee directly across the border. At the beginning of this year, Xicha quietly launched the coffee business, which may have a certain impact on the Chinese market that Starbucks is working hard.
On the other hand, after the Chinese economy has experienced an industry-wide blow, a considerable number of consumers will face the Starbucks of about 30 yuan and change their attitude before buying. After all, what accompanied the epidemic was a substantial increase in the cost of living. For consumers, retaliatory consumption must be based on retaliatory earning. This problem is difficult to solve in the short term.
If it is attributed to non-essentials for a long period of time, then the Starbucks consumer option is likely to disappear from the shortlist of most people. At this moment, Starbucks has to “do its best” and “see destiny”.
03 The Future of Starbucks
Going back to the global market, will Starbucks fail?
In fact, the impact of the global epidemic “hurrying up and down” will not be a permanent problem. Starbucks’ long-term growth prospects remain extremely attractive. US food industry analyst RoystonYang pointed out that the following three reasons can make Starbucks overcome this crisis well.
1. Strong brand influence
The brand is also the moat of the enterprise, and is an important asset that brings differentiation to the enterprise among intangible assets.
Starbucks has a strong brand influence not only in the United States but also globally. Over the years, management has steadily expanded the company’s business scope in Asia and South America.
This means that consumers’ daily activities and habits will not be interrupted by Starbucks temporarily closing the store, and the company’s name will always remain in people’s minds. In turn, these tough measures have created a suppressed demand for the company’s products. Once the situation is alleviated, this will drive a large influx of customers.
2. Stickiness of customer loyalty
Starbucks has implemented a loyalty reward program, and the number of members has grown rapidly over the years. The company reported in the first quarter of fiscal 2020 that the number of Starbucks members increased by 16% year-on-year to 18.9 million.
The healthy growth in membership has allowed Starbucks to retain customers and build strong brand loyalty. The plan is part of the Starbucks digital flywheel strategy and aims to use artificial intelligence to provide each customer with a personalized experience.
Not many coffee chains have established such loyalty programs. When the store reopens, it will attract a lot of repeat customers. To show sincerity, Starbucks also announced that it will postpone the expiry of all accumulated reward points that expire from June 1st, 2020.
3. Stable free cash flow
All along, Starbucks has a very strong ability to prepay customers through various methods (selling cups, selling stored value cards, etc.), which means that Starbucks itself is a “bank-like” system. As shown in the table below, Starbucks has maintained a good record of continuously generating free cash flow (operating cash flow minus capital expenditure), and the huge cash flow undoubtedly enhances Starbucks’ ability to resist risks.
Source: Starbucks financial documents
4. Strong expansion capability
It is expected to open more stores around the world, and its market performance in the United States and China is particularly impressive. In 2019, the company added 435 stores and franchise stores in the United States, and opened 1,300 new stores in the international market. In the past few years, Starbucks has maintained the speed of opening 1900–2300 new stores every year, leaving a lot of competitors behind (except Ruixing Coffee).
In summary, RoystonYang believes that although the closure of the store caused by the epidemic will have a negative impact on operations in the next few quarters, once the situation returns to normal, the company will quickly return to the right track.
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