Starbucks sales are slumping. Is it a bellwether for the economy?

Starbucks sales are slumping. Is it a bellwether for the economy?

The company's shares have plummeted about 17% in value since last week.

ByMax Zahn

May 6, 2024, 8:29 PM

Starbucks shares have plummeted more than 17% in value since the company revealed a sales slump in an earnings report last week.

“The brand is incredibly resilient, but it’s clearly not business as usual,” former CEO Howard Schultz said in a post on LinkedIn on Sunday.

The coffee giant is viewed by many analysts as a bellwether for consumer spending, which accounts for nearly three-quarters of the nation’s economic activity. The company's latest struggles, in turn, raise a question: Is the engine of the U.S. economy faltering, or is something wrong at Starbucks?

The explanation involves a little of of both, analysts told ABC News.

The experts described consumers fatigued by a years-long bout of inflation alongside high borrowing costs. In addition, they added, Starbucks has struggled to adapt to a post-pandemic economy, and also faces backlash over controversy tied to its alleged corporate stance regarding the Israel-Hamas war.

“Consumers have less demand for expensive coffee,” Albert Wang, a professor of finance at Auburn University, told ABC News. “There are also issues at the company.”

Starbucks did not immediately respond to ABC News’ request for comment.

In an earnings report last week, the company announced a roughly 2% decline in revenue over the first three months of this year, falling short of analysts’ expectations. Same-store sales, a measure of revenue generated at existing locations, dropped 4%.

On a conference call with analysts, Starbucks CEO Laxman Narasimhan last week attributed the sales slump in part to a generally “cautious consumer,” and noting as an example a decline in visits among U.S. customers who patronize the store only occasionally.

Narasimhan also cited additional sales headwinds, including the controversy tied to the Israel-Hamas war, as well as slower-than-expected performance in China.

Waning consumer enthusiasm, however, is hardly limited to Starbucks, analysts told ABC News.

Consumer spending in the U.S. slowed markedly at the outset of this year when compared with the final months of 2023, according to U.S. Commerce Department data released last week.

The trend coincided with stubborn inflation and a spike in credit card debt, suggesting challenges faced by consumers as they navigate rapid price increases and expensive borrowing costs.

The sluggish spending has weighed on restaurant brands beyond Starbucks. Fast-food giant McDonald’s reported a slowdown in sales earlier this month, as did KFC and Pizza Hut, both of which are owned by Yum Brands.

“When you see it happening at companies outside of Starbucks, that’s when it becomes a broader worry that you’re concerned about,” Michael Jones, an economics professor at the University of Cincinnati, told ABC News.

Starbucks, meanwhile, has encountered some specific challenges amid the wider consumer slowdown.

People picket outside of a Starbucks store as Starbucks Workers United have announced that they are waging the company's largest strike on Red Cup Day, New York City, Nov. 16, 2023.Spencer Platt/Getty Images

The company has struggled to sustain a surge in business experienced during the pandemic, when customers flocked to the Starbucks app flush with federal stimulus money and largely unable to dine at restaurants, Cait Lamberton, professor of marketing at the University of Pennsylvania’s Wharton School, told ABC News.

“Starbucks accommodated a global challenge with a solution that worked really well for a time, but they have to fundamentally rethink the value they offer so they don’t become a quick-service fast-food place,” Lamberton said.

“Starbucks could charge a premium because it’s a little bit special,” Lamberton added of the company's pandemic pricing. “Now, they’re charging $6.50 for people to walk in and walk out 10 seconds later.”

The company has also faced negative publicity centered on a dispute with the labor union Workers United regarding the Israel-Hamas war.

Starbucks sued the union in October after the labor organization, which represents food-service workers, posted a since-deleted message on X expressing solidarity with Palestinians. The message from the union subsequently triggered calls to boycott Starbucks, because some appeared to mistake the union's position for that of the company.

In response to ABC News' previous request for comment on the dispute, Starbucks pointed to a statement on the company's website.

“As the violence against the innocent in the region continues, some people are mistakenly tying these remarks to us, because Workers United and its affiliates and members continue to use our name, logo and intellectual property,” Starbucks said.

Workers United, which represents workers at roughly 400 unionized Starbucks locations, has negatively affected perceptions of the company through strikes and other labor actions, Nick Setyan, an analyst at Wedbush, told ABC News. The two sides are currently engaged in contract negotiations after reaching an agreement to restart talks in February.

“Historically, Starbucks has been billed as forward-looking and liberal,” Setyan said. “When you’re at war with a labor union, it doesn’t necessarily jibe with your brand identity.”

After acknowledging economy-wide and Starbucks-specific causes of the sales slump, Wang said the difficult times for the company may not change anytime soon.

“My expectation is that this will continue at Starbucks for an extended period of time,” Wang said. “I don’t think it will stop.”

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