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Howard Schultz seeks to restore Starbucks’ power

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When Howard Schultz introduced Starbucks to the UK in 1998, he hailed it as a beachhead for expansion into Europe, where Milan baristas had once inspired the caffeine-fueled vision that had made him a billionaire.

A generation later, there are over 1,000 Starbucks stores across the UK. But Schultz is now considering whether to pull out of a market where his brand is lagging behind Costa Coffee, the rival Coca-Cola bought in 2018.

Alex Rayner, managing director of Starbucks UK, responded to news that the company was assessing “strategic options”, reassuring staff that it remained committed to the UK and was “not in a formal sales process”. Investment bank Houlihan Lokey has, however, been engaged to advise on the possibilities.

Starbucks declined to comment further, but the question mark hanging over the British company is a rare moment of uncertainty for one of America’s most successful global exports.

Last April, after a five-year absence during which he flirted with a bid for the US presidency, Schultz returned to the business he built at the world’s largest coffeehouse chain, taking his third turn as general manager.

“Love and responsibility brought me back to Starbucks,” he told analysts in May. At the same time, he warned that major changes in customer behavior during the coronavirus pandemic had put the company under “significant pressure”.

This earnings call made it clear that the UK is no longer the strategic market it once was, with Schultz barely mentioning operations outside the US and China, the two markets he founded. their hopes for growth.

The issues that need to be addressed in those markets may also explain why Starbucks might want fewer distractions elsewhere.

In the United States, some 195 Starbucks locations have voted to unionize since December in what has become the most concerted labor campaign in fast food since the 1980s.

The company has long had a reputation as one of the best places to work in the restaurant industry, with industry-leading salaries and generous benefits. But since the start of the pandemic, workers have complained that the lack of safety measures and the lack of staff made their jobs untenable.

Leaders fought hard against the fledgling union and drew the ire of federal labor officials in the process.

In China, which Schultz says will one day overtake its home market, Covid lockdowns have prevented the company from forecasting its performance for the rest of the year.

The U.S. and Chinese markets are what Starbucks has “bet its whole future on,” said Nick Setyan, restaurant industry analyst at Wedbush, who called other countries where it has a store, from Canada to Japan. , of “distraction”.

“All other markets owned by the company may disappear,” he added. “I wouldn’t be surprised if they manage to sell the UK, Japan will be next.”

The UK – its biggest operation in Europe – “was an anomaly from the start”, according to a former Starbucks executive.

While other major European markets – France, Germany, Spain, Turkey and the Netherlands – have always been run by licensed operating partners, Starbucks still owns around 30% of its stores in the UK. -United.

“I’m surprised they’ve kept the UK business for so long,” Setyan said, pointing out that the majority of its stores in the Emea region are licensed and not company operated. In May, Starbucks withdrew from Russia, where a franchisee ran its 130 cafes.

The UK coffee market has also become crowded in recent years. In 2017, Citigroup analysts said the industry had only “four to five years of structural growth left.” Now, with more people working from home and spending less time in city centers during the week, that saturation point may have arrived.

Over the past three years, the number of cafes in the UK has grown by 2.5%, compared to a 22% increase between 2016 and 2019, according to market research firm Allegra World Coffee Portal. Starbucks managed 9% growth between 2019 and 2022, but that was only half of its growth rate in the previous three years.

A sale now would reflect “the maturation of the market and the maturation of Starbucks’ place in that market,” said Jeffrey Young, general manager of Allegra Strategies.

Column chart of Total branded chain outlets showing the congested UK coffee market

“It makes sense to seek an operating partner to operate the brand, especially as the cost of doing business increases and demand slows,” he added, citing rising costs for everything from energy with milk.

A former Starbucks executive, who helped found the UK company in 1998, said its review was a “pragmatic decision” by Schultz.

“You have to give [the divisions] space to make sure they can operate locally,” he said, adding that Schultz’s biggest problem was reinventing the larger, faster-growing US operation. “He’s trying to take over the business, so the ship gets righted,” he said.

Schultz’s first move upon his return was to suspend Starbucks’ stock buyback program to fund an additional $200 million in investments in equipment, salaries and innovations that appeal to staff, such as tips. digital.

In the United States, “we have demand everywhere,” he told analysts, but he conceded this month that stores – which he saw as a “third place” where customers could shop linger over a coffee between work and home – were “not set up” for the era of working from home, mobile ordering and the consumer preference for cold beverages that now account for almost 80% of his activity.

After beating the market after the onset of the pandemic, Starbucks shares have lagged for most of the past year, putting pressure on the new old boss to show progress by the day of the awards. investors that he has scheduled for September.

He told Wall Street to expect “game-changing industry” ideas to boost productivity in US stores, as well as a “big game-changing plan” for Web 3.0 – the next iteration blockchain-based internet platform – and a platform to sell NFT digital collectibles. And he has promised to appoint a new external chief executive this fall before stepping down from executive duties in March.

But after stepping down twice before – once in 2000 and then again in 2017 – this time he plans to stay on the board. Starbucks is still in growth mode, he told Wall Street analysts: “Is the glass half full? You bet yes.

Additional reporting by Taylor Nicole Rogers in London