Younger, diverse consumers are driving Starbucks’ success

SEATTLE — Just over half of Starbucks customers in the United States are Generation Z or Millennials, a key reason executives are optimistic about the brand’s future.

“When you enter our stores, you see that the meaning of Starbucks is not the coffee your parents drink, it’s the coffee young people choose every day,” Brady Brewer, chief marketing officer of Starbucks Corp, said on April 3 November. “Our current brand position, we have the strongest brand affinity of any takeaway coffee brand anywhere in the world and are recognized as the number one choice for takeaway coffee. So the younger you get, the stronger your brand affinity becomes. And the more diverse you become, the stronger the brand affinity becomes. For all these reasons, we continue to serve a very diverse and increasingly young customer base with these cold, bespoke plant-based beverages and the strategy is working.”

Howard D. Schultz, founder and interim CEO, said the company has consistently monitored the average age of its customer base.

“Not only has it gotten younger, but that young customer, that Gen Z customer, tends to have a lot more discretionary money on their hands,” Mr. Schultz said. “And their loyalty to Starbucks has been quite significant and predictable.”

Younger consumers are driving the growth of Starbucks’ cold coffee beverages, which account for 76% of total beverage sales at the company’s stores in the United States, Mr. Schultz said, adding, “And customers are increasingly customizing their cold coffee beverages by adding more beverages.” -High margin flavor modifiers to create unique beverages tailored to their own particular taste preferences.”

Additionally, in the most recent quarter, more than 60% of beverages sold in U.S. company-operated stores were customized, “contributing to the $1 billion and growing annual net sales for modifiers” achieved in recent doubled in three years, said Sara Trilling, president of Starbucks North America.

Mr Schultz said cold beverages are “in the early stages of what’s to come,” and pointed to continued innovation in the category over the coming year.

“However, no one should walk away and think that our hot coffee business isn’t growing,” he added. “It’s actually growing well, but the cold kind of took over. But we have significant innovation plans for Hot. So I think the percentage of revenue cold versus hot will go up as a result of the innovations we have around the hot platform.”

Net income attributable to Starbucks for the fiscal year ended Oct. 2 was $3.3 billion, equivalent to $2.83 per common share, down 22% from net income of $4.2 billion or $3.54 per share last year. Operating margin contracted on increased labor investment, inflationary headwinds and lower sales in China due to pandemic restrictions.

Net income for the full year was $32.3 billion, up 11% from $29.1 billion. Revenue increased 13% on a 52-week basis.

Fourth-quarter earnings were $878.3 million, or 76 cents a share, down 50% from $1.7 billion, or $1.49, for the comparable period. Total revenue for the quarter increased 3.3% to $8.4 billion from $8.1 billion. Revenue increased 11% on a 13-week basis.

Global comparable store sales increased 8% for the full year and 7% for the quarter. Comparable store sales in North America increased 12% for the full year and 11% for the quarter. Internationally comparable store sales declined 9% for the year and 5% for the quarter. Comparable store sales in China fell 24% for the year and 16% for the quarter, reflecting government lockdown measures related to COVID-19.

“Our performance supports our confidence in the ambitious growth agenda we announced in September, adding approximately eight new stores per day for the next three years and delivering best-in-class returns globally from nearly 45,000 stores worldwide by the end of fiscal 2025,” said Mr. Schultz.

Fourth-quarter channel development segment operating income increased 11% to $244.6 million with revenue increasing 10% to $483.7 million, reflecting growth at the Global Coffee Alliance and global Ready -to-drink business.

“Channel development continued to play an important role in differentiating, diversifying and strengthening our brand by creating consumer occasions outside of our stores,” said Rachel Ruggeri, Chief Financial Officer. “As a result, Starbucks remains the market leader in both the home coffee and ready-to-drink categories in the United States.”

Fourth-quarter results show the early success of Starbucks’ reinvention plan, which was unveiled at the company’s recent investor day, Mr. Schultz said. For the coming year, the company expects global and comparable US sales growth of between 7% and 9% and an increase in the number of stores worldwide by approximately 7%, with more than 75% of the growth coming from outside the United States. Management also expects earnings per share growth to hit the high end of the 15% to 20% range.

“With this strong combination of global comp and store growth, coupled with our channel development performance, we expect our consolidated revenue growth to be in the range of 10% to 12% in fiscal 2023 despite an expected adverse impact of approximately 3 percentage points from the Foreign currency conversion,” Ms Ruggeri said. “Within fiscal 2023, the unfavorable impact of currency translation is expected to reach approximately 4 percentage points in the first half of the fiscal year and moderate to approximately 1 to 2 percentage points in the second half of the year.

“Despite the significant pressure that we now expect from currency translation, which may ease, we remain confident in our full year revenue guidance. We have a solid path to capture strong demand, maximize opportunities arising from our reinvention roadmap, and deliver attractive revenue results.”

Starbucks stock price rose in after-hours trading, opening at $91.98 on Nov. 4, up 8.6% from its Nov. 3 close of $84.68.

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