Starbucks set for $4.4b fallout from pandemic

A Starbucks drive-through station in California. The firm plans to accelerate the roll-out of its pickup store concept, with smaller-format locations without customer seating. It says the pandemic has forced it to rethink its central concept of being
A Starbucks drive-through station in California. The firm plans to accelerate the roll-out of its pickup store concept, with smaller-format locations without customer seating. It says the pandemic has forced it to rethink its central concept of being a "third place" away from work and home for customers to relax.PHOTO: BLOOMBERG

NEW YORK • Starbucks expects the coronavirus pandemic to reduce sales this quarter by as much as US$3.2 billion (S$4.4 billion), dragging down the coffee chain's performance as it sees a recovery stretching into next year.

The company, which, like other restaurants, has had a difficult time offering guidance, said in a statement on Wednesday that it expects to report an adjusted loss of 55 US cents to 70 US cents a share when it next releases earnings.

Operating income will decline as much as US$2.2 billion in the period, Starbucks said.

The guidance underscores the depth of the challenges for consumer-facing businesses from the Covid-19 outbreak and the resulting worldwide lockdowns. The coffee seller, which is exploring new store formats to stimulate demand, is being closely watched as a barometer of customers' willingness to leave their homes and open their wallets as the pandemic subsides.

Mr Michael Halen, senior restaurant analyst at Bloomberg Intelligence, said: "These numbers are a lot worse than Wall Street was expecting."

He added: "People expect some sort of crazy snapback, but it's not going to materialise in restaurants."

Starbucks shares fell as much as 4.7 per cent on Wednesday, the most intra-day in more than a month. Shares had declined 6.3 per cent this year through Tuesday's close. The company's comments also dragged down peers, with an S&P index of restaurant stocks falling as much as 2.7 per cent, the most in almost a month.

Starbucks, due to its size and propensity to give regular updates, is seen as a proxy for the industry.

In the United States, its critical home market, comparable sales were down 43 per cent last month, though things have been improving with each passing week, Starbucks said.

About 95 per cent of the company's US stores are operating now.

That is a contrast to China, its other key market and a country further along the road to post-pandemic recovery, where 99 per cent of stores are open and same-store sales were down just 21 per cent last month.

While sales have fallen, customers that do go to Starbucks are spending more amid the pandemic, with the average order including more items, the company said. This is expected to normalise over time.

Starbucks plans to accelerate the roll-out of its pickup store concept, with smaller-format locations without customer seating.

The pandemic has forced Starbucks to rethink its central concept of being a "third place" away from work and home for customers to relax, the company said.

To make room for the new pickup locations, which will be in cities such as New York, Boston and Chicago, it will be closing about 400 of its traditional cafes in those urban areas over the next 18 months. Eventually, those shuttered stores - and then some - will be replaced by the new format, which will have roughly half the footprint of a normal store.

The company already operates one pickup location near Penn Station in New York and a second in Toronto's Commerce Court.

Another one is planned for the Grand Central Station area in Manhattan, with others following quickly behind.

Eighty per cent of Starbucks customers already take their orders to go, Starbucks chief executive Kevin Johnson said in an interview with Bloomberg.

"Until there's a vaccine available at scale and treatments for Covid-19, all of us have to continue to monitor the spread of this virus and adapt appropriately," he added. "And I think that's what we've tried to do."

In China, the company said it is on track to add at least 500 net new stores this fiscal year, despite the virus impact. It is examining its Canada operations and said it will potentially close 200 additional stores there, with some of these changing locations.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on June 12, 2020, with the headline 'Starbucks set for $4.4b fallout from pandemic'. Print Edition | Subscribe