Editor's note: For years, coffee drinkers flocked to Starbucks to get their morning caffeine fix. But according to our founder Porter Stansberry, that's changing. In this excerpt – adapted from a May issue of The Big Secret on Wall Street, published by his firm Porter & Co. – Porter outlines the headwinds facing this well-known coffee shop both abroad and at home... and explains what it would take to see a turnaround.
This Coffee King Is Struggling on a Global Level By Porter Stansberry
No matter how hard Tom the cat tries – with axes, poison, bazookas, or pianos dropped from above – he just can't catch (or kill) clever Jerry, the mouse. The warring animated duo in the Tom & Jerry cartoon franchise are mostly wordless, punctuated by occasional yelps of "Help!" "NOOO!" or "Something's burning!" (Often, Tom's fur or whiskers.) Now, though, thanks to the Chinese coffee-shop chain Luckin, the cat-and-mouse pair has a new catchphrase: "Who took my mascarpone latte?" Luckin is bouncing back from a near-death experience (after fraud charges and a delisting from the New York Stock Exchange in 2020). It serves intriguing treats like "velvet lattes"... liquor-infused chocolate milk... and its Tom-and-Jerry-themed mascarpone-cheese latte, paired with special Tom and Jerry stickers. But Luckin's genius lies in its deep understanding of its demographic of penny-conscious Chinese students... The high-tech coffee shop brews specialty drinks for roughly half the price of a Starbucks latte. Its app-only purchase system makes ordering quick and easy. And that's the crux of this surprising underdog story... You see, this scrappy coffee chain keeps trouncing its main rival in China, Starbucks (SBUX), by almost every metric. Despite Starbucks' longstanding presence in the country, Luckin is now officially the biggest coffee chain in China. The chain now runs 13,000 shops in China, compared to fewer than 7,000 for Starbucks. Starbucks' stumble in China isn't a one-off, though. The coffee giant's woes extend across the globe. So today, I'll discuss the future of this once capital-efficient powerhouse... and whether investors should steer clear. Over the past several decades, Starbucks grew from a tiny, regional coffee chain to one of the world's most popular brands. Despite significant ups and downs in the economy – including the great financial crisis and the 2020 COVID-19 lockdowns – SBUX shares have still delivered massive returns. However, the stock is still trading well below its 2021 high. And back in late April, it dropped 16% in a day after reporting one of the company's worst quarters ever... Sales fell for the first time in more than a decade (except during the COVID lockdowns). Total revenue declined 2% to $8.6 billion, North American revenue was flat at $6.38 billion, and international revenue fell 5% to $1.76 billion. Results were particularly poor in China. But total customer transactions across all stores declined 7%. Earnings per share fell 14% year over year. And active U.S. Starbucks Rewards members – the company's most loyal customers – also declined for the first time in years. The 16% plunge following the report was the worst drop in the stock price since the COVID crash. Shares are now trading around $75, more than 40% below their July 2021 peak. We're always on the lookout for world-class businesses facing temporary problems that cause their shares to go "on sale." However, this doesn't appear to be the case for Starbucks. The company is facing a fistful of significant structural problems with no easy solutions... The first big challenge isn't isolated to Starbucks alone. A number of other consumer-facing companies – from McDonald's (MCD) to Nike (NKE) to PepsiCo (PEP) – have recently warned about slowing consumer spending. After years of robust buying, it's becoming increasingly clear that U.S. consumers are running out of cash. This isn't a surprise given the status of inflation. Meanwhile, consumers' stimulus-fueled savings have officially run out... The chart below shows the "excess savings" for U.S. households – which measures the amount of savings above and beyond the prestimulus levels of 2020. After peaking at $2.1 trillion in August 2021, this excess cash dried up and went negative. Americans now have less savings than before the COVID stimulus began... Recent surveys suggest more than 60% of Americans are now living paycheck to paycheck. Given this bleak combination, it's only natural that consumers would cut some unnecessary expenses – like an $8 coffee. The second big challenge Starbucks is facing today is management. It has lost focus on what made the company so successful to begin with. The "secret" to Starbucks' success was simple... It sold premium coffee, at a premium price, at premium locations. Former longtime CEO Howard Schultz deserves much credit for the company's decadeslong success. He turned Starbucks into a beloved brand by offering customers a premium experience, not just a premium product. But today, Starbucks employees increasingly report that managers are more concerned with customer throughput than customer satisfaction. This has led to longer wait times and a loss of the friendly atmosphere that once drew people in. The result is that Starbucks is increasingly becoming just another place to get coffee – like McDonald's, Dunkin', and countless independent coffee shops. Yet, it's still charging premium prices. Finally, the third, and perhaps most significant, problem facing Starbucks today is its performance in China... which has been the company's second-largest market and primary source of growth over the past several years. As the rapid growth of Luckin Coffee – and its cheesecake-flavored lattes – suggests, Chinese coffee drinkers are different from their U.S. counterparts. While the "third place" model works in the U.S., Chinese consumers tend to be more concerned with convenience and value than experience. And just as Starbucks has failed at the U.S. "experience model," it's underperforming at China's "convenience model." Luckin's automated drink-making, cashless payments, and cheap prices beat Starbucks on all counts. And by not sufficiently catering to this preference, Starbucks is losing out on store traffic and sales. Without the Chinese market to fuel continued expansion, the company's future growth is likely to be dramatically slower than projected. Ultimately, unless Schultz decides to return a fourth time to right the ship once more, Starbucks could become the target of an activist campaign. If so, that could eventually lead to a lucrative investment opportunity. In fact, Elliott Investment Management – a major activist investor – recently took notice of Starbucks' challenges. Sources familiar with the matter said the firm has discussed ways of improving the coffee giant's performance. The stock surged higher on the news. We'll continue monitoring this story. But this latest development could potentially help turn the company around... which would be good news for small investors in the near term. Regards, Porter Stansberry
Editor's note: It has been a wild year in the market so far. But what's coming next? On Tuesday, July 30, Porter is stepping forward to answer that exact question. He'll outline his latest market prediction – and will even share what he's doing personally to prepare. This is a 100% free online event. But you must reserve your seat in advance. Click here to do so now.
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