Are Starbucks Corporation (NASDAQ:SBUX) Price Hikes Hurting The Company?

Starbucks Corporation (NASDAQ:SBUX) is an iconic American brand that was ranked third among the most admired global brands with the first brand being Apple and the second being The company continues to report strong financial figures in 2017, but is facing some headwinds that could affect its profitability negatively in the near future.

Article Summary

Starbucks has had a good run from 2009 up to 2016.

The company is experiencing declining sales in its core American and Chinese markets.

The significant price hikes might be responsible for Starbucks’ declining sales.

Here’s the trading report on SBUX.

One of the major headwinds that Starbucks is facing is declining same store sales in its core American market. The company has enjoyed significant increases in comparable sales over the last few years, but the trend has changed in 2017 as most stores are now reporting declining same store sales as compared to previous years.

Over the past five years, Starbucks has consistently hiked menu prices by 4 - 5% annually without witnessing declining sales, but this is not the case this year. Although the declining same store sales cannot be solely attributed to the higher menu prices, the price increases might be playing a significant role in the declining sales figures.

Customer acquisition also seems to have plateaued in its American and Chinese markets, which contribute a significant percentage of the company’s revenues. Starbucks has also embarked on a major restructuring strategy in China where it has recently bought out many of its licensees in a strategy aimed at operating all its stores.

This strategy has raised concerns among analysts as to its viability given the declining sales growth in China and the rest of the Asia Pacific region. The company is also on track to opening more stores in the CAP region, which beats logic given that the region’s growth has largely slowed down.

It would have been prudent for Starbucks to maintain its franchises in China and the Asia Pacific region given that statistics indicate that franchised stores generate more profit than company-operated stores. The company has further closed numerous stores in Germany and the UK, which are its main European markets instead of extending their presence in these promising markets.

However, Starbucks is currently trading at a P/E ratio of 27.97, which is higher than McDonald's Corporation (NYSE:MCD) 23.99, but lower than Domino's Pizza, Inc. (NYSE:DPZ) 34.61 and Chipotle Mexican Grill, Inc. (NYSE:CMG) 52.12. The opinion among analysts is divided on whether Starbucks is a good long-term investment or not, which is also the main question on most investors’ minds.

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