Starbucks: ‘The brand’s not going anywhere’

Reports that Starbucks could look to sell off its UK business prompted a fresh round of speculation about a dip in fortunes at the Seattle-founded coffeehouse multinational.

Having pioneered high street coffee culture in the US, UK and around the world, critics argue Starbucks has lost its edge against its competitors.

In the UK, the brand has strong competition from high street rivals, as well as a host of other specialty and value-led players slurping at its market share.

According to Lumina Intelligence, Starbucks has seen its total share of eating and drinking out occasions decline by 0.6 percentage points (ppts) quarter-on-quarter.

“Consumers are turning to more affordable options, including McDonald’s and Tesco, as cost pressures mount,” Aashna Patel, insight executive at Lumina says, drawing on its Eating and Drinking Out Panel. 

Indeed, Starbucks’ biggest challenge in the UK is that there are two home-grown coffee players, led by the dominant Coca-Cola-owned Costa Coffee.

“Costa is outperforming Starbucks by occasion share in the total market, but is lagging on breakfast occasions,” Patel says.

Costa’s 7.8% share compares to Starbucks’ 2.4%. Also ahead of Starbucks in terms of total eating and drinking out occasions are Greggs (4.8%) and Wetherspoon’s (3.6%), which has a strong, value-led coffee offer linked to its popular breakfasts.

“Starbucks has seen a decline across all day parts except breakfast, where its expansion into new formats, including drive-thrus, has allowed it to capitalise on morning commuter traffic as growing volumes of consumers are working in offices,” Patel adds.

McDonald’s has also undercut Starbucks with a value-led coffee offer McCafe, seeing it grow its share of drinks-only occasions to 2.7%.

And Caffe Nero, another home-grown albeit smaller rival, is close behind Starbucks on drinks-only occasions at 5.5% share, up 0.3pp quarter on quarter.

One senior executive of a high street brand tells MCA it was clear his business has been taking coffee market share away from Starbucks.

And one of the challenger brands, Black Sheep Coffee, says it had received numerous enquiries from Starbucks franchisees looking to convert to a fresher brand.

Gabriel Shohet, who runs the fast-growing speciality coffee shop concept, admits he had not set foot inside a Starbucks for some years, but says there is clear nervousness about the brand.

“We are getting loads of Starbucks franchisee applicants who wish to convert their sites into Black Sheep shops these days, which suggests many are uncertain about the future of the Starbucks brand in the UK,” he tells MCA.

While Starbucks clearly has plenty of competition on the high street, it may be a little too soon to write off the brand in the UK.

After all, speculation is not over a brand exit, but a sale of the division.

UK general manager Alex Rayner insists Starbucks is “not in a formal sale process for the company’s UK business”, but that it continues to “evaluate strategic options” for its international businesses.

With investment bank Houlihan Lokey reportedly hired to advise on options, one option would be for Starbucks to sell its UK business to a master franchise business, which could continue to run it under the Starbucks brand.

MCA contributing editor Peter Martin suggests a private equity-backed management team could take on the brand in the same way TGI Fridays and Pizza Hut Restaurants operates in the UK – which would reduce operational overheads for the brand owner.

He says the return of Howard Schultz has so far not provided the shot in the arm some had expected.

“When Schultz came back, everyone was hoping for a Steve Jobs moment, and that everything would be fixed because the founder’s coming back, but that hasn’t necessarily happened yet,” Martin tells MCA.

“It’s an interesting tale of a brand which at one moment was seen as a disrupter, a very entrepreneurial business, which all of a sudden flips into being a tired, slow, big corporate, as I think it’s seen now.”

Martin says Starbucks has been late to the party in introducing technology-driven efficiencies and drive-thrus.

With the US and China seen as its biggest and core markets, cost-cutting by exiting managed stores “makes sense”.

“They’re falling back on the tried and tested franchise model,” he says.

“Of course, no one’s officially said anything yet, they’re just ‘looking at their options’, and seeing what comes out of the woodwork.”

The benefit of franchising is it gives Starbucks a chance to recover some of its entrepreneurial spirit, and get closer to its local communities, Martin says.

“Franchising is becoming more popular in the UK, companies are looking at franchising in their own market now, which was pretty unheard of until recently.

“Often in fast food, franchisees come up with the biggest innovations, because you’ve got some entrepreneurial spirit. It brings in new ideas.

“When you’ve got a systemized operation like fast food or coffee chains, it can work pretty well.

“Franchisees can adapt to local markets better, there’s some real upside as well as cost cutting.”

While there are various potential options, Starbucks’ UK management team could look at private equity-backed management buy-out, Martin suggests.

He cautions against writing off Starbucks just yet.

“I don’t think the brand’s going anywhere,” he adds. “Brands evolve, and that’s what it needs to do.”

For Jeffrey Young, CEO of coffee analyst Allegra, the move is an indication of the maturing of the coffee chain market.

He says with so much competition on the high street, Starbucks needs to show more differentiation to UK consumers.

Alongside Costa and Nero, he highlights Pret’s coffee subscription in particular as providing fierce competition.

“They introduced it during the pandemic, and it looked like a knee jerk reaction, but it’s turned out to be quite a brilliant strategy from them,” Young tells MCA.

“It has put them on the map for consumers wanting the comfort of a known brand focusing more on coffee.”

While he doubts whether value-led brands like Gregg’s and McDonald’s have undercut established coffee chains, he acknowledges cost of living pressures could eat away at discretionary spend on coffee.

He sees the likes of Gregg’s and McDonald’s providing an entry point to coffee, albeit in a more food-led environment, and argues customers will still feel value the setting of a coffee-focussed venue.

“The role of the branded coffee is more of a relaxing environment, it doesn’t have alcohol and it doesn’t have the smell of burgers.”

Despite being a “strong, powerful, consistent brand”, that has been responsible for a “lot of innovation”, Young says Starbucks’ rivals have been able to successfully imitate the brand.

“It’s been pretty bang on for many years, but as they’ve grown in volumes, they’ve been copied, whether it’s the latte, which they made popular in America, or iced beverages.

“Their ability to innovate is being limited by the fact a lot of their prized possessions, like the frappuccino and seasonal beverages like the pumpkin spiced latte have been easily copied.”

While there’s still excitement around US brands, as seen by reception to Wendy’s and Five Guys for example, Costa’s home advantage has enabled it to grow more widely.

“It’s been able to go out much more into the provinces and conquer more of the nation and the hearts and the minds of the British consumer,” Young says.

Costa Express self-vending machines for example are ubiquitous all across the UK, meaning Starbucks is competing with a “very strong local competitor”.

While the company sounds out options, Young speculates that one outcome could even involve a competitor operating the franchise, in order to expand its options for consumers.

“As the market matures, customers get used to a certain set of players and they decide which player they want to go to on a given day,” he says.

“Landlords also want choice, so who’s to say that at some point, you might see a market where Starbucks might be operated by a competing brand.

“It’s like in airports where you have franchise agreements, with an airport operator running a Costa in one city and a Starbucks at another.”

Young says the question is very much an “operational play” with efficiencies to be gained by another operator taking on the brand.

“Starbucks will have some of the tightest operating manuals that exist, they’re responsible for 35,000 outlets across the world. Like McDonald’s, they’re experts at putting in place those systems,” he says.

“They’re probably looking at where they can add the most value, and the value may not be in operating the stores.”

While a new operator could drive efficiency and innovation, it will still operate under these set of brand guidelines, Young says.

“Starbucks is a global brand. I don’t think they’re going to create a funky UK Starbucks.”

And the return of Howard Schultz could yet inject some new energy into the global brand, Young adds.

“They’re realising with a big tanker that needs to be turned around, you might need to make some radical decisions. Not just change in captain, but perhaps also what ship they sail in.”