Starbucks Stock Fell Despite Its Rewards Program Improvements to Enhance Profitability

Starbucks Stock

Starbucks Stock (NASDAQ:SBUX)

Bank of America believes that recent changes made by Starbucks Corporation (NASDAQ:SBUX) to its rewards program’s structure might substantially impact the margin line.

Analyst Sara Senatore stated that the new structure implemented in 2023 would generally reduce the value of the stars that can be redeemed. For example, the minimum tier for a standalone menu item will increase to 100 stars from the previous level of 50 stars; handcrafted beverages will require 200 stars instead of the previous level of 150 stars; and lunch items will be in a new tier of 300 stars after previously being at the level of 200 stars.

It is interesting to see that SBUX has made a few exclusions that have the potential to become margin drivers as well. The number of Stars required to redeem an iced brew coffee or tea has been reduced to 100 from the previous rate of 150. “Cold drinks dominate U.S. beverage sales at 70%-80% of the mix, indicating a counterbalance to the higher redemption rates elsewhere,” stated Senatore. “Most crucially, they are more likely to be upsized and personalized, yielding more tickets and higher margins.”

Additionally, it is important to note that cold versions of coffees and teas are more customizable than hot ones. They need less time to produce than handcrafted drinks at a time when Starbucks is attempting to meet the demand that has not been reached. Under the new tier system, high-priced products that take little work to produce, such as reusable to-go cups and pre-packaged coffee, need fewer stars, which may also assist increase throughput.

When everything is considered, Senatore and the rest of the team at Starbucks believe that the strength of the Starbucks Rewards program will help shield the coffee giant during an economic downturn.

Bank of America assigned a Buy rating and a price target of $125 to the Starbucks stock.

Starbucks stock ended the premarket session down 0.61% at $104.36.

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