Since the beginning of November, shares of Starbucks Corporation (NASDAQ:SBUX) have increased by more than 20%. But as the new year gets closer, worries about Chinese lockdowns and growing efforts to organize workers weigh on Starbucks stock.
Unions v. Schultz
Howard Schultz’s second term as CEO ends at the end of the year. At the end of the year’s first quarter, Laxman Narasimhan, who was just named CEO, will take over from the 69-year-old businessman. As he gets ready to leave, the coffee chain faces problems with how it treats its employees and how it grows internationally.
The New York Times says that Schultz has been very against workers joining unions because he thinks Starbucks can be a great place to work. Because of this, unionization should not happen.
In the article about the restaurant chain’s ongoing problem, Schultz’s efforts to reassure employees about the company’s responsibility to them were shown by wage increases, help with college costs, and savings programs. Still, union efforts are making progress.
In Mid-November, workers at hundreds of Starbucks stores went on strike to protest what they called “union-busting practices” on the part of Starbucks management. As of the beginning of December, more than 270 stores had voted to join a union, and tens more were still voting.
Starbucks Workers United said on December 9: “One year ago today, a group of working-class baristas organized the first unionized Starbucks store in the United States.” “In a year, we went from having NO unionized Starbucks stores to having 270 unionized stores and almost 7,000 union workers.”
Indeed, more than 60 stores that tried to join a union have either closed or had their vote to join a union fail. But as more places file for union elections every week, it’s clear that momentum is on the side of union organizers.
The Problem with China
In addition to growing union efforts, the coffee chain is also threatened by growing tensions between China and the U.S. and by the Chinese government’s unclear plan to stop COVID outbreaks.
The chain has more than 6,000 stores in China, and the country has been a critical growth driver for a long time. Schultz talked about the company’s ties to Communist Party officials as a way to help it grow quickly as early as 2005.
Schultz told NPR at the time, “I think the Chinese government is very interested in opening their doors to Western companies and brands, especially those that can come and be very respectful of how that country was built.” “When you go to a country like China or any other country for that matter, you really have to show that you want to understand how they think and live.”
In China, the company had 24 places that year. Even though COVID was shut down and there were general worries about how foreign companies were treated in the country, the company opened 724 new locations in the fiscal year 2022. The company wants to open 9,000 stores by 2025, making it even more dependent on the country.
As Xi Jinping has taken on more power than any Chinese leader since Deng, getting the support of Chinese officials will be more critical than ever. As Xi’s “Common Prosperity” plan has gone after Chinese tech giants, there is some worry that it may also go after multinationals that make a lot of money.
Even if you ignore the political and legal problems in the region, the Chinese consumer is being hit hard by frequent lockdowns and a shaky real estate market that threatens the health of the economy as a whole. So, it’s possible that expensive lattes won’t be on the menu.
A recent survey of Chinese consumers by McKinsey found that 58% of urban households wanted to “save money for a rainy day,” 9% more than before the pandemic.
The survey found that people are more likely to buy domestic brands in all categories, not just because they save money. In 2013, foreign quick-service restaurants were what most people wanted to eat. In China, they had 73% of the value share. By the end of 2021, only 8% of the market was made up of foreign brands.
The survey’s results say, “There was a time when people paid more for foreign brands, but those days are over.”
Starbucks has been an exception as a foreign brand that has been able to keep Chinese customers loyal for a long time. On the other hand, buying trends show that domestic competitors like Luckin Coffee (OTCPK:LKNCY) are likely to take some of the Seattle chain’s market share.
Starbucks Stock: The Street Is Neutral
Even though the stock has been strong heading into the end of the year, analysts are being more cautious. SeekingAlpha data shows that 21 of the 35 polled analysts still have a “Hold” rating, and the consensus price target suggests a slight drop from Monday’s levels.
Due to the stock’s recent rise, Deutsche Bank removed its Buy rating, saying that the upside its analysts had predicted is now baked into the share price. An equity analyst noted that he is “truly neutral” on the stock as it gets close to the 100 mark.
In the same way, SeekingAlpha’s Quant team recently changed its rating for Starbucks stock from Buy to Neutral because it kept going up. Even though the team liked the company’s pricing power and profitability, the stock’s current price was too high, so the team gave it low marks for growth and valuation.
The company plans to report earnings at the beginning of February, hoping to change Wall Street’s cautious attitude. Howard Schultz said he would “never return as CEO” of Starbucks after he leaves on April 1. This means that the next earnings call with analysts will be his last.
Featured Image: Pexels @ Melike Benli
