Starbucks (SBUX) stock has really cooled off this year on the back of weaker earnings results and ongoing labor shortages. Undoubtedly, the Great Resignation, as it’s called, has hit the broader quick-serve restaurant space, and even industry greats like Starbucks are not immune. Even though the company offers better payments and benefits packages than most of its rivals, Starbucks has suffered.
Staffing shortages have led various Starbucks locations to lure in new workers with higher wages. Indeed, such upward wage pressures will weigh on profitability over the medium term, but investors need not fret, as Starbucks has a plan. The firm has shown a willingness to test creative store concepts to help bolster the operating margin trajectory over the next several years.
Starbucks is one of the most tech-savvy coffee chains out there, after all. For that reason, I am bullish on shares of SBUX on recent weakness. (See Starbucks stock charts on TipRanks)
Starbucks and Amazon Team Up, and It’s a Pretty Big Deal
Last week, the company shed light on its partnership with e-commerce behemoth Amazon (AMZN), opening its first cashier-less shop in New York. It resembles something between a Starbucks cafe and an Amazon Go mini-grocery convenience store.
A symbiotic relationship between the two Seattle-based companies, through the automation of various tasks, could have the potential to be considerable, as the number of employees required to serve a population is decreased. Indeed, if such a tech-equipped hybrid store concept is shown to be promising, it could help improve the fundamentals of both firms in a big way as they look to pivot to adapt to the new age to combat higher wage costs.
Higher wages tend to result in fewer jobs, and labor automation could accelerate the trend amid the Great Resignation.
Amazon has the innovative technologies, with frictionless payments that allow for limited staff, while Starbucks has the great brand that can lure customers into its doors. If the New York store is a success, you can bet that the two firms will try to bring the store concept into new markets, driving down the number of employees per store.
The Starbucks of Tomorrow is Worth Betting on Today
Undoubtedly, the COVID-19 pandemic and upward wage pressures have incentivized many quick-serve restaurants to embrace next-generation technologies.
Indeed, delivery, drive-thru, and digital (the three D’s, as they’re often referred to) have been keys to thriving as a restaurant amid the ongoing pandemic. Starbucks has done a great job of bouncing back from a turbulent 2020, thanks to its strength in digital.
Delivery and drive-thru were more challenging areas for Starbucks to compete in. That’s due to a lack of pre-pandemic infrastructure, relative to the likes of a fast-food firm like McDonald’s (MCD).
In any case, Starbucks has demonstrated it’s not afraid to take drastic steps to bolster its longer-term profitability prospects. The company shuttered many of its less-profitable stores last year, especially in the Canadian market, as the remote and hybrid work environments led to fewer coffee runs at the local Starbucks.
Arguably, Starbucks had a tougher task on its hands to adapt to the new normal. As the economy reopens, Starbucks is poised to pick up where it left off before the pandemic, but there are a new slate of challenges in upward wage pressures. As conditions normalize and new concepts are shown to hold more promise, I wouldn’t at all be surprised to see the store count surge, both at home and abroad.
For now, Starbucks is fine hiking wages, but it has a longer-term plan to get profitability prospects back on the right track. The new store concept announcement had a rather muted reaction in SBUX stock, which barely budged, as AMZN shares popped over 4%.
Only time will tell if the New York store takes off, but there’s not much to lose for either Seattle-based firm, as they look to help one another make it through upward wage pressures.
Wall Street’s Take
According to TipRanks’ consensus analyst rating, SBUX stock comes in as a Buy. Out of 22 analyst ratings, there are 14 Buy recommendations and 8 Hold recommendations.
As for price targets, the average Starbucks price target is $124.24, implying an upside of 12.15%. Analyst price targets range from a low of $105.00 per share to a high of $142.00 per share.
Disclosure: Joey Frenette owned shares of Starbucks at the time of publication.
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