The Reason Starbucks' Financial Results Are Being Warmed By Its Cold Drinks

Younger consumers view cold coffee as a healthier alternative to soda. And rising temperatures from climate change may also be stimulating demand. JL


Heather Haddon reports in the Wall Street Journal:

Stronger U.S. sales of iced coffee and other cold drinks bolstered sales in its latest quarter. Sales rose 6% in the U.S., where Starbucks has promoted its nitro cold-brew coffee. The company has brought nitro taps to all of its 8,700 company-owned U.S. stores, and started advertising the option. It released a pumpkin-flavored cold drink for the fall. Cold coffee is proving popular with younger consumers generally, not just during warm months. Younger consumers increasingly view cold coffee as a healthier alternative to soda, the firm found. Competitors are also introducing more cold drinks.
Cold coffee is warming up Starbucks Corp. ’s U.S. sales.
The world’s largest coffee chain said Wednesday that stronger U.S. sales of iced coffee and other cold drinks bolstered sales in its latest quarter. Global comparable-store sales rose 5% in Starbucks’s fiscal fourth quarter, a percentage point more than analysts expected.

Chief Executive Kevin Johnson said the results reflected strong sales of cold coffee and teas that now account for about half of the company’s beverage sales. Younger customers in particular are buying those drinks throughout the day, he said, not just in the morning.
“We are being very focused on the things that we know matter the most,” Mr. Johnson said in an interview.
Shares rose more than 2% to $86 in after-hours trading.
Comparable sales rose 6% in the U.S., where Starbucks has promoted its nitro cold-brew coffee as sales of its older Frappuccino beverages have slowed. The company has brought nitro taps to all of its 8,700 company-owned U.S. stores, more than one-fourth of its total, and started advertising the option. It released a pumpkin-flavored cold drink for the fall.
Starbucks recorded robust cold-coffee sales during the summer, a more natural time to drink iced beverages than the fall.
Still, cold coffee is proving popular with younger consumers generally, not just during warm months, according to a recent Guggenheim report. Younger consumers increasingly view cold coffee as a healthier alternative to soda, the firm found.
Competitors are also introducing more cold drinks. McDonald’s Corp. is selling new cold coffees and Wendy’s Co. is set to introduce blended cold-brew beverages next year. Canadian coffee chain Tim Hortons, meanwhile, has had less success with its cold brews. Parent company Restaurant Brands International Inc. said Monday that it is working to improve them.
Starbucks has chosen to focus on coffee as those and other rivals work to improve their breakfast menus. Under Mr. Johnson, who succeeded longtime CEO Howard Schultz in 2017, Starbucks is expanding to new parts of the country while also simplifying store operations. Mr. Johnson has also scaled back Mr. Schultz’s plans to open hundreds of more upscale Starbucks cafes.
Mr. Johnson told store managers last month that the chain plans to automate or eliminate some tasks to reduce work and help the company forcus more on serving customers, as well as training.
Abroad, Starbucks faces tough competition in China, its second biggest market after the U.S.
Local rival Luckin Coffee Inc. has expanded rapidly there as consumer spending across the country has slowed. Starbucks has also become a target for democracy protestors in Hong Kong who are critical of the company’s franchisee there.
Mr. Johnson said Starbucks is increasing sales in China through new stores, and hasn’t experienced a softening of consumer spending.
“We expect to see a lot of competitors competing for that addressable market,” he said.
The company struck a deal this year to roll out delivery across the U.S. with Uber Technologies Inc. ’s Uber Eats division, and is quickly increasing its to-go service in China through a deal with Alibaba Group Holding Ltd. Starbucks executives said delivery is generating new business, but it is more expensive to provide and eats into the company’s margins, particularly in China where more customers are using the service.
For the fourth-quarter, the company said revenue rose 7% from a year earlier to $6.7 billion. Starbucks reported a quarterly profit of $802.9 million, up from $755.8 million, last year and in line with analyst expectations.
Starbucks said it expects to earn an adjusted profit of $3 to $3.05 a share for its 2020 fiscal year. Starbucks also projected a 3% to 4% gain in global comparable sales for that year.