Omicron variant slashes Starbucks margins

Photo courtesy of Starbucks

Starbucks had a great vacation. Customers visited the chain’s stores more often, generating record sales of $8.1 billion, driven mainly by strong results in the United States, where same-store sales increased 18% in during the quarter ended January 3, with most coming from higher transactions.

But the company also got a piece of coal in its storage of the omicron variant. The new spike in COVID infections has disrupted the company’s supply chain, kept sick workers at home and driven up costs for things like training. This capped the company’s margins and prevented Starbucks from fully capitalizing on its higher sales.

“While we’ve seen extraordinary results, we’ve also seen extraordinary cost pressures, which have impacted margins,” CEO Kevin Johnson told investors Tuesday.

Operating margins increased to 14.6% from 13.5%. But they didn’t rise as much as expected, and the company lowered its full-year earnings forecast. Executives said the impact of omicron is expected to reduce margins by 200 basis points.

They also suggested that the impact of the variant worsened in January. Executives told investors it could be until 2024 before the company can return to its traditional profitability targets.

As a result, company executives said they plan to cut costs this year. With demand soaring, Johnson said Starbucks will cut some promotional and marketing expenses. “We are taking the necessary steps to reduce discretionary spending” and “tighten” general and administrative spending, Johnson said.

Starbucks raised prices in October and again in January to offset higher costs. And the company said it expects further price increases in the United States this year.

For the company, the results painted a complex picture. Sales and transactions hit record highs over the holidays – transactions grew 12% in the US last quarter. But the company often struggled to keep up with demand due to labor and supply shortages, while higher costs ate away at profits.

Starbucks hinted at those challenges last month by delaying the expiration of loyalty “stars” earned by customers until April, as it warned of sporadic store closings and supply issues.

Starbucks chief operating officer John Culver told investors the company saw an impact on customer mobility in the last two to three weeks of the fourth quarter. In addition, there has been “a similar increase” in the number of cases affecting workers at the company, as well as an increase in the number of people reporting sick.

But the booming variant has also impacted the companies Starbucks uses to get food and supplies delivered to its restaurants. The company used the cash market to obtain its products more often as well as alternative delivery companies. But the result, Johnson said, was “a rapid increase in supply chain costs” in the quarter.

Additionally, training costs increased as the company struggled to get people to work in its shops. This also resulted in increased costs over the period.

“When the omicron surge started, the inflationary costs and personnel issues were magnified, far beyond our expectations,” Johnson said.

The company expects many of these costs to continue this year, moderating this summer and into the fall.

Rachel Ruggeri, Starbucks chief financial officer, said the company’s efforts to offset higher costs “will take some time,” which could delay the company’s planned return to normal operating margins of around 18% to 19%.

It could happen sooner if the chain sees better sales, and Johnson noted that “demand for Starbucks” typically increases after each COVID surge. “Sales, overall, is going to be our continued opportunity for growth not just this year but through” 2023, Ruggeri said.

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