Starbucks' 'fall from grace' that precipitated CEO Narasimhan's untimely exit

A fall in same-store sales in April - first in nearly three years - led to Starbucks cutting its annual sales forecast.

Starbucks - one of the world's leading coffee brands - had been facing intense cost pressures and dwindling sales, facts exacerbated by US inflation pinching customers to tighten purse strings.

CEO Laxman Narasimhan's efforts to turnaround the decline in same-store sales didn't yield results, with the situation getting worse when the company cut guidance in April as US sales faltered and China business grew slower than expected.

Here's a quick summary of four main factors that may have precipitated the financial stress for Starbucks, leading to Laxman Narasimhan's unexpected exit.

1. Falling Sales: A fall in same-store sales in April - first in nearly three years - led to Starbucks cutting its annual sales forecast. The fall in same-store sales was recorded in both US as well as international business. “In a highly challenged environment, this quarter's results (March quarter) do not reflect the power of our brand, our capabilities or the opportunities ahead,” CEO Laxman Narasimhan had said during the earnings call after the results.

2. Rising Competition: The US market - Starbucks' largest in terms of stores - started to see discounts and new product launches by the coffee chain, in an effort to bring back customers.
Earlier this year, Dunkin' Donuts launched a new line of iced energy drinks aimed at younger customers. To fend off increasing competition, Starbucks had been moving more of its marketing budget to reach Gen Z and millennials. In 2023, Starbucks' advertising spend was around $508 million, globally. This intensifying competition was making growth more challenging.

3. Geopolitical Crossfire: Late last year, a tweet in solidarity of the ongoing war in Gaza from Starbucks Workers United prompted widespread boycotts, affecting business. The Starbucks union represented 340 outlets throughout the US, and the post sparked calls to boycott the coffee giant. Some reported pegged the hit on market value at around $11 billion.

4. Rising Coffee Prices: Coffee prices have been trending upwards since 2023, squeezing margins and forcing the company to pass on the costs. Earlier in August 2024, colder weather in Brazil - one of the world's top producers of coffee beans - pushed Arabica coffee prices higher again after a brief downtrend in July.

Howard Schultz - Narasimhan's predecessor and a celebrated CEO and founder - had as recently as in May said that Starbucks needed to bring its focus back. "I have emphasized that the company’s fix needs to begin at home: U.S. operations are the primary reason for the company’s fall from grace. The stores require a maniacal focus on the customer experience, through the eyes of a merchant. The answer does not lie in data, but in the stores," Schultz had said.