Starbucks plans to tap young, wealthy customers to weather recession

Demand in North America for pricier drinks remained strong and declines in China were not as bad as projected in its fourth quarter ended Oct. 2. Earnings were $0.81 per share, versus analyst expectations of $0.72, according to Refinitiv IBES.

Amid record inflation and fears of a global economic downturn, restaurants McDonald’s Corp and Yum Brands Inc have drawn lower-income consumers with cheap meals. Even so, wealthier people keep buying pricier food and drinks from Starbucks and Chipotle Mexican Grill Inc.

“That younger customer, that Gen Z customer, tends to have significantly more discretionary money at their disposal, and their loyalty to Starbucks has been quite significant and predictable,” said interim Chief Executive Officer Howard Schultz during an earnings call with investors.

More than half of its U.S. customer base are Gen Z and millennials.

Some analysts and investors have questioned how Starbucks can meet its global sales guidance of 7% to 9% growth for 2023, especially amid worsening economic conditions.

“We’re highly concerned and humbled by the environment,” Schultz said. “But we feel that we’ve got the resources and the know-how, the history and the innovation to produce the kind of numbers that we feel very confident about.”

New product launches and a mix of new store formats that include drive-throughs and carry-out counters will also help it survive, he said.

The company’s U.S. comparable sales rose 11% in the quarter, also boosted by the return of its iconic Pumpkin Spice Latte – which, according to Credit Suisse analysts, contributed to the highest sales week in Starbucks’ history.

The jump helped Starbucks cushion the hit from a 16% decline in comparable sales in China – its fastest growing market – where it is still reeling under a zero-COVID policy that has shut its seating areas.

Wall Street analysts expected Starbucks’ comparable sales in China to drop by 20%, according to analysts at Gordon Haskett. The company had reported a 44% slump in the previous quarter.

Schultz is set to depart as of April 1, when Laxman Narasimhan will take over the role.

Global comparable sales at Starbucks rose 7% in the fourth quarter ended Oct. 2, while analysts on average had expected a 4.2% rise.