Tags: starbucks | earnings | fast food | employment

Starbucks Is Disrupting Fast Food Employment as We Know It

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Tuesday, 08 November 2016 07:47 AM Current | Bio | Archive

 

I recently joined CNBC to chat about Starbucks’ (SBUX) fourth quarter earnings.

Overall, this was a very solid quarter for Starbucks, and the most profitable in the company’s history. SBUX beat analyst estimates on both top-line sales and earnings per share. Guidance for next year was a little weaker than expected, but not enough to offset investor enthusiasm for what was a very solid quarter.

Starbucks is still expanding its empire — it opened a location in its 75th country this past quarter and expanded its total store count by about 3% — but what is more important is that same-store sales rebounded. Two quarters ago, Starbucks disappointed on same-store sales, calling them an “anomaly.” So investors were certainly happy to see that this was true. Store traffic was flattish, but the average ticket size was up 4%, far outpacing inflation. A shaky economy hasn’t stopped coffee drinkers from getting their Starbux fix.

Perhaps the most interesting development is the success of Starbucks’ loyalty program, which runs on iPhone and Android smartphones and allows customers to pre-order and skip the line. About 1 in 20 U.S. transactions is now made using the Starbucks smartphone app. That is a major development because it allows Starbucks to make far more efficient use of their staff. More efficient use means less overall demand for labor.

This is the future of food service in general, with minimum wages rising in much of the U.S. The app essentially makes the cashier redundant. Today, you’re skipping the Starbucks cashier. Tomorrow, it will be McDonald’s (MCD)… and then virtually everyone else in food service. So, even if the trend towards higher minimum wages continues, food service companies will defend their margins by making more efficient use of labor… and ultimately hiring a lot fewer people.

This is probably not what the “Fight for $15” crowd had in mind, but I don’t see how another outcome is possible given a general lack of pricing power. In a tepid economy growing at less than 2% per year, companies cannot simply pass on the costs of higher labor to consumers in the form of higher prices.

Uber has disrupted taxis as we know them, and driverless cars are about to do it again. Bots and robos are making financial advisors redundant. And now, the same technological forces are reshaping fast food, with Starbucks leading the way. It’s a brave new world.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. To read more of his work, CLICK HERE NOW.

Disclaimers: If I mention a stock favorably, you should assume that I have a position in it, both personally and in client accounts.  This does not, however, automatically mean that you should own it. I am expressing my opinions in this newsletter, not offering individualized financial advice or soliciting you to buy securities.  See full disclaimer here.

 

 

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CharlesSizemore
The North American market continues to be a bright spot for Starbucks.
starbucks, earnings, fast food, employment
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2016-47-08
Tuesday, 08 November 2016 07:47 AM
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