Starbucks’ UK Review Signaled a Sharper Focus on the U.S. and China

This is an English adaptation of a FoodBud historical article originally published on July 29, 2022.

When Howard Schultz led Starbucks into the UK in 1998, he described the market as a bridgehead for European expansion.

More than ten years later, even with more than 1,000 Starbucks stores in the UK, the company was considering whether to pull back from a market where it trailed Costa Coffee, the chain acquired by Coca-Cola.

Starbucks’ UK general manager said the company was reviewing strategic options in international markets. He told employees that Starbucks was still operating in the UK and had not entered a formal sale process. Separately, Starbucks had hired investment bank Houlihan Lokey to advise on possible scenarios.

Schultz’s Return Shifted Attention Back to Core Markets

In April 2022, after five years away, Schultz returned to the global coffee chain he built, serving as CEO for a third time.

On an earnings call after his return, Schultz told analysts that post-pandemic shifts in consumer behavior had placed Starbucks under significant pressure, and that a sense of love and responsibility had brought him back.

His comments also suggested the UK was no longer a strategic priority. On the call, Schultz focused largely on the U.S. and China, the two markets where he saw the strongest growth potential.

For Starbucks, North America and China were the largest and most demanding parts of the system. Both required management attention.

In the U.S., about 195 Starbucks stores had voted to unionize since December 2021. Starbucks had long been viewed as one of the stronger employment choices among restaurant chains, with industry-leading pay and benefits, but post-pandemic labor shortages and operating strain had increased employee dissatisfaction. Tensions between Starbucks executives and union organizers were becoming harder to resolve.

In China, Schultz believed the market had the potential to surpass the U.S., but recurring pandemic restrictions made near-term performance difficult to forecast.

Analysts Saw Non-Core Markets as Distractions

Wedbush restaurant analyst Nick Setyan said Starbucks had effectively bet its future on the U.S. and China. Outside those two markets, he argued that businesses such as Canada and Japan could distract management.

Setyan added that Starbucks could potentially sell markets outside China and the U.S.; if it found a way to sell the UK business, Japan could be next.

A former Starbucks executive said the UK, the company’s largest European business, had been unusual from the start. In other European markets such as Germany, France, Spain, Turkey, and the Netherlands, Starbucks used licensed operators. In the UK, however, about 30% of stores were still company-operated.

Setyan said it was surprising that Starbucks had maintained such a high level of direct operation in the UK for so long.

A Mature and Crowded UK Coffee Market

The UK coffee market had become increasingly competitive. In 2017, Citi analysts said the market had only “four to five years” of structural growth left. After the pandemic, more people worked from home and spent fewer weekdays in city centers, potentially bringing saturation forward.

According to Allegra World Coffee Portal, the number of UK coffee shops grew only 2.5% over the prior three years, compared with 22% from 2016 to 2019. Starbucks managed 9% growth in the UK from 2019 to 2022, but that was only half its growth rate in the previous three-year period.

Jeffrey Young, CEO of Allegra Strategies, said a potential sale would show Starbucks’ UK position had matured. Finding the right licensed or franchise partner made sense as operating costs rose and demand slowed.

One executive who had helped build Starbucks’ UK business said reassessing the UK was a pragmatic move by Schultz. In his view, Schultz’s bigger issue was rebuilding control of the larger and faster-growing U.S. market and getting Starbucks back on track.

Store Operations and Leadership Pressure

Cold beverages accounted for about 80% of Starbucks’ business. After returning, Schultz suspended the share buyback plan and said the company would invest more in stores and employees.

Schultz said store equipment and layouts no longer fit the current business. The first priority was upgrading store equipment to reduce operating pressure, followed by investment in employee wages.

After the pandemic, Starbucks’ stock had underperformed the broader market for much of the prior year, adding pressure on Schultz and his eventual successor.

At the time, Starbucks planned to appoint a new CEO in fall 2022. Schultz was expected to step down by March 2023 at the latest while retaining a board seat.

Note: sale, share buyback, stock performance, and CEO succession figures were historical as of the article’s July 29, 2022 publication date.