The global coffee franchise Starbucks has seen a downfall in its stature over the last couple of years. Acute competition from rivals and an array of racism related incidences have resulted in stagnant sales in the U.S. market. In 2017, Starbucks reorganized its management structure as Howard Schultz stepped down from the position of CEO. It hardly seemed to have mattered, as its market shares remained flat well into 2018. However, on 9th October 2018, the activist hedge fund Pershing Square Capital Management LLP announced that it had built a 1.1% stake in the company worth nearly $900 million. The news resulted in a 5.5% increase in Starbucks’ share, rising a further 2.1% by the end of the day – closing in at $57.71.
The announcement was made by none other than William Ackerman at Grant’s Fall 2018 conference in New York. Having invested in McDonald’s in 2008 and more recently in Chipotle Mexican Grill, Ackerman’s previous experience in the food retail sector gave him sufficient confidence to entrust in the failing Starbucks. He said that recent actions by current CEO Kevin Johnson were “encouraging” and believes that Starbuck’s current challenges are “fixable with appropriate management execution.” He divulged that Pershing Square had acquired 15 million-share position in the company three months ago, and believes the world’s biggest coffee chain can not only overcome stagnant sales in its home market but also expand overseas, especially in China.
In a slide presentation titled “Doppio” – the term for a double shot of espresso, Ackerman wrote, “Starbucks plans to nearly double its units in China over the next four years, and estimates that China will ultimately surpass the size of the U.S. business.” He shared his belief that the company has the potential to be a “category killer” in the away-from-home coffee space because of its quality, and that the chain’s unit economics are good in the U.S. and have the potential to be even better in China. “We expect that China will grow nearly twice as fast as Starbucks’ overall earnings and represent an increasingly larger percentage of the company’s earnings,” he wrote in his presentation.
Despite a poor stock market performance and competition from high-end coffee shops, Ackerman re-affirmed his faith in the brand – calling it “one of the greatest businesses in the world.” With the potential growth in China providing a boost to the coffee behemoth, he said that Starbucks’ share price could more than double over the next three years if the company can meet its targets.
Owing to an entry-level pay that’s higher than the minimum wage in all 50 states, Ackerman noted that the company is secure from additional loss of revenue that may occur as a result of minimum wage increases in the U.S. Meanwhile, as Starbucks is on the mission to persuade other investors that it can ward off competitions from rivals, its spokesperson said, “We look forward to maintaining a productive dialogue with Mr. Ackman as we do with all of our shareholders.” While the franchise may not regain its lost ground at home, it’s on the path of establishing its dominance in other countries.