Starbucks says Middle East conflict — and protests in the U.S. — have hurt sales

“First, we saw negative impacts to our business in the Middle East,” he said. “Second, events in the Middle East also had an impact in the U.S., driven by misperceptions about our position.”

“Our most loyal customers remained loyal and in fact increased their frequency of spend in the quarter,” he continued. “But we did see a softening of U.S. traffic. Specifically, our occasional U.S. customers who tend to visit in the afternoon came in less frequently.”

On the impact in the Middle East, he later added: “We have seen a significant impact on traffic and sales in the region and we are working with our licensees during this time to ensure the safety and well-being of our partners and our customers.”

The remarks about the U.S. were the latest instance in which consumer outrage against a large corporation has cut into sales, after anti-LGBTQ boycotts against Bud Light and Target Corp.
TGT,
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last year. Companies have struggled with how best to weigh in on human-rights and social-justice matters, amid concerns over alienating customers and harming profits.

Starbucks executives did not break out the exact financial impact from China or the fallout from the fighting in the Middle East. During the call, they described the impact as “transitory.”

But after the company’s fiscal first-quarter results on Tuesday missed expectations, Starbucks cut its full-year sales forecast to gains of 7% to 10%. That compared with a prior forecast for the “low end” of 10% to 12% growth.

The boycott calls against Starbucks — from both pro-Palestine and pro-Israel voices — came after the union representing some Starbucks workers, Starbucks Workers United, posted “Solidarity with Palestine!” on the social-media platform X shortly after Hamas militants raided Israel in October, killing 1,200 people and taking roughly 240 hostages. Israel, in response, has killed more than 26,000 people in Gaza, and destroyed nearly half of the region’s residential properties, according to one report.

The post from the union was later deleted. But Starbucks later that month sued the group, alleging that the post — and the union’s usage of Starbucks’ name and logo — stirred up consumer outrage that hurt business and amounted to trademark violation. According to the Associated Press, Starbucks said it got more than 1,000 complaints about the post, along with threats to employees.

The union, in turn, accused Starbucks of trying to vilify them and disrupting their efforts to unionize.

“Our members face threats and harassment across our country, which is disproportionately affecting our Muslim, Jewish and Palestinian co-workers,” the union said in a statement in October expressing support for Palestine.

Starbucks stores have drawn protests in the process, and the company has said “many” of its stores have been vandalized. Still, it has tried to distance itself from the war between Israel and Hamas and the broader fighting in the Middle East, which has encompassed other nations there and drawn in the U.S.

During Starbucks’ call, Narasimhan avoided taking sides. “I am deeply distressed by the violence shaking the region,” Narasimhan said. “As I have shared, Starbucks condemns violence against the innocent, hate and weaponized speech.”

But following the sales hit in the U.S. and abroad, Starbucks executives said the company would try to engage its most loyal customers more and do more to attract its “very occasional” customers. And it said that as price competition increases in China, Starbucks would push more premium offerings while avoiding a bigger price war there.

The coffee chain reported quarterly results as analysts point to concerns about a U.S. consumer still grappling with higher prices for basics when compared to pre-pandemic levels, and bigger worries over China’s economy following the collapse of real-estate giant Evergrande.

But none of it had much impact on Starbucks’ stock price on Thursday. Shares rose 3.7% after hours.

Stephens analyst Joshua Long, in a note after the results, said “after-market strength is likely attributed to 1) positive traffic domestically, 2) international (possibly) better than feared, and the shares’ recent pullback.”

Within the U.S. and North America, comparable customer transactions — one gauge of how often consumers are stopping in to buy coffee or food — rose 1% during Starbucks’ fiscal first quarter. International same-store sales rose 7%, helped by a jump in China.

Overall during Starbucks’ first quarter, revenue rose 8% to $9.4 billion, below FactSet estimates for $9.6 billion. Its adjusted earnings per share were 90 cents, below FactSet forecasts for 93 cents. Same-store sales rose 5%, compared with FactSet estimates for a 7.1% gain.

Operating margins expanded to 15.8%, helped by “in-store operational efficiencies,” but partially offset by efforts to pay staff more and give them better benefits, and higher costs related to a turnaround plan. Starbucks in November unveiled plans to save $3 billion in three years.

Shares of Starbucks
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have fallen 13.7% over the past 12 months.