Starbucks headed for tumultuous 2023 amid union challenges, CEO shift
Scott Olson

Starbucks Corporation (NASDAQ:SBUX) stock has surged toward the year-end, jumping over 20% since the start of November. However, heading into the new year, lingering concerns on lockdowns in China and escalating unionization efforts hang on the stock.

Schultz v. Unions

Into the close of the year, so too comes the twilight of Howard Schultzâs second term as CEO. The 69-year-old businessman is set to hand the reins to newly-named CEO Laxman Narasimhan at the close of the first quarter of the calendar year. As he seeks to exit the company, adverse factors loom over the coffee chain in terms of employee relations and international expansion. 

According to the New York Times, Schultz has vehemently eschewed unionization among workers due to his belief that Starbucks can be a model employer. As such, unionization should be unnecessary. 

The piece examining the lingering issue for the restaurant operator pointed to wage increases, tuition assistance, and savings programs as signs of Schultzâs efforts to reassure employees about the companyâs duty to them. However, the union efforts have gained steam nonetheless.

In mid-November, workers at hundreds of locations went on strike to decry what they called âunion busting practicesâ by Starbucks management. As of early December, over 270 stores have unionized with tens more pending elections. 

âA year ago today, a group of working class baristas organized the first unionized Starbucks store in the United States,â the Starbucks Workers United said on December 9. âIn the span of one year, we went from ZERO unionized Starbucks stores to 270 and almost 7,000 union workers.â 

To be sure, over 60 stores that attempted to unionize have either closed or seen their union vote fail. Still, the momentum is clearly in favor of the union organizers as many more locations file for union elections each week.

China Challenge

In addition to escalating union efforts, the coffee chain faces significant threats from similarly escalating Sino-American tensions and the eminently unclear strategy the Chinese government is employing to combat COVID outbreaks. 

The chain operates over 6,000 stores in China and has counted the region as a key growth driver for quite some time. Indeed, as far back as 2005 Schultz had touted the companyâs connections with Communist Party officials in order to facilitate rapid growth. 
âThe Chinese government is very interested, I think, in opening up their doors to Western companies and Western brands and especially those companies that can come and be very respectful of the heritage and the tradition of how that country was built,â Schultz told NPR at the time. âWhen you enter a country like China or, for that matter, any other country, you really have to come hat in hand and demonstrate a willingness to understand their way of thinking and their way of life.â

During that year the company operated 24 locations in China. During fiscal year 2022, the company opened 724 new locations even amid COVID lockdowns and general concerns as to the treatment of foreign corporations operating in the country. The chain aims to have 9,000 locations open by 2025, increasing its reliance on the country even further.

As Xi Jinping takes the most power of any Chinese leader since Deng, securing the support of Chinese officials will be more important than ever. Certainly as Chinese tech giants have been targeted under Xiâs âCommon Prosperityâ push, there remains some concern that highly-profitable multinationals could face pushback as well. 

Even beyond the geopolitical and regulatory issues in the region, the Chinese consumer is being hit hard amid off and on lockdowns and a teetering real estate sector that threatens the health of the overall economy. As such, expensive lattes may not be on order.

According to a recent McKinsey survey of Chinese consumers, 58% of urban households indicated a desire to âput money away for a rainy day,â a 9% jump from pre-pandemic levels. 

In addition to saving, the survey suggested consumers are more keen to buy domestic brands across categories. In 2013, foreign quick service restaurants dominated consumer tastes with 73% of the value share in China controlled by foreign brands. By the close of 2021, only 8% was held by foreign brands.

âThere once was a time when consumers paid a premium for foreign brands; those days are over,â the survey concluded.
Starbucks has been an outlier for quite some time as a foreign brand able to drive loyalty among Chinese consumers. However, the buying trends suggest that domestic competitors like Luckin Coffee (OTCPK:LKNCY) are poised to eat away at the Seattle-based chain's market share.

The Street heads to the Sidelines

Despite the stockâs resiliency into year-end, analysts overall have taken a more cautious approach into year-end. According to SeekingAlpha data, 21 of 35 analysts surveyed maintain a Hold rating while the consensus price target suggests modest downside to levels marked on Monday.

Deutsche Bank recently removed its Buy rating due to the runup for the stock, arguing that the upside its analysts had recommended is now baked into the share price. Equity analyst said that he is âtruly Neutralâ on the stock as it trends around the century mark.

Similarly, SeekingAlphaâs Quant team recently shifted to Neutral as the stock made its latest climb higher. While the team lauded the company for its pricing power and profitability, the valuation is too rich at present, leaving the stock with low marks for both valuation and growth. 
The company is next expected to report earnings in early February to attempt to shift the broadly cautious tenor on Wall Street. The ensuing earnings call with analysts will be the last call of Howard Schultzâs tenure as he has vowed that he is ânever coming back as CEOâ of Starbucks after his expected April 1 departure.