Issue #12: Another Week, Another Large Retailer Identity Crisis

Last week, we covered a retailer undergoing an identity crisis. Nike. This week, there is another large retailer trying to shift its identity. Starbucks. When Starbucks got started, the focus was on quality coffee and being a third place for people to congregate/work. However, going into a Starbucks right now would be very different than when it was founded in 1971. Instead of a coffee and third-place-focused establishment, the focus is on non-coffee products, like breakfast food and sweet/iced drinks, and having customers spend as little time in the stores as possible. To push customers to spend minimal time in store, Starbucks has encouraged customers to use their mobile app and drive-throughs.

However, this push is not resonating with customers. Last week, Starbucks reported earnings and it was not pretty. Sales were down for the second straight quarter, as its prices in-store have increased on average by 7% since February 2024. Coupled with many new retailers in the beverage space focused on sweet drinks for kids (the market Starbucks is targeting/expanding into), like Dutch Bros, the environment is not very friendly for Starbucks. As a response, Starbucks has launched a new value menu in the $5-$6 range that has worked for other stores, like McDonald’s. On the operations front, they are launching a new system to make cold drinks faster. Starbucks is hoping these changes will draw back customers and improve their experience.

The tough part about these decisions is that Starbucks is playing catch up to a competitive market. Starbucks will never be able to beat McDonald’s for value or Dutch Bros for sugar quantity. Where Starbucks wins is with quality products and a third-place environment. No one else in the market offers that value proposition at Starbuck’s scale. I really like expanding the beverages and food to increase AOV that Starbucks has done and give people another reason to stop by. I also like the mobile push and drive-through to meet customers where they want. However, that cannot be at the expense of compromising the quality of the brand and products. I believe Starbucks needs to return to its roots and win that way. Its brand is everything and right now it is being tarnished. Otherwise, more quarters of falling sales are on the horizon.

Shopify Continues to Roll 

Shopify, the website platform focused mostly on eCommerce, released earnings this week. Unlike Nike and Starbucks, it is a commerce company that is experiencing a growth surge. Why? Because it has honed in on its target market, that market’s pain points, and built a super-focused brand around that ethos. What started as a website to sell your goods on is now an all-in-one commerce platform. Wholesale, POS, Subscriptions, Payments, International, Enterprise - all features launched to enable the full commerce stack. Having all these features and focus has led to improved revenue and profit. Sometimes all you need is to stick to a clear vision/focus to succeed. It will be exciting to follow as Shopify continues to get involved in the entire commerce stack.

Mars & Kellanova

This week rumors were swirling about the merger of two food giants. On the purchasing side, Mars, a candy, confectionary, and pet food company. On the other side, Kellanova, the Kellogg’s spin-off producing Cheez-It, Eggo, and other snacks. However, there are a couple of concerns that may cause it to drag on. First, as illustrated with the Albertsons and Kroger merger, regulators may try to block it. This would drag it out and hurt innovation as the companies would be in a wait-and-see mode, not trying to rock the boat at all. Second, as shown by Kraft-Heinz, mergers between two large food companies with different product mixes don’t produce the synergies desired. After reaching stock market highs in 2017, the Kraft-Heinz stock has fallen and has shown no signs of recovery. Last quarter, the company went through declining sales, inflation, and rising costs. Overall, I believe this could be positive or negative for the companies, but regardless would need to be speedy and actually have some synergies that would lead to lower costs/better products. Otherwise, I think it will hurt the companies as consumers will turn elsewhere. This news is something for retailers and upstart brands to monitor and react to as it progresses.

Madison Reed Partners With UConn Basketball 

Retail and UConn Basketball. Ask anyone, these are two of my favorite things to talk about. This week those two worlds collided. Madison Reed, the omnichannel hair care and hair color products company, announced a partnership with UConn Basketball. In this deal, the company founded by a UConn alum Amy Errett, Madison Reed is sponsoring the UConn court, doing NIL endorsement deals with some women’s basketball players, and supporting the career development of athletes. This partnership type is part of the new world of college athletics now that athletes can do endorsement deals. It is a really smart partnership for Madison Reed because not only do they partner with one of the best teams in college basketball, but they also are able to work with some major stars (Paige Bueckers and Azzi Fudd have a combined 2.3M followers on Instagram). For retail brands especially, Name, Image, and Likeness (NIL) represents a huge opportunity to win local markets. I am very bullish on these types of partnerships and excited to see where they continue. Retailers and brands should have a strategy regarding NIL and partnering with college athletes.

NYC Struggling With How to Handle Vacant Pharmacies

This week, the New York Times did a deep dive into the big box pharmacies of NYC and their struggles. Since 2020, 222 locations have closed and around 60% still remain empty, resulting in over 1 million square feet of vacant space that used to be pharmacies. This problem is multi-faceted. Most of these retailers signed long-term leases, so the landlords aren’t trying to fill the vacancies. The companies were not making enough money from the stores, so they would rather close them. The companies may try to sub-lease, but that is a lot of work and who would take the place. Like many other businesses in NYC, these locations failed because they were too big, typically between 8,000 - 15,000 square feet. Pharmacies in NYC have shifted to smaller footprints and just focusing on medications, which many owner-operator pharmacies have done. The question is, what to do with this space? Here are my two ideas:

1. Small format hybrid grocery stores and specialty food experiences, like what Whole Foods is doing with their small format stores or a small format Eataly

2. eCommerce brands utilizing the space for an omnichannel experience (hybrid fulfillment center, experiences, and in-person shopping all in one location)

While this may not fill the entire vacant 1 million square feet, I believe each location represents a unique opportunity to fill the space. Plus, if you are an emerging brand, it can’t hurt to make a relationship with some large pharmacy chains that might stock your brand.

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Additional Links:

1. GoPuff is focusing on personalization to win shoppers (read more here)

2. 53% of grocery shoppers are more loyal to merchants than products (read more here)

   • My take: This loyalty preference is why private-label products are having increased investments from stores

3. Good Eggs, an eCommerce retailer, was sold to GrubMarket, a software provider and distributor (read more here)

4. Saint James Iced Tea partners with PopUP Bagels to launch limited edition lemon butter (read more here)

5. Sak’s stopped paying brands and here is what happened

6. Ikea launched food halls, co-working spaces, gyms, and more in an effort to transform underutilized retail (read more here)

   • My take: This strategy is a fantastic way to get more traffic to their stores while also breaking into more urban areas with less square footage

7. Under Armour sales fall (read more here)

8. Allbirds closing stores leads to falling sales (read more here)

9. The best bagel in New York? Read more about behind the scenes of Apollo Bagels (read more here)

   • My take: I have not personally tried Apollo yet and cannot endorse them as the best bagel in New York

10. Ace Hardware is transforming stores to be more experiences focused as it tries to differentiate itself from the big box hardware retailers (read more here)

11. CVS is focusing on growing digital reach to maintain revenue growth (read more here)

12. Over frustrations with items locked up, customers are switching to eCommerce for their pharmacy needs (read more here)

13. A peak behind the curtain of tinned fish brand, Fishwife, and how they profitably and intentionally grew retail while balancing D2C (read more here)

14. JP Morgan launches the ability to pay with your face (read more here)

15. McDonald’s spinoff CosMcs launches another location (read more here)

16. Pete Wells, the long-time NYT food critic, is leaving and penned an interesting goodbye (read more here)

17. How restaurants can learn from the NY Times revenue diversification and diversify their revenue (read more here)

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