Starbucks China to Probe Expired Ingredients Usage

American coffee chain Starbucks Corporation (SBUX) has caught the attention of Chinese officials, after an undercover operation by Chinese reporter exposed that two of its outlets were using outdated ingredients.

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The two stores were immediately shut down and the company said it will undertake a store-wide inspection of all 5,400 Chinese stores.

Following the news, shares closed down 1% at $115.56 on December 13.

Undercover Operation

An undercover operation carried out by a Chinese reporter found two stores in Wuxi city violating food safety norms by using outdated ingredients.

Beijing News broadcast the clips, which show Starbucks employees removing the expiry date sticker from a bottle of chocolate sauce and replacing it with a newly printed sticker with the current date. In another clip, staff was selling expired pastries and cacao nibs.

The company is facing backlash and criticism over the incident, with almost 270 million views as of Tuesday morning. Many have commented that Starbucks must ensure superior quality for the premium price charged for its beverages.

According to the report, China is the second most important market for the coffee maker following the U.S. Amid the ongoing uncertainty and restrictions related to the COVID-19 pandemic, the company’s CEO Kevin Johnson remains committed to his confidence and long-term growth prospects for China.

Management Comments

Starbucks put out a statement on its Weibo (WB) account, saying, “We deeply apologize and will actively improve the practices. We’ll closely cooperate with the investigation and request continuous monitoring from the public and media.”

The company added, “In the 22 years since entering the Chinese market, we have been committed to implementing strict food safety standards and resolutely adopting a zero-tolerance attitude towards food safety issues. The general public and media are welcome to continue to supervise us.”

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Analysts’ Take

Following the news, Robert W. Baird analyst David Tarantino lowered the price target on the stock to $126 (9% upside potential) from $128, while maintaining a Buy rating.

According to Tarantino, Starbucks could end up paying a high price for the malpractice. Though the effects will be transitory, the analyst believes it could affect the near-term outlook in China, which happens to be an important market (13% of total sales in FY2021) for the company.

Overall, the stock has a Moderate Buy consensus rating based on 15 Buys and 7 Holds. The average Starbucks price target of $124.90 implies 8.1% upside potential to current levels. Shares have gained 11.9% over the past year.

Website Traffic

TipRanks’ Website Traffic tool, which uses data from SEMrush Holdings (SEMR), the world’s biggest website usage monitoring service, offers insight into SBUX’s performance.

In November, Starbucks website traffic recorded an 11.34% year-over-year decline in monthly visits. Similarly, year-to-date website traffic growth decreased by 5.08% compared to the same period last year.