Starbucks' stock continues to struggle as competition heats up in the US, overseas

Starbucks (SBUX) is looking to find its footing amid a sea of rising global competition.

Shares of the coffee chain are struggling as the company is being hit on multiple fronts, with a pullback in occasional visits in the US, cautious consumers in China, and increasing investments in coffee from players big and small.

The ongoing Middle East conflict presents another headwind, which prompted CEO Laxman Narasimhan to share his concerns about misinformation being spread about the company in an internal memo.

Year to date, shares of Starbucks are down 5%, compared to the S&P 500's (^GSPC) roughly 9% gain.

Though the company is facing an uphill climb, Deutsche Bank analyst Lauren Silberman told Yahoo Finance that the worst is over for the stock. "We see limited downside and believe the risk and reward is skewed to the upside" moving forward, said Silberman.

It'll take time to bring customers back in, but Starbucks can turn things around with product innovation, particularly that geared toward Gen Z and millennial customers, added Silberman.

That includes the launch of three new beverage flavors this fiscal year, including its first, lavender, on March 7.

"Some of their early Instagram posts ... introducing lavender ... [had] some of the best engagement that I've seen on Starbucks posts in a very long time," Silberman said. "Lavender in itself seems to be a growing trend popular with the younger consumer."

In the US, Starbucks is shifting more of its marketing budget to social media to reach Gen Zers and millennials, who make up approximately 51% of its customer base, per a client note from TD Cowen analyst Andrew Charles. Last year, its advertising expenses came in at $508 million globally.

The company is exploring energy beverages, which can help attract younger drinkers and afternoon visitors, according to Charles. It's working to improve US and China same-store sales, but management has projected fiscal Q2 to have soft revenue growth.

However, gaining share won't be easy in a competitive US market. Upstart drive-through coffee chain Dutch Bros (BROS) is already offering energy drinks, which make up roughly 20% to 25% of its total sales, according to Charles's note.

In February, Dunkin' Donuts also launched a new line of iced energy drinks, SPARKD'.

So far, Dutch Bros and Starbucks are not hurting one another, William Blair analyst Sharon Zackfia told Yahoo Finance back in January, adding that the overall coffee business typically has "exceptional" margins.

Those margins are drawing fast food giants like McDonald's (MCD), Wendy's (WEN), Burger King (QSR), and Taco Bell (YUM) into the breakfast game.

McDonald's, which launched its first drive-through beverage and breakfast restaurant CosMc's last December, announced on Tuesday that it's partnering with Krispy Kreme (DNUT) to sell its doughnuts at all restaurants nationwide by 2026.

Silberman said Starbucks isn't "meaningfully losing share" in the growing coffee and beverages category and that there can be room for everyone as the industry continues to expand.

But the coffee chain is also facing increasing competition in China, where it has announced major growth ambitions.

Starbucks has built up its presence in the country over the past 25 years, opening its first store in Beijing in 1999. Last September, Starbucks announced its 20,000th location outside of North America and plans to expand to 9,000 stores in China in the next two years.

The company has also invested in building an ecosystem, announcing the opening of its $220 million China Coffee Innovation Park manufacturing facility last fall.

Executives at the helm are making the case that the Asian market is a long-term play.

"China's coffee market is still in its early stages, with huge potential to expand the addressable market," Starbucks China CEO Belinda Wong said during Starbucks' 2022 Investor Day. "Per capita demand for coffee in China will grow further from 12 cups per year to 14 cups by 2025."

However, local independent coffee shops and discount chains like Beijing-based Luckin' Coffee (LKNCY) present a challenge to Starbucks' plans, particularly as the Chinese economy slows down.

"The China environment remains promotional, which Starbucks is trying to balance with targeted offers ... while trying to maintain the brand's premium positioning," wrote Charles. "We anticipate intense market share competition to linger in China for the foreseeable future."

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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