Rundown: Coffee sales struggle, Etsy's posts solid growth and Subway sued over ads

0:04Hello and welcome back to the Modern Retail Rundown. I am senior reporter Gabby Barco and I'm here with Editor-in-Chief Kale Guthrie-Weissman. Hey, Kale, how are you today? Good morning, Gabby. We've entered November. How are you feeling about it? It's a little stressed, but you know, you're just hanging in there as usual. I know this is our busy time. Yeah, exactly. But yeah, no, everything, you know, it seems like obviously there's a lot of uncertainty and a little chaos in the air, but we are bringing everyone the latest retail news. So this week, we're going to check in on a couple of companies' performances.

0:43So first up is Starbucks, which continues to be struggling this year. You know, they've had a lot of ups and downs in the last few months. So it seems like they are trying different things to turn that around. So we'll get into that. On the other hand, Etsy seems to already be doing pretty well going into their holiday season, thanks to a bunch of different tools that they introduced recently. And overall demand for people are just looking for handmade or more unique gifts. So they're turning to Etsy. And then lastly, we'll end on a little bit of a lighter story, I guess you can say, which is Subway is the latest fast casual.

1:30Is it fast food, fast casual? It's kind of in that weird category. It's in the between areas, but we can say fast casual. It would love that. Yeah, they would. in the fast casual space to be just coming under fire for their small portions, especially in comparison to those giant sandwiches you see in ads and on billboards. So there's a lawsuit that was filed regarding that. So we'll get into that. But yeah, first up, let's talk about Starbucks. So, you know, we checked in on them a few months ago, but it seems like there are still difficulties that not just them, but actually coffee companies in general, including Keurig, also interestingly, are facing right now.

2:12There's a lot of challenges in the coffee space. So, Kel, why don't you give us sort of the rundown, if you will, about what this performance looks like for Starbucks, at least? So as a whole, coffee companies have been not doing as well as they hoped for this year. So Wednesday, this past Wednesday, Starbucks reported its earnings. Net sales dropped 3 % year over year. Overall, the sales were$9.07 billion. And that's below what analysts expected, which was$9.36 billion. Global same-store sales fell by 7%. And just in key markets, Starbucks has not been performing. In the US, same-store sales dropped by 6%.

2:55And traffic as a whole was down by 10%. And in China, same-store sales went down by 14%. We're probably not going to get too much into China. That could be its own episode because there's really interesting competition there. But it just shows that Starbucks' global and U.S. strategy for trying to get back to growth is not working. But this is what's really interesting. There have been a few stories written about this over the last few weeks, but it's not just Starbucks. Starbucks has its own issues. But Keurig is also dealing with some coffee issues at Keurig, Dr. Pepper's most recent earnings.

3:27The U.S. coffee business it announced dropped by 6.3 % at its last quarter. And so we'll get into exactly what's causing this, but the industry as a whole is facing a softness. And there have been a lot of strategic missteps from the major players about getting people to buy coffee more than they ever have before. So, yeah, that's what's going on. Yeah. And, you know, Keurig, interestingly, we touched on last week when speaking about their ghost acquisition. So on the other hand, you know, coffee, unlike energy drinks, is seeing a slump. But let's talk about what they've been doing to try to mitigate some of these issues.

4:04So both Keurig and Starbucks have really been pushing promotions over the last year. If you have the Starbucks app on your phone, you probably have seen just a lot of different bogos and things that I never really thought Starbucks would be doing, honestly, at this point, if you asked me a few years ago, including combos, right? They, you know, with all of these sort of fast food deals, like meal deals going on, like Starbucks has gone in on that, which seems off brand in my opinion. But we'll get into that. But yeah, promos seem to be a really big strategy. Although, as we're seeing from the numbers, unfortunately, it's not working too well.

4:45The other thing which we spoke about when it was announced is the CEO Brian Nicol, who is credited with basically, you know, helping Chipotle really thrive recently. He was brought on as CEO a few months back, and he did admit that there's a change. You know, it's clear we need to fundamentally change our strategy to win back customers. And then on the other hand, the Keurig CEO, Tim Cofer, said at their earnings that no doubt at home coffee category performance has been sluggish and it is taking longer to recover than we planned and anticipated. That's, you know, coming off of all of that growth, especially during the pandemic when everyone invested in, you know, like a coffee set up at home does not bode well either.

5:32But yeah, there's a few different issues going on here. And I think a big one is also that's usually overlooked is, you know, coffee beans are agricultural and there's a lot of different geopolitical and, you know, socioeconomical challenges that go into their constant fluctuation and pricing. And so when demand is down at the same time, that that seems to be a recipe for low performance. Yeah, that's actually what happened with Nestle. And so at its most recent earnings, its CEO, Laurent Frege, I believe, if I'm missing pronounced that, I apologize. But pretty much Nestle CEO said that Robusta Coffee, which is one of the two major coffee beans that is giving everyone in the world their caffeine jolt, has hit a record high.

6:21And the company is really trying to figure out how to balance increased prices with staying competitive with customers. And as a whole, there was a Wall Street Journal article this past week just about how Starbucks and Keurig and Nestle are trying to deal with this and change strategies. And just the entire industry has faced fluctuation. So U.S. dollar sales of at-home coffee, which includes ground coffee, whole beans, and pods, declined 1.4 % in pretty much the last year, in the last 52 weeks, beginning in October. Unit sales dipped by 1%. And this is according to a Jeffries analysis of NIQ data.

6:58So you're just seeing weird things in the industry just a few years after coffee was really booming, especially at home coffee. And so now we're seeing a bunch of these major companies saying we need to change strategies and figure out what we can do to bring customers back in. Yeah. As we mentioned, you know, promos, discounts have been a big focus. But Starbucks is also actually doing some other things to help bring traffic back in. So, for example, it's no longer charging extra for milk alternatives. I feel like that was a long time coming given where they are right now. Whatever. It's like, what, 50 cents to a dollar usually to get like oat milk or whatever.

7:40But yeah. And then at the same time, it's also RIP. the olive oil coffee, all the auto is also going away, apparently, because it was not a hit with the customers. But yeah, Nicole said a few weeks ago that he was also going that, you know, the company is going to be pulling back on the promotions that I just described. So kind of going back to basics a little bit. And maybe it sounds like to me, you know, trying to get back to a more premium offering. Yeah, I think that that is the big thing is that it's a premium offering and having people come in not for a one-off deal, but to continue coming in.

8:17And there's a bigger thing that we won't get into now, but many people have just complained that the Starbucks retail experience is not great. A lot of them are understaffed. I believe Nicole said he's going to focus on staffing. A lot of them, it used to be the third place you would sit down, you'd enjoy a cup of coffee, you'd hang out. That's no longer the case anymore. And so I think right now the focus is on making Starbucks seem more premium and making the experience feel a little bit nicer than it has in the years past. And similarly, Keurig, it didn't go into as much detail. And it's a little bit different because it's not a coffee shop, it's at home.

8:48But Keurig did say it's going to raise prices in 2025. And that's a big change from this past year. And so pretty much it's saying the pricing strategy, the promotion strategy is not working, we need to go back to the drawing board. So you're going to see some probably not huge changes, but the prices are going to go up, The offerings are going to change, and these companies are hoping that they'll be able to bring back customers at a new rate than the last year plus. Yeah, when in doubt, raise your prices, right? I feel like it's been the lesson the last few years. But yeah, we'll watch out and see whether this new plan that's being put in place for both the companies will pan out in the next few months.

9:30But from there, let's move on to Etsy, which is faring much better, it seems. So its holiday quarter, you know, going in is looking already pretty bright. It just reported its Q3 financials and looked like it was already being really fueled by early holiday shopping. But yeah, let's get into what Etsy's up to. It's a little surprising, I think, not only because, you know, the marketplace and everything that it's been going through. But I think also given that discretionary spending is still down and a lot of retailers are actually warning everyone to tame expectations for soft sales just going into the season.

10:10So, yeah, what are what are your thoughts on these numbers? Yeah, well, let's get into them. So revenue rose 4.1 percent year over year. Etsy hitting six hundred sixty two point four million dollars. Some of this was fueled by some back end changes. As we've written about, as we've talked about, Etsy has increased its fees. on every transaction. But still, gross merchandise sales was$2.92 billion for the quarter. And that's above what analysts thought, which they were expecting around$2.89 billion. And so, the fact that GMS is up shows that more people are buying on Etsy. And I think that there's, you know, Etsy is not, we talk a lot about resale platforms.

10:51We talk a lot about people seeking out value. Etsy is kind of in the middle where it's handmade goods, but it's different than if you're buying from a premium brand. I think people see it as sort of like maybe you're going to buy something from an artisan, but it might be a little less expensive than if you're buying something from some expensive luxury brand. So I imagine it might be in some sweet spot for holiday sales where people feel like it's a little bit cheaper, but it's not like you're buying something used, you know, and it all depends on what you're getting from Etsy. But I imagine that it actually has some things that are helping it propel forward because of the way that it works, you know?

11:25Yeah, I think that sort of uniqueness aspect is also a big one. I feel like we've all had those stories of like asking someone where something's from. It's like, oh, Etsy, you know, they got it custom made or whatnot. And so, you know, I feel like I can see why holidays is a good time to be really delving into that. But at the same time, you know, Etsy has also been pretty proactive this year going in. They've had a little bit of a, you know, transition in the last couple of years. We've written a lot about their fee restructuring and Etsy store owners or sellers have been frustrated over the last couple of years, actually.

12:03But it seems like Etsy is pretty dedicated to kind of keeping this sort of everything we just talked about described. For a while there, they were having issues with like dropshippers and sort of this like mass produced products that sellers are bringing onto the platform. But let's get into some of the things they've done actually to really clean up the platform. I'll just put it that way. They've changed the seller fees, which there's been tumult with that, but it's also introduced some new tools. According to Etsy, shoppers who use the company's new gift mode feature drove more sales than what the general site offered.

12:38And so this is a button that allows customers to buy presents based on the receiver's personality and interest. And so it's a new way to try and get people to think of Etsy as a gifting platform pretty smart ahead of the holidays. this feature analysts believe is going to boost holiday sales makes a lot of sense. There are other things, and you talked about the dropshipping issue that Etsy has been facing, but Etsy has clearly been trying to differentiate itself from Amazon and Timu just to show that it sells different products and that it sort of has a different vibe than the other more commoditized platforms where you're just buying something likely for cheap and it'll come to your door in a day to 10 days, you know.

13:18So yeah, I think that a lot of what Etsy has been focusing on is proving that it is a gifting platform, adding new sort of services to showcase that, but also differentiating from the other e-commerce platforms that are selling very different products. Yeah, I can, you know, name check some of these ventures or investments, I should say, which is in February, they introduced this sort of pledge program. It's a$15 seller setup fee when you open a store to ensure quote to ensure new shops are committed to running a business in these under these circumstances let's get into it so basically the marketplace is asking all sellers to provide store info like whether their products are handmade by them themselves the company also changed the way items are labeled I think if you shop Etsy you've probably noticed You know, it really says where whether the seller was involved in the design or making it or whether they sourced it from somewhere else.

14:17So I guess creating more transparency around that because of all of the criticism they got from these, you know, very generic looking stores that were popping up. But yeah, so many of those complaints, you know, it seems like the companies heard them. And yeah, I think even CEO Josh Silverman said in July that actually Etsy also reduced, this is probably some sort of AI programming, but they also reduced the number of listings that look alike. You know, that's actually a big problem is a lot of copied images in stores that are deceiving some customers a little bit, you know, when it comes to trying to shop for something that's a little bit more unique.

14:56So, yeah, this is kind of what I meant by like really getting in there, streamlining and cleaning up the listings and I guess getting the sellers recommitted a little bit, you know, to this sort of ethos that they've had. Yeah, I mean, I think that it has been a big year of transition for Etsy. And you always wonder if you make these big changes, if you change the way products are shown, the way products are labeled, will A, our sellers going to revolt and B, our customers going to vibe with it. And it seems like now we're a few months out, we're seeing these sales come in. It's proving to have been maybe a good bet.

15:32And so I'll be interested to see what the holiday sales look like. And also, if you're focused on being a gifting platform, what do you do post Q4? And so that will be something to definitely look into is what does Etsy do beginning in Q1 to keep that momentum going? Yeah, so we'll find that out with Q4 results and whatnot. But yeah, from there, let's move on to food portions. These have become pretty controversial on social media. I'm not sure some of you have seen, but Chipotle kind of got into this lately. And they've actually also been pretty good about, you know, getting on that and fixing the issue.

16:12But basically, the latest news is that Subway, the sandwich chain, you know, is under fire for basically being skimpy on their meat, you know, just in person versus ads. I feel like this has always been a thing, right? like the joke that your sandwich, your burger is just never going to look as good as the advertisements. But now there's a new lawsuit that was filed in federal court in Brooklyn that accused Subway of quote unquote, grossly misleading customers by advertising these sandwiches that contain at least three times more meat in the visuals than is actually the case in real life. Okay, so let's get visual speaking of, you know, just looking into this, I thought this was interesting.

16:58But yeah, according to the proposed class action filing, Subway's ads for the steak and cheese sandwich show like these giant piles of layered meats, reaching this is a quote reaching about as high as the surrounding hero bread. But in reality, a lot of the photos that were, you know, I guess included in the filing, show that the sandwiches actually have more bread than filling ratio. Kale, I feel like I need your take on this. Like this is I mean, it's very specific, but it just goes to show that, you know, with the rise of social media call outs, and you know, consumer protection laws coming into it, the customers are really doubling down on the fact that they are not getting their worth, especially because these restaurants are also raising their prices.

17:46First, I want to meet whoever this Brooklyn person is, like, I guess we're neighbor, you know, We live in the same city. Who wants to take the time to sue Subway over, I don't know. Images always look better. Yeah, she was actually a Queens resident. Oh, really? I believe you're technically a Queens resident. I am a Queens resident. All right, we need to meet. I want to talk more with her. But I guess there are a few things, which is that Subway has come under fire over the last few years. It was always considered one of the options that was cheaper and you would get more food,$5 foot longs, RIP.

18:19That was the big deal is that you would spend$5 and you would get a huge sandwich. Prices have gone up. Portions have gone down. I think that there's something interesting here, which is that the suit said the practice is especially concerning given inflation, high food prices, and that especially lower income customers who are cash strapped. And I think that that gets at the heart of what a lot of the misleading advertising is talking about, where I think a lot of companies are trying to showcase one thing, but then give customers another. That being said, I never have high hopes when I go to a Subway about the sandwich that I'm going to get.

18:54And so never enough to sue them. But I'm probably not the right person to be talking about this. Yeah. So the lead, I guess, customer who helped file the lawsuit said that she paid$7.61 for the steak and cheese sandwich at her local Subway. But then they realized that the ads show at least 200 % more meat than what customers are actually receiving. in reality. I would love to look at the forensics of how they came up with these percentages. That'd be fun. But yeah, it sounds like, you know, I guess the class action aspect of it is interesting because a lot of it comes down to how much momentum it gains, right?

19:33And how many people actually sign up. I mean, yes, but there's one other thing that I'm just thinking about now, which I think is interesting and worth noting, is that this is an issue that all the not all, but many of the fast casual chains are facing, which is just around systemization with portion sizes. So earlier this year, Chipotle went viral because people were showing all the different hacks you could get to get better portions or how their portions were going down. There were all these different things. And it got so bad with the TikToks that Chipotle had to actually respond to it and now says that its portion sizes are going to be more consistent and maybe even a little bit more.

20:10And I think that is sort of the heart with the subway thing, where when you have someone who is making a sandwich in front of you, I'm sure you're getting heat from your manager, from the store owners, from all of that, to use fewer ingredients so that you can save on costs. But also when you're doing it in a way where you do the same thing every time. And I think that is a really interesting issue where it's more difficult to systematize how someone makes a sandwich, how someone makes a burrito bowl. And if it's not what they thought it was going to be, that they're either going to go viral on TikTok or they're going to sue you.

20:42And I think that that's something that, you know, especially for these fast casual chains, they're going to need to pay more attention to going forward. Yeah. And like you mentioned Chipotle, but this week the interim CEO mentioned that customers are actually posting photos proof that the portions are now bigger again, or at least back to what they were. So, you know, I guess, you know, they've experienced both sides of the spectrum on that issue. But then there are some of the, you know, some of the chains actually have fought for years, you know, some of these lawsuits, including Subway over its, you know, the footlong, speaking of, that was really under fire for, you know, not actually being a footlong.

21:25But yeah, that lawsuit went out for about four years before it was dismissed in 2017. So they put a lot of money into fighting that back. And then earlier this year, McDonald's actually also had that hash brown, I guess, gate or whatnot, where people were paying for hash browns and some of them got like one or two inside their little packs. So this is just pretty widespread, I guess, across chains. It just goes to show that there are different ways that some of them are approaching it, whether it means, you know, making it right for the customer or fighting back. Yeah, I don't know if it's an influx, like this has happened for years, but we're seeing more of this stuff happen.

22:05And I think that this isn't necessarily the case with Subway, but with others, social media is definitely a big, big propellant, a big accelerator of people talking about the false advertising they see from these restaurant brands. And so, you know, we'll be keeping an eye out. Maybe I'll meet my neighbor of Queens and talk to her about her Subway sandwich one of these days and get more details about it. Yeah, her name is mentioned in the filing. I didn't want to mention it on air for privacy reasons. We'll see how that goes. But I'm sure we'll just keep seeing these viral videos from all these different restaurants for the rest of time.

22:44All right. Well, on that note, we can wrap up. You can rate and review the Modern Retail Rundown wherever you get your podcasts. And then on Thursdays, you can come back to listen to Kale's interviews with industry executives. So let's see if you have a preview for us for next week, Kale. I do. I spoke with the CEO of W, which is Jake Paul's body care line. And we, you know, talked about working with Jake Paul, which was interesting, talked about the state of being the leader of an influencer brand. He, this guy Woody, has led other influencer brands or creator brands. And so we just talked about it.

23:23It was a really fun conversation. Definitely check it out. Yeah, that should be a fun one. Yeah. And then come back next Saturday for the Modern Retail Rundown. Thank you.