24/7 Insights

• Labor negotiations between Starbucks Corp. (NASDAQ: SBUX) and Workers United have resumed for a second week.
• The current CEO believes that labor relations are critical to financial results.

Labor negotiations between Starbucks Corp. (NASDAQ: SBUX) and a union representing some of its store staff have resumed for a second week. The union, Workers United, wants its members to have better pay and benefits, as well as what it says are better hours. While Workers United does not represent all Starbucks store workers, if it is successful, its membership could spread.

Unions have struggled to gain a foothold at Starbucks. Previous CEO Howard Schultz was rabidly anti-labor, which triggered court battles, an appearance before Congress, and attacks by workers that he cared more about investor returns than better treatment of employees. But now he is gone. The new chief executive, Laxman Narasimhan, favors labor talks.

Narasimhan sees the negotiation with unions as favorable for Starbucks to the extent that they can help turn around tepid sales. Those sales have driven the company’s stock down 19% this year, compared to an advance of 11% in the S&P 500. He recently said:

Specifically in our U.S. stores, we’re focused on creating a more stable environment for partners through investments in equipment innovation, process improvements, staffing, scheduling and waste reduction, all things our partners value and prioritize creating a more satisfying work environment in our stores while de-risking our business.

It is a tacit admission that labor relations are critical to financial results.

Narasimhan is taking a risk. If workers are treated better, it may not improve sales. Like McDonald’s, many consumers think Starbucks is too expensive, and better labor relations may not change that. Other coffee shops are among the fastest-growing brands in each state this year.

Starbucks management can also do the math. Higher compensation often means lower margins. Minimum wage hikes in some states have certainly raised labor costs. For example, the minimum wage for many workers has gone to $20 an hour.

Narasimhan has decided that the labor movement at Starbucks will grow and that cooperation is better than the fights that went on for over a year before he took his job as CEO.

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