How Starbucks is Adapting to a ‘Challenging Operating Environment’

In the US, Starbucks Rewards loyalty program 90-day active members topped 32.8 million, up 6% year-over-year. US same-stores sales decreased 3%, and store transactions decreased 7%, but that was offset by a 4% increase in the average ticket.

• Starbucks' Investment in Equipment Pays Off

“Still, we face a challenging operating environment. The headwinds discussed last quarter have continued. In a number of key markets, we continue to feel the impact of a more cautious consumer, particularly with our more occasional customer. And a deteriorating economic outlook has weighed on customer traffic, an impact felt broadly across the industry,” Narasimhan said.

Cart Abandonment Issues

Starbucks saw “a mid-teens percent order incompletion rate” within the Mobile Order & Pay (MOP) channel this past quarter, Narasimhan said. In some cases, customers cited long wait times and product unavailability for not completing their order. 

The company is ramping up supply chain investments to improve availability of customer favorites such as the Potato, Cheddar & Chive bakes.

It is also “revamping and investing” in its technology to improve wait time estimates and provide more transparency for customers. Behind the scenes, “We're intensely focused and actively working on improving operational throughput by providing our partners with the right processes and tools and on giving our customers a better sense of when their order will be ready,” Narasimhan said. “Rollout of our equipment-driven Siren System is on track, but we're also fine-tuning the store processes that underpin this new equipment.”

For the past six months Starbucks has been working with the Toyota Production Systems Support Center to unlock additional capacity. “What we saw through store tests was a real near-term opportunity to fundamentally improve how we operate our stores. The Siren Craft System, as we're calling it, requires no capital. The technology solutions are relatively straightforward. And we are working to roll it out in North American stores over the coming months.”

Stores already using the Siren Craft System to optimize operations have already seen an increase in peak throughput, Narasimhan said. “The Siren Craft System also bolsters the highly incremental returns we expect from our equipment-driven Siren System as it is deployed in-stores. Taken together, these new processes and new equipment systems act as complements and amplify efforts to unlock capacity at peak.” 

“We are working to increase throughput and improve product availability to enhance the customer experience, improve convenience and better capture existing demand. Over time, we believe these improvements will attract a larger subset of customers,” he said.

Connecting with the Occasional Customer

Starbucks is working to connect with its occasional and non-Starbucks Rewards customers. “We have loyal customers in the US, and they stay truly loyal in terms of frequency, transactions and the level of customization they sought with their purchases, but in this environment, many customers have been more exacting about where and how they choose to spend their money,” Narasimhan said. 

Starting this month, Starbucks will add new and exclusive in-app offers to create additional value for customers. Also in the works, app updates to improve its wait time algorithms, a guest checkout feature. “In July, we will begin opening the Starbucks app for all while making MOP available in more places outside our app.”    

“Starbucks Rewards and the Starbucks app play a central role in driving value for our customers,” Narasimhan added. “Our MOP set another [record high] in the US, representing 31% of all transactions in the quarter. Our Starbucks Rewards members in the US also grew by 6% over the prior year to nearly 33 million members. The stickiness and evolution of our digital position provides us with structural advantages. Building on this strength, we are mapping additional ways to engage customers as we work to double SR members over the next five years,” Narasimhan said. 

The coffee retailer plans to invest $600 million over the next three years to “further digitize” its stores and to “better target customers in more personalized ways. This includes the installation of digital menu boards across our footprint of all our [company-owned] stores in the US and China. And we're making additional investments in our Deep Brew AI and machine-learning platform to further digitize and fine tune how we operate our stores while delivering an improved digital customer experience and more personalized customer offers, offers that are timely and relevant and flexible to location, inventory availability and weather,” he said.

Targeting Unmet Demand

The coffee retailer pointed to unmet demand -- during overnights and weekends. “We see it as a tremendous and untapped incremental opportunity. Last quarter, we mentioned we were conducting a pilot program to serve customers overnight between 5 p.m. and 5 a.m., when our stores are traditionally closed. During this pilot test, we doubled our business. Building off that success, we are aggressively pursuing options to build a $2 billion business over the next five years,” Narasimhan said. 

In March, the company achieved a milestone towards its environmental goal of certifying 10,000 Greener Stores globally by 2025, including over 6,000 certified Greener Stores in more than 40 markets globally.

Specifically in its US stores, Starbucks continues to invest in equipment innovation, process improvements, staffing, scheduling and waste reduction. “Our stores are running better than ever before, underpinned by the strong fundamentals our team has built,” he said. In the drive-thru Starbucks has seen “meaningful improvement” in drive-thru times, he added. 

The full earnings statement is here.