Starbucks' Billion-Dollar Investment
Current challenges and the path forward were big themes in Starbucks Corp.'s Q2 fiscal year '22 earnings call with analysts on May 3.
"Love and responsibility brought me back to Starbucks,” said Howard Schultz, who is serving as interim CEO, during the call. “ … I've traveled the country and met with thousands of Starbucks retail store partners and visited all five of our roasting plants, and I've learned firsthand about the unique challenges confronting the company today."
Confronting Challenges
It is hard to overestimate COVID-19 impact on consumer brands and consumer behavior, Schultz explained. “Even as restrictions have lifted, brands are being smacked with unprecedented operating challenges,” he added.
"COVID also drove dramatic changes in customer behavior that Starbucks stores and systems were not designed or built for. The challenges have been amplified by record demand for Starbucks coffee in our U.S. stores that has accelerated with the lifting of COVID restrictions."
In Q2, Starbucks' sales comp in North America increased 12% YoY, 23% compared to Q2 2020. Consumers continue to embrace drive-thru and order ahead.
"Both drive-thru and Mobile Order & Pay (MOP) activity have surged, together now generating over 70% of our U.S. store volume," Schultz said. "Delivery, a nearly $500 million business, was up 30% in the first half of fiscal year. And in our stores, customers are increasingly further customizing already complex handcrafted cold beverages.”
All of these factors, and then some, are stressing operations. Starbucks is struggling to keep up with demand. "...The combination of shifts and customer patterns, accelerating demand and algorithms built for different customer behaviors has placed tremendous strain on our U.S. store partners," he said.
But every challenge presents an opportunity, and Starbucks has a glass-half-full attitude.
"Over the last month, we've realigned Starbucks’ U.S. organization to focus entirely on transforming and reimagining our core U.S. business," said Schultz.
The coffee roaster and retailer is planning $1 billion in investments -- including $200+ million for U.S. company-operated stores this fiscal year. These include further investments in training, wage and equipment and a new partner app that will communicate directly with all store partners.
Other investments include adding new tech and equipment into existing stores and providing employees with the tools they need “to elevate the Starbucks Experience we deliver to our customers and create even more demand in the future,” Schultz explained. “And we'll be making significant investments to extend our digital capabilities and deepen our digital connection to customers and the emotional attachment our customers have to the Starbucks brand.”
Doubling Down on Digital, Drive-Thru
Returns on its digital investments are “consistently among the highest returns we generate, which brings us to the decision we will revisit in fiscal '23 to suspend stock buybacks” which yield about a 10% return, Schultz said.
When it comes to new stores, 90% will have a drive-thru. “Our newest class of drive-thru will integrate new store designs, technology, including more handheld devices and equipment improvements that will increase efficiency, speed of service, and, we believe, deliver even greater profitability in the future," Schultz explained.
Starbucks Reimagined
All of these investments are designed to increase store productivity and efficiency. To that end, expect more innovation around technology and personalization.
“What you will see is the coming transformation and reimagination of the Starbucks customer and partner experiences,” said Schultz. “The transformation will accelerate already record demand in our stores, but the investments will enable us to handle the increased demand and deliver increased profitability, while also delivering an elevated experience to our customers and most importantly, reducing strain on our partners.
“We must reintroduce joy in the customer and emotional connection back into the partner experience,” stressed Schultz.
Web3
The launch of Starbucks Web 3.0 and a platform for NFTs are in the works. “I believe Web 3.0 will create an authentic digital third place experience and drive substantial new revenue streams for Starbucks and be accretive to the brand,” said Schultz.
Starbucks Reimagined: Designed for the Times
Step One: Invest in the right equipment
“The business … has changed dramatically,” said Schultz in regards to MOP and the demand for cold beverages, which account for 80% of its business. “…The equipment in our stores and the layout of the stores have not been designed for the way customers are using our stores today. And that has put enormous pressure on our people. So, the first thing we must do is give them new tools, and there will be upgrades in equipment that will be sequentially brought into the stores to try and relieve them of the pressure.”
Behind the scenes, the labor scheduling algorithms need an update, and the digital app too needs enhancements to provide customers with the most accurate time for pickup, he added.
Step Two: Retaining & Maintaining the Workforce
“We've always been ahead of the curve, but I think we haven't done enough. And I think we have to recognize that there is a lot of pressure on our people,” said Schultz.
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“If you look at where we can really be much more efficient is that we can provide our people with better training, better wages, better equipment behind the counters to give them the tools and resources, the self-confidence and self-esteem to do their job, we will lower attrition and our retention rate will be much greater. That alone is a significant level of ways in which we can take money out of the P&L and money out of the store economics.”
A nod to the increasing complexity of beverages hot and cold, new barista training will be expanded from 23 hours to 40 hours. Schultz stressed that all hourly employees will get a pay increase.
Digital Tipping
In 2023, Starbucks will add enhanced digital tipping for its employees. Currently only customers paying with a Starbucks Card can leave a cashless tip. Digital tipping “has been one of the most requested opportunities from our partners in the meetings I've had around the country, and this is something we're going to accelerate as much as we can," said Schultz.
On Inflation & Supply Chain
Rachel Ruggeri, Executive Vice President and Chief Financial Officer, detailed the supply chain issues the company is facing.
“…Going from Q2 and for the balance of the year, we're seeing increasing inflationary pressures across our supply chain, both in labor, as well as freight and then across our commodities.
On International
Outside of China where COVID-19 lockdowns remain, Starbucks is “seeing very strong recovery across many of our international markets,” said Schultz. In its key markets, of Japan, Korea, the U.K., Mexico, "Our average store sales are actually higher than our pre-COVID averages. …Customers are back out. They're starting to return to their routines and they're starting to return to our stores,” Schultz said.
The Experience of the Future
As drive-thru and Mobile Order & Pay (MOP) generate more than 70% of U.S. store volume, it’s not a shock that 90% of new U.S. locations will have a drive-thru. MOP accounts for 25%, explained Brady Brewer, Executive Vice President and Chief Marketing Officer, during the earnings call. Customers are looking for the Starbucks experience, where they’re known by name and by drink, in the drive-thru. “Increasingly, that's what customers are seeking: an effortless, personalized human connection at Starbucks,” he said.
Delivery too is poised for additional growth. It has been growing 30% YoY. In a business that’s increasingly driven by digital transactions, the challenge becomes: “How does Starbucks unlock that magic connection, which only Starbucks can, between connection and convenience? And because we've been successful with that so far, that's why we're seeing customers adopt those channels so quickly and so holistically, but I'd say we're just getting started,” said Brewer.
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