Starbucks CEO Kevin Johnson dubbed this stage in the COVID-19 recovery, the “Great Human Reconnection.” And it bears similarities to the “third-place,” social-forward positioning the java chain built an 18,000-unit empire on. But the Starbucks waiting on the backside of a global pandemic won’t be the same brand from 18 months ago.
While “human connection is the very foundation of the Starbucks experience,” Johnson said Tuesday, how Starbucks reaches and courts guests has progressed years in a matter of months.
Its ability to drive frequency opened up; Starbucks can meet customers where they need to be, Johnson said, in ways it couldn’t pre-virus. Definitely not at this scale.
And the result was record-busting results across the board in Q3, despite mobility restrictions still impacting markets, industrywide pressure in pockets of the supply chain, and Starbucks’ in-store cafe seating not yet fully reopened.
The brand posted Q3 year-over-year revenue growth of 78 percent, up to $7.5 billion—a figure the chain has never reached. Just in the U.S., revenues lifted 92 percent to $5.4 billion (from $2.8 billion Q3 2020) as corporate same-store sales jumped 84 percent off the COVID floor this time last year.
Yet even pulled back to offer a clearer view (same-store sales fell 40 percent in the U.S. in the prior-year period), Starbucks’ two-year comp grew 10 percent. Transactions rose 82 percent this quarter compared to last year’s negative 53 percent drop, while ticket continues to hike as larger orders edge out solo trips, up 1 percent versus a 27 percent leap in Q3 2020.
Although it can prove murky trying to decipher financials in a COVID vacuum, there are underlying trends fueling Starbucks’ optimism going forward.
For one, internal research, Johnson said, showed Starbucks gained “meaningful market share in the U.S.” in Q3, “and the momentum we have created is sustainable.”
Starbucks’ competitive share is the highest this year it’s ever been in the away-from-home coffee and tea category, Johnson added.
Meanwhile, the total coffee addressable market is on the doorstep of major growth. Johnson said it’s expected to scale to well over $400 billion in size globally over the next three years, or a compounded annual growth rate of 8–9 percent as the market bounces back from a global crisis.
According to The NPD Group, diners consumed about 44.5 billion servings of coffee last year, spent $2 billion on coffee makers and accessories for in-home brewing, and made 6.3 billion visits to order coffee at foodservice outlets.
Also, within this sector, Johnson said consumer preferences are shifting from mainstream Robusta coffee to Arabica (more on the difference here), the latter of which Starbucks hangs its beverage hat on. The cold category represented 74 percent of beverage sales in Q3 for the brand, up 10 percentage points over the past two years. Alternative dairy offerings also represented nearly 25 percent of milk-related beverage business.
But really, it’s Starbucks’ adaption to new consumer behaviors that could kickstart a multi-year tailwind.
Drive-thru represented 47 percent of transactions for Starbucks in the period. Mobile ordering for in-store pickup delivery or curbside totaled 26 percent.
These might sound like COVID-ignited realities, and, to some level, they are. Yet the end-result isn’t so transitory. In-store business will drag figures down closer to previous norms, but they will never look as they once did.
In the past 12 months, Starbucks has opened 554 new stores combined with café seating and drive-thru service. The company is about 80 percent complete with a previously outlined U.S. asset transformation that’s shedding overlapping and underperforming stores.
So far, Starbucks’ portfolio repositioning increased drive-thru performance to 75 percent of total U.S. sales, Johnson said. A number that continues to rise as the chain increases efficiency. Overall, Starbucks’ trade-area transformation benefited its operating margins in the Americas segment by 80 basis points in Q3 (70 basis points last quarter). BTIG analyst Peter Saleh said Wednesday he expects this benefit to approach 100 basis points at its peak, somewhere around Q1 2022.
What this climate and synergy has also done for Starbucks is help it add nearly 5 million 90-day active rewards members since the beginning of the fiscal year.
There are now more than 24 million active members in Starbucks’ program after a million more joined in Q3, representing 51 percent of all spend in domestic stores—up 8 percentage points from pre-pandemic levels.
“Our ability to engage has never been higher,” Johnson said. “More and more of these customers are embracing experiences that effortlessly fit their lifestyle.”
Namely, the drive-thru, curbside, or mobile ordering when they’re not interested in sitting in a café for a couple of hours.
Q3 stood out for Starbucks, however, in the way non-rewards customers flocked to the brand. While rewards spend grew at a mid-teens rate, quarter-over-quarter, non-rewards spend growth outpaced the rate for the first time in 11 quarters.
“This is further evidence of the Great Human Reconnection,” Johnson said. “The rapid reengagement of non-rewards customers not only propelled our record results but also underscores the strength of the brand and the growth potential ahead.”
Like nearly all quick-serves, Starbucks’ rewards members spend more than average guests. And the brand believes this increase in non-rewards visits from Q3 will fuel the base as it works to convert them over. Johnson has previously said—and reiterated Tuesday—Starbucks aspires to double its current number of active rewards members in North America, which would provide a massive boon to both its data collection and transaction growth. You’d be talking north of 40 million people.
John Culver, Starbucks’ group president of North America and COO, said the brand’s “Stars for Everyone” launch three quarters ago opened the funnel. At its core, the program made it easier for customers to make purchases by adding alternative payment options (they had to upload funds onto a card before), and quickened the pace to actually earn rewards. “And what this has done is driven a meaningful increase in the conversion rate for those who joined the Starbucks Rewards program, and really, while we've not seen a material shift from customers leaving the store-value program to alternate payment methods, the vast majority of the customers who use these alternative payment methods are new or reengaged members that we're tracking back into the program,” Culver said.
Starbucks boasted a very similar overall customer count in Q3 as it did pre-pandemic. Where the opportunity lies, executives said, is in driving frequency once guests come in. It isn’t so much about trial business. Starbucks ended the period at roughly 90 percent of pre-COVID transaction levels.
“I think that we're very optimistic in terms of No. 1, customers returning to our stores and our stores being ready with relevant innovation that resonates very strongly with our customers,” Culver said.
It’s here cold beverages are resonating and laying the runway, a fact that rings positive for Starbucks’ margins given they’re typically ticket friendly on the premium side of the menu. “You couple those products with the ability to customize and personalize to the customers' desires, we've got a wide range of beverage options for customers that are both hot as well as cold and we're seeing meaningful growth in the customization of our beverages and the modifiers that people are adding to their products, such as espresso shots, cold foam, alternate dairy, and really driving awareness of these personalized offerings and our customers are resonating with that,” Culver said.
Another angle to consider: Before COVID, consumers sourced about 73 percent of coffee servings from home and 27 percent from foodservice, according to NPD. The split between at-home and away-from-home coffee consumption became 81 percent from home and 19 percent from foodservice during the pandemic.
As expected, lockdowns disrupted traditional patterns. In the year ending May 2021, coffee servings ordered at commercial foodservice declined 7 percent from a year ago. For a pre-pandemic look, it decreased 11 percent on a two-year view. Consumers also cut down on visits to coffee houses and gourmet chains. Stops to these outlets fell 6 percent in the period compared to a year ago, and slid 8 percent from two years ago.
In regards to Johnson’s comment on why Starbucks is taking share and feels great moving forward, per NPD’s study, when purchasing coffee at foodservice outlets, consumers showed preference for specialty coffee beverages over regular coffee (chiefly, cold innovation in Starbucks’ case). Those orders overall represented 44 percent of business, while regular coffee accounted for 40 percent. Specialty coffee held 71 percent of servings ordered at coffee shops, and regular coffee numbered 29 percent of servings.
Operations, labor, innovation at the center
In Q3, Starbucks returned to pre-pandemic levels in terms of operating efficiencies, Culver said. The chain took the COVID four-wall pause to boost productivity across a few areas. Firstly, it upgraded its “play builder program,” which focuses on the smart deployment of labor.
One staggering and telling figure: roughly 70 percent of Starbucks’ current employees were hired in the last 18 months. “So we’re reinvesting now in customer service training for our partners,” Culver said, “as customers become more mobile and frequent in our stores.”
That 70 percent mark offers a peak into how critical training and systems have become in quick service, where the industry as a whole has rapidly added labor back in recent months after some five million hospitality employees exited during the heart of the pandemic. Before COVID, 11.1 million people worked at restaurants. Even with jobs flooding back, the industry remains down 10 percent, or about 1.1 million versus prior levels.
This labor arena placed added pressure on brands to not just locate employees, but to deploy hours effectively as demand outpaces supply.
Starbucks made equipment investments to improve efficiency, throughput, and consistency as well. New espresso machines are live at 70 percent of U.S. corporate venues, with a complete rollout expected by fiscal 2022. There’s also an upgraded warming oven that’s currently in 20 percent of the base, with plans to reach 35 percent by year’s end. And with the success of cold beverages, Starbucks developed a proprietary cold brew system through its Tryer Center innovation lab (opened in November 2019) that’s currently installed in 2,000 U.S. locations, and should be in 75 percent by 2021. While Starbucks didn’t divulge specific details on the program, Culver said it makes brewing more efficient and frees up employees.
Another “big thing” rolling out, he added, is automated inventory ordering, which Starbucks continues to test and recently expanded the pilot. It just hit 1,500 stores this past week.
The system removes inventory tasks from employees and allows them to focus on guest-facing activities. Starbucks expects to fully cover the corporate system for food and merchandise items by the end of the calendar year.
Lastly, Starbucks placed specific focus on drive-thru innovation and decreasing its out-the-window times over the past year-plus. It introduced new equipment and handheld order points to improve speed of service. There’s also fresh tech to make orders easier to manage through consolidation and hand-offs, and the company is in the process of renovating about 150 constrained drive-thru stores to “design a new engine,” with one change being the dedication of a POS system to the drive-thru store. “And then we're not stopping there. We're continuing to innovate around when is the next evolution of the drive-thru store for our customers,” Culver said. In January, Starbucks hinted a drive-thru only model was in the works.
Unsurprisingly, especially considering the drive-thru focus, Starbucks’ sales recovery has flashed strongest in rural and suburban areas. This has pushed larger orders and higher tickets into the picture. Starbucks reported record ticket in Q3 from an overall U.S. perspective.
However, customers are becoming more mobile again and returning to central business district restaurants and Starbucks’ urban core. The brand achieved a positive comp in that trade area for the first time since Q1 2020, it said.
As this continues, Starbucks expects transactions to increase and ticket to moderate. But as noted, the brand believes it will stay “slightly elevated” from pre-pandemic levels, EVP and CFO Rachel Ruggeri said. In addition to the cold beverage focus and growing channels of trade, Starbucks enjoyed record food attachment in Q3.
The brand’s growth of drive-thrus alone should carry positive implications for average check into the future thanks to beverage attachment. And the transformation will only drive restaurant margins higher.
Starbucks ended the period with 18,175 stores in the Americas (15,348 U.S.), down from 18,235 this time a year ago. Globally, the chain opened 352 net new units to get to 33,295 locations.
For the full year, Starbucks expects to open 800 restaurants in the Americans with zero net, which is a retraction from previous guidance of 850 openings and 50 net. It’s a plan “virtually offset by higher than normal closures, reflecting the continued progress of our accelerated trade area transformation initiative,” Ruggeri said.
Internationally, Starbucks projects 1,350 new locations and roughly 1,100 net.
Note: Charts courtesy of Placer.ai.