Starbucks Isn’t Waiting Around for COVID to Disappear

    The chain has a couple of operational game-changers in the works.

    Fast Food | September 2020 | Danny Klein
    Starbucks employee with a mask serves a customer.
    Starbucks
    Starbucks' recovery might be six months away, but it's not sitting idle.

    The COVID-19 haymaker hit Starbucks with more intensity than most. Its routine-reliant traffic and wide urban footprint, coupled with a preemptive decision to shut down cafés, resulted in roughly $3.1 billion lost—relative to pre-pandemic expectations—by July. And while Starbucks improved U.S. same-store sales from negative 40 percent in Q3 to negative 11 percent in August, the java chain believes it’s starting down another six months of recovery.

    But Starbucks isn’t counting the days, CFO Pat Grismer said. Speaking at the J.P. Morgan Gaming, Lodging, Restaurant & Leisure Forum this week, he admitted there will be a cohort of locations that will, for some time, face pressure until the spending environment normalizes. “We don’t know when that will be,” Grismer said. “We’re not waiting for that.”

    Roughly 60 percent of Starbucks’ domestic units boast drive thrus. Of the remaining 40 percent, about a third are in central business districts. Although not all of those are closed today, a fair percentage are, Grismer said. And they represent the 3 percent of Starbucks’ total company-owned system that’s failed to reopen.

    As you might expect, drive-thru locations are actually comping positively for Starbucks already. Urban cafes are not.

    Additionally, more than half of Starbucks’ U.S. venues now have at least limited seating. On a two-year comp stack, which helps balance variability, the brand progressed from negative 11 percent in June to negative 8 percent in July to negative 5 percent in August.

    Yet given the real estate fracture and how consumer behavior is changing around morning business, Starbucks’ recovery isn’t as straightforward as “get the restaurants open again,” as it is for some counter-service peers.

    Rather, it’s a progression of opening up ordering and sales channels from drive thru to entry-way pickup to in-store ordering and seating. Or as Grismer described it: “rapidly innovating in order to capture new demand, new occasions that we didn't have before that tied to how customers are currently leading their lives.”

    This is why Starbucks moved quickly to introduce fresh channels of distribution at existing stores, primarily in suburbs. Grismer says customers started to visit units closer to home (not on their way to work), later in the day, and are spending more when they do show up. “As customers have modified their behavior,” he says, “we’ve adapted to accommodate them.”

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    COVID-19 Has Cost Starbucks $915 Million So Far

    Starbucks was Preparing for the Coronavirus in February

    Also to note, some of the city locations will get swept into the 400 store closures Starbucks previously guided for a 12–18-month block—a process Grismer said is underway. In that same window, though, Starbucks expects to bring more than 50 “Starbucks Pickup” stores to market in urban trade areas, preferably within a three- to five-minute walk from traditional cafés. “Several hundred” are slated for the next three to five years.

    So how is Starbucks opening these channels ? There are really three key initiatives at work. First is the deployment of handheld point-of-sale devices at the drive thru. Second is the rollout of curbside pickup where the company enjoys convenient parking. Lastly—something that launched just this week—Starbucks introduced “Stars for Everyone,” an update to its rewards platform that makes it easier to earn “Stars,” but, perhaps more notably, allows users to scan their app and pay with cash, credit/debit cards, or select mobile wallets and earn rewards toward free items. Members can save the payment methods directly in the Starbucks app to earn Stars.

    This has long been one of the biggest friction points and complaints among the chain’s core base, which recovered to 18.7 million 90-day active members in August after dropping to 16.4 million at the end of Q3. It was 19.4 million pre-pandemic.

    Previously, customers had to load funds onto their account. That hurdle is now gone, and guests also collect rewards faster. If somebody saves a card to their account to pay (they can also link up PayPal) they earn a star per dollar. It’s a one-step transaction, as the graphic below shows.

    Starbucks

    But returning to the drive-thru handheld POS initiative, Grismer said Starbucks is currently piloting and refining the model “so that we can rapidly deploy this.” The company first unveiled the change in July—a “bust the line” program that mirrors Chick-fil-A and In-N-Out, where order takers roam the line to get orders into the queue quicker and boost throughput and satisfaction.

    “Absolutely we expect this to be a game changer for us in drive thru,” Grismer said.

    When Starbucks first crashed the java scene, it was simply not designed for the drive thru. It’s a highly customized, made-to-order offering that backs up quickly with bulk orders.

    It originally added drive thru to tap into a convenience movement, figuring (correctly) guests would trade long waits for the luxury of staying in their car. However, the equation isn’t so plain anymore. If for no other reason, there’s just a lot more people relying on the drive thru during COVID times. Bulking and line rejection are far more worrisome to Starbucks today than they were before.

    Grismer said demand for drive thrus spiked significantly in suburbs thanks to people working from home. They’re taking a break in the mid-morning, and maybe in the afternoon again. They’ve brought the family along.

    In turn, order sizes are up and so is ticket growth. Just in Q3, average ticket soared 27 percent in the U.S. as traffic fell 53 percent overall.

    “We do expect that will moderate over time, but that does put pressure on the drive-thru experience,” Grismer said. “And so, we see handheld POS as an opportunity to collect orders sooner in the lines, so that we can start the production of those handcrafted beverages and be prepared to fulfill those orders more quickly than we are today.”

    The stakes are clear: Better drive-thru times equal fewer drive-aways. “So we’re better able to capture the demand that is out there,” Grismer added. “The last thing we want to have happen is someone drive up to Starbucks, see a long line, and continue on their way.”

    Before COVID-19, customers were, naturally, more likely to park and get out if they didn’t want to wait. But now, personal safety comes into play. Why guests pick the drive thru isn’t just about convenience.

    Which brings Starbucks to another fast-moving update—curbside. In addition to the convenience draw here, curbside provides customers another COVID-ready option. They place their order via mobile device, pull into a designated parking spot, and wait for an employee to bring out the order.

    “That is working beautifully,” Grismer said. “That’s taking pressure off the drive thru, and it’s accommodating more of that customer demand.” From a store-level perspective, where Starbucks features drive thrus also happens to be where curbside fits. They’ll work in tandem more than replace each other.

    Currently, Starbucks’ curbside system is live in about 800 restaurants. Within the next couple of months, Grismer expects the number to hit 2,000. He called curbside “an important enabler” in Starbucks’ climb back.

    The rewards change really can’t be understated, either. Starbucks Rewards transactions accounted for 44 percent of U.S. tender in Q2. “We do expect, as we've observed with Starbucks Rewards previously, that when customers make the move and we're able to build that relationship with them and bring to bear our personalized marketing, their frequency increases and their average spend increases,” Grismer says.

    Starbucks’ loyalty strength allows it to spend marketing dollars more efficiently than competitors. Its marketing spend is about 1 percent, whereas other category chains are generally in the mid-single digits. “And we see the opportunity to continue to realize efficiencies, not only through our loyalty program-oriented marketing, which includes the personalized marketing that we do as we build these relationships with our customers, but also through social media and traditional media,” he said.

    Grismer also briefly touched on Starbucks’ decision to launch its pumpkin-centric fall lineup August 25—the earliest recorded release date in the company’s history of the PSL, which dates back 17 years. Here’s a look at how traffic trended in response.

    “I think it just goes to show you that in the current environment, customers are looking for a taste of something familiar, something that helps them feel that they've returned to a sense of normalcy,” he said. “And that's what Starbucks as a brand represents for many customers, and that's what a product like Pumpkin Spice represents for so many of our customers as well.”