Starbucks is only days away from igniting a reopening program it believes will bring 90 percent of company-run stores back on line—in some form—by early June. But the COVID-19 impact has been massive so far, and could show far worse in Q3 than it did in Tuesday afternoon’s announced Q2, where same-store sales declined 3 percent in the U.S. (period ending March 29). The figure was Starbucks’ first negative domestic comp since 2009.

Today, roughly 50 percent of the chain’s corporate footprint and 46 percent of licensed restaurants are closed. There are 9,000 or so company stores in the U.S. and 6,000 licensed.

CFO Patrick Grismer said COVID-19’s estimated impact on Starbucks’ revenue to date, due to temporary closures, restricted sales channels, shortened operating hours, and “severely reduced customer traffic,” has been about $915 million. That equates to 80 percent of flow-through on dropped revenue, which is materially higher than the 50 percent variable flow-through rate the company typically observes—something that reflects employee and long-term investments intended to weather the crisis.

COVID-19’s impact on Starbucks’ Americas segment is about $450 million, Grismer said.

As the company mentioned during an intra-quarter review, it was off to a stellar start before the pandemic struck. Through the first 10 weeks of Q2, the U.S. business was delivering 8 percent same-store sales growth on transaction gains of 4 percent. Two-year comps were tracking toward 12 percent—Starbucks highest number in more than three years. Revenue growth was on pace to reach its best level in more than four years.


The pivot to off-premises begins

A two-week dining-room shutdown goes into effect for Starbucks

Closures extend into at least May

Starbucks to provide direct relief grants to employees

Starbucks provides sales update, says it began preparations in February

A look at why May makes sense for Starbucks to reopen


In mid-March, the chain decided to close more than half of its corporate fleet and limit service to drive thru and delivery at restaurants still open. Fifty-eight percent of Starbucks’ company restaurants feature drive thrus, and 76 percent of those kept running. Additionally, 55 percent of licensed stores continued to operate, the vast majority in grocery stores.

Naturally, sales plunged in response—to the tune of negative 65–75 percent. And, so far in April, U.S. comps are down 25 percent, which means the company’s drive-thru is covering three-quarters of its typical revenue in recent weeks.

The dramatic March turn was enough to shift Starbucks’ positive period into a 3 percent loss and drop total revenues 5 percent to under $6 billion. Net earnings fell by half to $328.4 million (28 cents per share).

China, where the pandemic stretched for most of the quarter, resulted in revenue loss of $325 million. However, CEO Kevin Johnson said, close to 100 percent of China locations are now open, albeit many with limited seating and reduced hours. To illustrate some perspective, China comps hit weekly lows of negative 90 percent in mid-February. They were down 35 percent in April.

While Starbucks has leaned on its China experience throughout its response, the company’s U.S. recovery is likely to take on a very different feel. Mainly, China appreciates a far more prominent dine-in business historically, as high as 80 percent pre-COVID-19. It’s essentially a flip.

In the U.S., more than 80 percent of Starbucks’ customer occasions before the pandemic were on-the-go, with the majority of these orders coming via drive thru or by using the Starbucks app to mobile order for pickup or delivery.

In Q2, Starbucks 90-day active rewards base increased to 19.4 million, up 15 percent year-over-year. During COVID-19, they’ve remained roughly 44 percent of the brand’s business. Nearly 70 percent are frequent users. They’re still showing up, just less frequently. The morning has witnessed the biggest disruption. “We believe that these highly resilient customers will come back to us,” COO Roz Brewer said. Starbucks has also seen its ticket lift (up 5 percent in Q2) from people ordering more at the drive thru, either for their families or for groups of people, like first responders.

Overall, these digital trends give the company confidence, Johnson said, that its reopening plan will infuse significant order volume back into the business. “We are well positioned to leverage our digital assets and new operating formats, like contactless pickup and curbside, to expand service to customers,” he said.

Brewer said Starbucks deployed a decision modeling tool to examine customer frequency at drive-thru stores. It’s also looking at local government guidance, infection curves by county, customer sentiment, and employee sentiment as it begins to reopen.

How this will unfurl, at least early on, is through amplified delivery and drive-thru business, mobile order and pay channels, and a new concept—an entryway handoff. Only 30 or so stores will be café open and order. And in those, Brewer said, there won’t be any seating.

In the summer, as shelter-in place mandates lift, Starbucks expects to reopen more cafés. Also, curbside access is being explored in locations where parking in available.

“Pre-COVID, 80 percent of our customer occasions in stores in the U.S. were for to-go, take-away,” Johnson said. “And so, by augmenting the in-store experience with mobile ordering and contactless pickup, we can service significant volume of customers without having the cafe seating area actually opened. I think that’s an important point.”

He anticipates stores near offices will struggle to regain sales, as will mall locations, which account for fewer than 8 percent of Starbucks’ total unit count.

Starbucks is preparing to unveil an aggressive marketing plan next week, too. During the lockdown, the brand delayed its spring beverage introduction and “Double-Star Days” promotion in addition to Happy Hour. Brewer said those will come back “with a lot more energy than in the past.”

Starbucks isn’t planning to spend more than its 2020 allotment, just condense it and center the majority of messaging around app usage and trying to encourage customers to order ahead. “We’ll have digital media. We’ll have TV. We’ll have paid social, owned, earned media. That all begins early next week. We’re also creating new email contacts to each one of our members,” Brewer said.

That latter point is a 30-million-person pool. The No. 1 communication goal? Let people know Starbucks is open again, she said.

“The acceleration of these new models that we opened, we’re going to talk about them pretty broadly and loudly, and we’ll know more over the next 30 days,” Brewer said.

Even so, Starbucks has its share of challenges ahead. The company hinted the U.S. recovery could stretch into fiscal 2021, which begins in October. Like many chains, it elected to forgo guidance given the sales volatility.

Grismer said Starbucks is at peak cash burn rates currently, going through about $125 million per week after CapEx, but before dividends. This number should decline as company-run units reopen in May and Starbucks normalizes employee pay practices in the coming weeks.

BTIG analyst Peter Saleh estimated Wednesday in a note, based on the above figure, Starbucks has about 18 weeks of liquidity, with available borrowings (commercialpaper/revolvers/term loan) providing another 19 weeks. He added the company likely needs to regain 75 percent of historical sales volumes (comps down 25 percent) to achieve a cash neutral position.

“While we believe the issues related to coronavirus are transitory, we are not yet convinced that consumers will fully return to their prior purchasing habits when lockdowns are lifted in the U.S. While we initially expected a more aggressive sales recovery with comps turning positive in 4QF20, we now believe comps won’t turn the corner until 1QF21 at the earliest, dragging out the earnings disruption further,” he said.

Starbucks previously said one of the key motivations for its May reopening plan was to get employees back into typical schedules. It extended “Service Pay,” which adds $3 per hour for workers coming in during COVID-19, through the end of May. It did the same for “Catastrophe Pay,” designed to cover diagnosed employees or people exposed to coronavirus.

Once stores reopen, Starbucks said, it will no longer be able to offer Catastrophe Pay to employees who are unwilling to work after May 3. These workers will have the option to use their remaining vacation or sick leave, apply for unpaid leave, or evaluate eligibility for assistance based on the CARES Act, or any state mandates.

The company expects to phase out Catastrophe Pay and Service Pay in June as it returns to normal operations, pay, and benefits.

This monitor-and-adapt phase in the U.S. is the inflection point for reopening stores and begins a recovery process that requires ongoing monitoring, community by community, to rapidly adapt and drive the recovery,” Johnson said.

Finance, Story, Starbucks