As Starbucks’ “Reinvention Plan” begins to web across the fleet, touching every lever from automation to worker compensation to store design, there’s little question COVID-19 changed guest behavior and spending patterns at the second-highest earning restaurant chain in America. The brand’s U.S. same-store sales increased 9 percent in Q3 as average ticket bumped 8 percent. Average weekly sales, executives said, were at all-time highs in corporate stores—30 percent above pre-COVID-19 levels. Q3 produced five of the top 10 grossing sales days in brand history, including a $410 million week.

Yet traffic inched just 1 percent year-over-year and remains below 2019 marks. That reality is less a siren than a reflection of how the business adjusted, COO and North America group president John Culver said. “New routines are being established,” he noted.

Drive-thru, mobile order and pay, and delivery accounted for 72 percent of Starbucks’ Q3 domestic revenues, a number that rose 9 percent systemwide to a quarterly record of $8.2 billion.

Unique customer visits lifted 6 percent versus last year and 9 percent, quarter-over-quarter.

Generally, Starbucks sees single transactions in those channels with a much higher ticket, Culver said. But the second factor at work is something that could paint ample whitespace in the coming months as mobility resets and routines return.

The morning daypart now represents roughly 51 percent of Starbucks’ volume, with 65 percent of it occurring before noon, above pre-virus results. BTIG analyst Peter Saleh noted this suggests the transaction shortfall, presently, is isolated to the afternoon daypart.

A.M. business continues to grow and is headed upward, Culver said, alongside Starbucks’ urban core opening back up. Q3 marked the fifth consecutive period of positive comps growth. “And we’re optimistic,” he said, “that those morning routines are going to start coming back, which will drive higher transactions and probably a little bit lower ticket at that time because those are single transactions.”

READ MORE: Inside Starbucks’ Billion-Dollar Plan to Catch Up After COVID

However, what’s fueling this potential isn’t a daypart mix or asset debate necessarily; it’s the fact Starbucks’ customers have changed what they’re drinking. Beverage growth rose 9 percent in Q3. Cold, though, was the undisrupted heavy-lifter, accounting for 75 percent of the company’s beverage sales.

Cold beverages and the doors they’re cracking open for Starbucks surfaced early and often during Tuesday afternoon’s quarterly recap with investors. Espresso, brewed coffee, and refreshers all turned in double-digit growth in Q3. Meanwhile, modifiers, which flash in cold innovation, grew more than $60 million and “contributed significantly” to Starbucks’ attach rate, Culver said.

Interim CEO and founder Howard Schultz spotlighted cold and its personalization strength, especially as it pertains to Gen Z. “Customers are increasingly customizing their cold beverages by adding modifiers that enable the creation of a virtually unlimited range of taste, flavor, and color profiles, and then sharing their unique cold beverage creations with the world through social media,” he said.

In one example, Iced Shaken Espresso—introduced to Starbucks’ platform last year—is resonating “so wildly,” Schultz said, it’s already become the fastest-growing product category in the company’s U.S. corporate restaurants—up 50 percent, year-over-year, and more than doubling year-to-date. It’s created new customer occasions in the midday and afternoon dayparts. It’s also among the best-selling iced options in China.

“The premium customized cold coffee opportunity ahead for Starbucks all around the world is simply enormous,” Schultz said.

This is hardly a Starbucks turn. According to The NPD Group, servings of cold brew coffee ordered at quick-serves climbed 27 percent in the 12 months ending April 2022, year-over-year. That amounts to 373 million servings. Frozen/slushy coffee upped 3 percent in the same window to 726 million. Customers also ordered 2.8 billion servings of iced coffee in the calendar up to April, which was 11 percent higher than the prior year.

Cold drinks (including tea) mix about 70 percent of sales at The Coffee Bean & Tea Leaf; 58 percent of Bad Ass Coffee’s business; and 70–80 percent at publicly traded Dutch Bros.

Schultz said when Starbucks talks to peers about what they’re experiencing (he didn’t signify who that was exactly), they’re “shocked, stunned that Starbucks continues to create the kind of velocity without any indication whatsoever of customers turning away from Starbucks or, most specifically, trading down.” One reason owning to cold beverages.

In addition to being a Gen Z friendly product, he said, cold presents a “significant competitive advantage” in Starbucks’ ability to customize drinks guests want with speed.

A metric that can’t be forgotten alongside, either, is Starbucks’ active rewards membership in Q3 reached 27.4 million members, up 3.2 million (13 percent) year-over-year and 3 percent sequentially. The cohort, which dovetails into customization, drove a record 53 percent of U.S. company-operated revenue.

It’s a critical element as inflation rears. VP and CFO Rachel Ruggeri said Starbucks’ rewards customers increased greater relative to non-rewards users in Q3, although both hiked. What the brand observed, however, was all-time high member spend. “And that’s driven by a combination of things,” she said. “More strategic pricing, more premium beverages. More personalization as well as greater attach. … We think that has a benefit for us over the longer term, particularly as we continue to personalize the experience more uniquely so that we can have a deeper relationship and engagement with the customer, which will allow us to have the ability to continue to provide value in ways that are more personalized to them individually as a customer.”

In other terms, Starbucks will deliver value through engagement rather than price as a recession potentially looms.

Schultz referred to the brand’s standing as “affordable luxury,” and said there’s been no material pushback from prices rising about 5 percent over the last 12 months.

“I think the other thing is, we’ve never had as many, if you look at the national footprint of Starbucks, the multiple footprints in terms of the different types of formats that Starbucks has provides us with an ability to create convenience that we’ve never had before, specifically in the drive-thru,” he said. “And so, if you take that and then you ladder up the Starbucks Rewards program, and that probably is where we would go to provide discounts and value and a value proposition on an ongoing basis with our existing Rewards customers if, in fact, there was a significant downturn in the economy.”

Customers add modifiers to cold drinks at a greater rate than hot, and it’s an easier process through the app than anywhere else. These transactions raise ticket and produce personal branding for Gen Z to broadcast via social. “We’re in the early stages of the cold beverage platform in terms of what we’re going to bring in terms of innovation and the modifiers and the customization gives us a significant competitive advantage,” Schultz said. “You layer all of that on what I said earlier, and that is the morning daypart coming back with velocity, and I think all bets are off in terms of the operating leverage that we’re going to get in here.”

On the morning claim, Schultz was citing a comment made earlier in the call that it would “come roaring back.” Initially crippled by COVID and its push toward remote work, Schultz said it’s now not a question of if, but when morning business ramps up. “And you couple our afternoon business now on cold with a morning business in terms of people coming back to work, the acceleration of the business and the operating leverage that we always have had is just going to be that apparent,” he said.

Starbucks is working to streamline its cold strength, which has caused complexity and slow-downs in the past due to those same points of differentiation Schultz spotlighted. The modifiers and customization are powerful carrots for younger guests to chase, yet they can also slog throughput.

Starbucks’ Mastrena 2 machines are currently in 86 percent of stores, and will roll fully by the end of the fiscal year. Warming oven upgrades are 60 percent deployed and should be 75 percent complete by 2023.

On the cold front specifically, Starbucks developed an in-house proprietary cold brew system that’s spread through the U.S.. The brand is improving cold beverage labelers (in 38 percent of units, soon to be 80 percent) and the company sees opportunity with handheld order points. Handheld tablets, presently in about 50 percent of locations, with 65 percent on deck for 2022, drive speed of service and higher throughput at the drive-thru.

In the back of the house, Culver highlighted the runway for automated ordering, which is fully deployed across food and merchandise in the U.S. Starbucks is moving toward getting that up and running as it relates to beverage and its remaining in-store products.

Also, Starbucks witnessed a higher attach on food in the quarter. The company drove 19 percent and all dayparts witnessed double-digit lift.

The broader picture and future of Starbucks

Schultz’ return as CEO is going on four months now. He’s been candid regarding the brand’s struggles from the outset, namely highlighting employee relations and Starbucks’ lagging base. Simply, it’s been a steep climb to meet soaring demand with the assets and staffing in place.

Schultz said some of these “issues and challenges” were COVID related, some were a function of Starbucks not focusing long-term, and, “unfortunately, many were self-induced.”

It’s what led to the chain’s unveiling of a “Reinvention Plan” in July. Starbucks promised more details at its September investor day in Seattle, but did pull the curtain back a bit on Tuesday.

The brand has held more than 100 “co-creation” sessions to piece together a blueprint. There are more than 30 cross-functional teams focused exclusively on executing the strategy in the U.S., which will take shape over the quarters ahead.

Two-hundred executives gathered in Seattle in July to kick off the agenda, Schultz said. Chief strategy officer Frank Britt, who previously served as CEO of workforce development firm Penn Foster and joined Starbucks in April, has been one of the key architects. There are five major strategy shifts “to pivot the U.S. business in a new direction,” he said.

The first, for the U.S. company-owned retail business, involves integrating culture and values and creating a greater focus “as a single company with agility and empowered organization.”

Next, the in-store employee experience. This includes a wage lift that just went into effect that brings the average rate up to $17 per hour ($15 floor). It’s not a move available at units that have unionized. The brand expects to spend about $1 billion this year on improvements, with much of it tied to wages.

Starbucks also doubled training investments to about 40 hours and reintroduced its Black Apron and Coffee Masters credential. Additionally, Starbucks implemented a new digital employee engagement platform and expects to roll universal tipping and a badging program by year-end 2022.

Culver said Starbucks is noticing green shoots in retention and hired a record number of employees this fiscal year thus far. As it’s reduced open positions, the number of operating hours have gone up.

“What you should expect from us in the months and quarters ahead is a greater opportunity to personalize the experience for Green Aprons to meet them where they are,” Britt added. “And that could include a whole variety of things from new services, new types of flexibility, new types of credentialing models, new types of training notions, and just moving us away from a one-size-fits-all approach to meet people where they are in their lives, the same way we’ve done it so well with our customers.”

The other pillars include store reimagination—a plan that will feature innovations such as new bar configurations, patented coffee technology, novel store prototypes, and key equipment acceleration to drive efficiencies, like Clover Vertica, an on-demand brewer that combines vacuum-press technology with control over the temperature of the water and length of brew; customer engagement efforts around customer-facing products and platforms and new models of “effortless” digital ordering; and lastly, “creating new ways to continue to evolve us from a listening company to a co-creation company,” Britt said. More details are coming, but for now the high-level idea is shared innovation and shared accountability.

“In the end, our goal is to become a wholly new kind of company that again sets a new higher standard for our industry and our business overall,” he said

Beverage, Fast Food, Finance, Story, Starbucks