Within the next year and a half, Starbucks will look materially different. Drive thrus, Pickup stores, walk-up windows, and curbside-enabled locations. All thanks to a retail world that has shifted dramatically in light of COVID-19. It’s also a bet on convenience and a consumer that was already changing before the crisis hit.

Starbucks’ transformation, however, will be accompanied by a retraction. The company revealed in a securities filing Wednesday it will shutter up to 400 company-operated stores over the next 18 months in conjunction with the portfolio repositioning.

Starbucks temporarily paused new store development in its Americas segment at the onset of COVID-19. It’s since resumed. Building on the roughly 200 net new locations opened through Q2, Starbucks now expects to debut about 300 net units in fiscal 2020. That’s half of the company’s pre-coronavirus expectation of 600, and reflects Starbucks’ accelerated decision to blend store formats and grow new ones.

Starbucks could shutter an additional 200 Canada venues in the next two years, it said. The company typically closes about 100 company-operated stores annually in the Americas.

Starbucks added Wednesday that current-quarter operating income is on pace to drop by up to $2.2 billion, with sales declines continuing throughout 2020, even as locations come back on line. It projected an adjusted loss of about 55 to 70 cents per share for Q3, which ends in June, and expects U.S. same-store sales to fall as much as 45 percent, year-over-year. While Starbucks believes comps will trend upward in Q4, it’s still forecasting a full-year slide of 10–20 percent.

The company predicted it will lose between $3 billion to $3.2 billion in revenue this quarter, with an operating income decline between $2 billion and $2.2 billion. Starbucks reported operating income of $1.07 billion in Q3 2019.

Starbucks called this transformational phase “restore and build resilience.” Before the pandemic, about 80 percent its U.S. company transactions were on-the-go occasions. This dynamic led Starbucks to reexamine its domestic footprint “to determine how we might evolve our retail presence over time through targeted store renovations, relocations and new stores, a process that has been underway for two years,” it said.

The end vision is that each large city in the U.S. will ultimately have a mix of traditional Starbucks cafes and Starbucks Pickup locations. The first version of the latter, tailored for consumers who order ahead and pay through Starbucks’ mobile app for pick-up, or those who want to order via Uber Eats, debuted November 2019 in New York City’s Penn Plaza. The second is planned for 42nd and Park near Grand Central Terminal in the near future.

Starbucks envisions having Pickup models within walking distance of traditional cafes, and is targeting New York City, Chicago, Seattle, and San Francisco out of the gate.

“Starbucks Pickup stores will provide more points of presence to better serve ‘on-the-go’ customers while reducing crowding in our cafés, thereby improving the sit-and-stay’ experience for ‘third place’ occasions,” the company said.

And all of it aligns with rapidly evolving customer preferences jolted by COVID-19, including higher levels of mobile ordering, more contactless pick-up experiences, and reduced in-store congestion.

Essentially, Starbucks knew crowded, shoulder-to-shoulder cafes might not satisfy a future, socially distant guest.

The chain has actually been operating two Pickup stores in the last seven months, with one in Toronto’s Commerce Court. Originally, it planned to execute the Pickup strategy over a three- to five-year timeframe. But the pandemic hastened the need for rollout, Starbucks said. Thus, it’s now an 18-month window.

Renovations and relocations will be part of the process, in addition to closures. “To inform these decisions, we are evaluating trade-area shifts, lease expirations and changes in customer traffic patterns while also considering opportunities to enhance the customer experience and capitalize on future growth potential,” the company noted.

Some renovations will include the addition of a separate counter for mobile orders at high-volume stores. New designs will also enable employees to focus on the customer and craft beverages, Starbucks said.

Starbucks added customers will soon be able to use curbside pickup from their car. Guest access the app to order and pay ahead and check-in at designated parking spots once they arrive.

The experience is another initiative sped by COVID-19’s arrival. Starbucks said it will increase the number of stores that offer curbside pickup over the coming months, as well as pilot a select number of locations to exclusively offer the format.

On the drive-thru side, Starbucks will continue to develop outside of densely populated cities and in new markets, it said. New experiences could include double-lane drive thru, or drive thru plus curbside pickup, all of which would leverage the company’s digital ordering and payment.

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Reopenings, and more

Starbucks began reopening U.S. corporate stores in the second week of May, increasing from about 50 percent at April’s end to 91 percent as June arrived.

While these stores generally featured reduced hours and many were limited to on-the-go business, U.S. same-store sales improved (year-over-year) from negative 63 percent in April to negative 43 percent in May.

Comps fell roughly 32 percent in the final week of May, representing the sixth consecutive period of sequential improvement from a low of negative 65 percent in mid-April.

Starbucks rolled out entryway pick-up in May.

In-store transactions, which comprised about 40 percent of total sales mix before COVID-19, increased slightly following the gradual May reopening of cafes, the company said. In the last fiscal week of the month, more than 90 percent of domestic sales flowed through the drive-thru window and mobile order-and-pay. That figure was 97 percent in April’s final week and 60 percent or so pre-crisis.

Starbucks said its product mix held relatively steady since the start of the crisis. Average ticket, though, continues to trend above normal levels with more beverages and food items per transaction. The company expects that to normalize in time as consumers get back to routines and solo occasions rise.

Starbucks deployed loyalty offers and digital campaigns in May to reengage customers and drive business, which led to “a significant increase” in average weekly downloads and activations of Starbucks’ mobile app since the campaign ignited in early- to mid-May. Starbucks Rewards contribution to U.S. company-operated tender in the last week of May was 48 percent, up from 44 percent in Q2.

Same-store sales for corporate units open the last week of May dropped 28 percent versus the prior year. As of Wednesday, 95 percent of Starbucks’ domestic company venues were running at various levels of modified operations. The 5 percent that remain closed are primarily located in the New York City metro area.

China update

Starbucks’ China recovery stretches back to late February. Comps improved to negative 21 percent in May, better than the 32 percent fall in April. They were down 14 percent in the final week of May compared to prior year.

Today, 99 percent of Starbucks’ China restaurant are open, of which about 90 percent have returned to pre-pandemic operating hours. More than 70 percent of the open stores have full café seating available.

As that’s happened, sales mix from mobile orders trended down correspondingly, from a high of 80 percent at the end of February to about 22 percent before June.

Starbucks has begun growing in China, too. The chain opened 57 net new stores across April and May, including eight Starbucks Now models that focus on mobile ordering for pickup and delivery. Starbucks has more than 4,400 China units currently, with the addition of 281 new restaurants through the end of May in fiscal 2020. It’s on track to add at least 500 net new stores this fiscal year.

Fast Food, Story, Starbucks