CEO Laxman Narasimhan on Tuesday said Starbucks was in the process of “recovering our brand from its perceptions.” Holistically, to say this represents a multi-tasked effort for the java giant wouldn’t be doing it justice. It darts from technology to real estate to product innovation, and the reality of navigating an increasingly challenged consumer climate that appears to be hitting coffee—a commodity guests can make at home—harder than most.
But the conversation for Starbucks during one of its rockiest stretches on record starts with traffic.
The brand’s stateside transactions plunged 7 percent in Q2 as same-store sales declined 3 percent. It marked the worst performance outside of the pandemic or Great Recession and a sharp departure from post-COVID trends—traffic figures were healthy as recently as October. That red line continued in Q3, the three-month period that ended June 30 and was announced Tuesday, with Starbucks’ U.S. same-store sales falling 2 percent, comprised of a 6 percent traffic slide and 4 percent growth in average ticket (the same number as Q2).
Mostly, Starbucks’ Q3 U.S. traffic decline owed to younger, non-rewards customers in the afternoon. Non-rewards customers accounted for 40 percent of Starbucks’ revenue, which implied a near double-digit drop in this base. It also appeared, according to analyst Peter Saleh of BTIG, the weakness was related to hot beverages and food. Cold as a category grew 1 percent to 76 percent of Starbucks’ overall beverage mix.
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So, broadly speaking, what those results suggested is non-rewards customers were opting more often to make their own coffee as the gap between food-away-from-home versus at-home widens. BTIG believes it’s currently about 300 basis points throughout foodservice, and “likely a lot higher in the coffee category.”
Narasimhan was asked where he figured these customers were going and why the decline was so steep. “I think we are operating in a challenging consumer environment,” he said. “You see the impact of that in away-from-home consumption. If you look at our business at-home for grocery stores with our brands, you’re seeing volume increase; you’re seeing share increase in a category that’s in decline. But we’re seeing volume increase at home.”
And that brings Starbucks to the ongoing, wide-ranging efforts to balance, as Narasimhan put it, “what we’re focused on is what is it that we can do to control what we have.”
Last quarter, Starbucks outlined a three-part action plan to fix recent struggles. It breaks down as meeting and unlocking capacity for new demand through in-store operations; attracting guests and driving traffic through products and relevant marketing; and reaching fresh customers by demonstrating value so diners “believe that Starbucks experience is worth it every time.”
The opening point—to unlock capacity for demand—is a topic that’s stirred at Starbucks for years and well before 2024’s downturn. In particular, the brand out of COVID found it wasn’t fully equipped to digitally meet the flood of multi-channel orders suddenly flowing to stores, whether at the drive-thru, order-ahead, or in-restaurant.
Narasimhan said, while early, the plan is seeing green shoots. Near term, Starbucks took sight at improving operational execution across its nearly 10,000 U.S. corporate stores. Things like improvements in employee scheduling and turnover, reducing critical restaurant issues, and inventory management. Narasimhan said units in the top two operational performance quartiles reached a new high in Q3—a 28 percent upward shift from Q2. There’s also been a corporate fleet-wide multi-second, year-over-year, improvement in out-of-the-window times, a nearly 50 percent reduction in calls received via customer contact center for “my order took too long,” and mobile order and pay and delivery uptime rates of 99 percent.
Starbucks in Q3 introduced Phase 1 of its “Siren Craft” systems. That included process and employee-driven improvements to domestic operations, such as a new Peak Time Play Caller position, where an employee roams the restaurant, helping where needed, strategic investments in employee hours, training, new routines, enhancements to tech, and an evolved beverage build process. For instance, employee feedback led a change in Starbucks’ beverage sequencing, or where milk gets steamed before espresso shots are pulled. Through tests, workers realized they could save time by reversing the process and pulling espresso before steaming milk. Starbucks also unveiled a new Digital Production Manager tool that enables employees to anticipate bottlenecks.
Deployment across 1,200 locations, Narasimhan said, demonstrated a “material incremental improvement across key performance, throughput, efficiency, and reliability metrics.”
In turn, Starbucks decided to fully deploy Siren Craft improvements through its entire U.S. company portfolio this week. Later in the quarter, it will begin unfolding a refit to espresso machines as well (more than 6,000 stores to start Q4). That, Narasimhan said, should improve espresso throughput by up to 15 percent without compromising quality. “And with a minor software change in our store production systems, we have a similar ability to improve food throughput,” he added.
The larger picture, however, is a Starbucks world where the “Craft” side of Siren gets paired with the equipment upgrades, which were first announced in September 2022. Narasimhan said the combo will be a “forced multiplier” the company expects to drive a true step-change improvement.
Assessments to date show the capability for Starbucks to reduce wait times by 10 to 20 seconds. While that might not sound massive, it would amount to a potential comp improvement of 1–1.5 percent for a system of this scale.
As a refresher, the Siren kitchen layout and equipment package does everything from cut the need for workers to open refrigerators while making cold drinks to features like a custom ice dispenser, faster blenders, and a milk-dispensing system. Central is the Clover Vertical system, a machine that can serve a cup of coffee on demand in less than 30 seconds. It’s topped by six hoppers and doesn’t require paper filters. Otherwise, employees have to grind coffee beans every 30 minutes, batch it in paper filters, and brew. Narasimhan said that should in all stores by the end of fiscal 2025.
Additionally, thanks to Starbucks’ evolving Deep Brew analytics platform, Narasimhan said the chain identified customer experience outlier stores—about 10 percent of the network—where it can develop targeted plans to address and improve them, including accelerated Siren system deployment.
Front-facing technology has been a work in progress as well. Narasimhan said Starbucks improved wait time algorithms on its app to better order-ready accuracy by nearly 50 percentage points. Combined with in-app offers, Starbucks reported 10 percent year-over-year growth in mobile order and pay revenue—a 7 percent year-over-year increase in transactions.
As these in-store updates progress, Starbucks appears poised to become the country’s fastest-growing restaurant chain for the third consecutive calendar (it topped the U.S. field by adding 429 and 473 net locations in 2022 and 2023, respectively).
Narasimhan said Starbucks will quicken the pace of new-store builds and renovations with 580 net openings and north of 800 renovations planned for North America this year. Increasingly, these new-store builds and renovations will include Siren system equipment. Overall and in line with prior guidance, Starbucks is on track to deploy the equipment to less than 10 percent of company-owned units and roughly 40 percent by the end of 2026.
There are two other developments at hand from a growth perspective: One, Starbucks said Tuesday it wants to target expansion efforts to “Tier 2 and Tier 3” cities where it sees population growth and forecasts underserved demand and high incrementality.
CFO Rachel Ruggeri provided an example. Even with more than 16,700 total locations, Starbucks sees whitespace, especially as people move to suburban and rural areas. For Japan, Missouri, in one Tier-3 market highlight, a drive-thru boasts a Year 1 ROI in excess of 65 percent for Starbucks, with cash margins approaching 30 percent and a payback period of less than two years. Those opening calendar average-unit volumes, she added, hit about $2 million, “with opportunity ahead as we built out the trade area.
Starbucks also recently agreed to terms with Gopuff to expand an ongoing pilot and open 100 delivery-only kitchens across the U.S. Narasimhan said Starbucks expects to bump the rollout of digital storyboards with target deployment across most domestic restaurants in the next two years, 12 months earlier than originally expected.
Restaurants around the country are undergoing café improvements. Narasimhan said Starbucks is working on ways to feature new and expanded seating options.
Thanks to “precision partner-centric staffing and scheduling efforts,” Starbucks ended Q3 with a new post-pandemic low employee turnover rate, the best shift completion rate in two calendars, and a 13 percent improvement in average hours per employee—now the highest on record.
Getting back to traffic
Naturally, if Starbucks is facing softness with 40 percent of customers who aren’t rewards members, initiatives to engage loyalty users will climb in importance. It fits into Starbucks’ broader perception battle of how value is defined.
As guests on social media have attested to recently, the brand ramped up some of its promotional activity. But that’s been a balancing act. In Q3, Narasimhan said only 14 percent of transactions at Starbucks were driven by offers compared to the competitor average of 29 percent. Of offer-driven transactions, 10 percent were star-based deals targeted to Starbucks Rewards users. Just 4 percent were pushed by price-based offers. “Our best offers are in the app,” Narasimhan said.
Ruggeri added Starbucks’ 4 percent ticket increase reflected how product innovation and promotions have come together to clarify its value proposition. About 25 percent was due to beverage attachment or multi-beverage orders in response to promotional offers. The other 75 percent was net price. “It showed that our customers responded well to our offers. So, that’s really the driver of it. We aren’t seeing the customization and the personalization in the same way because our offers were much more targeted and driven around specific beverages as well as overall beverage attach,” Ruggeri said. “And so, as a result of that, that drove the ticket in the quarter, but we were pleased with that because it shows that customers responded well to those offers.”
Narasimhan said offers and integrated marketing, paired with product innovation, helped grow rewards membership, reactivate lapsed users, and drive traffic on promotional days and product launch weeks. Active U.S. Rewards users lifted to 33.8 million in the quarter. Members across every decile increased their frequency, Narasimhan added. “We’re focused on the continued growth of the program because the average active members spends materially more annually and drives a higher lifetime value for the business than a non-member,” he said.
Research also showed Starbucks most inactive members don’t realize they’ve lapsed, which, Narasimhan explained, demonstrates an opportunity to drive return visits, active member growth, and deeper guest loyalty.
The plan going forward will be to continue using more targeted offers coupled with select pricing actions funded by efficiency initiatives (Starbucks said new efficiencies, cost savings, and performance improvements across its supply chain will help it deliver a goal of realizing $3 billion in efficiencies over the next four years, and it could get to $4 billion).
Starbucks expects to leverage a mix of paid media, acquisition and retention offers, disruptive signage, and employee education to generate traffic and increase visits with a focus on product launches and further rewards growth.
Getting more granular, data revealed one in four non-Starbucks Rewards members requested the ability to use mobile order and pay, Narasimhan said. About 80 percent of those don’t want to join the rewards program, however, or create an account to do so. This is why Starbucks decided to open mobile order and pay for all to provide guests the convenience they’re seeking without the commitment once required.
Overall, though, Starbucks hopes to take a measured approach to promotions given its premium positioning, Ruggeri said. So the vast majority of efforts will zero in on driving rewards membership growth because those guests tend to increase their value over their lifetime. In other words, they don’t show up for a discount and never return. It’s more about reactivating and rewarding core users than drawing in fleeting ones. The discount is worth the payout.
“When you look at the words, ‘worth it for the Starbucks experience,’ what we measure in our work and brand equity is not just about price, it is about the quality, the distinctive quality, the product customization … the consistency of the experience that we create both in stores and digitally, delivered at a price that customers believe is worth it when they come into the store to transact with us or when they transact with us across channels,” Narasimhan said
With non-rewards members, he added, Starbucks is still the No. 1 brand in terms of coffee shops visited. What that tells Narasimhan is the softness is a product of the overall environment. Once they come in through expanded mobile order and pay, Starbucks hopes it can expose them to other app benefits and convert them over.
Onto the innovation front
As noted, Starbucks’ cold share rose to 76 percent of beverage mix in Q3. Narasimhan said a newly formulated iced coffee was received positively, too, and espresso grew 4 percent.
Beyond coffee, Starbucks new Summer Berry Refreshers beverages, notably with “Pearls,” drove the chain’s highest Week 1 product launch ever, Narasimhan said. It buoyed the entire Refreshers platform to an all-time high during the quarter, even leading Starbucks to scale back marketing efforts. He mentioned on the call Starbucks has begun to take a more concerted approach toward platform innovation over product releases, like its energy drinks that arrived in U.S. stores in just three months compared to the normal 12–18 it takes.
Worth noting for the upcoming period as well—Pumpkin Spice is coming back.
