Starbucks’ traffic was healthy as recently as October, and it rode three years of robust demand out of the pandemic. Going back to May 2022, founder and former CEO Howard Schultz described the challenge for Starbucks as “completely half full.” Interest was “relentless,” driven largely by the surge of digital ordering (mobile order and pay was up 400 percent over five years), yet the brand was “not doing our best,” he said.

In plain terms, Starbucks had more consumer activity than it could meet with the systems in place pre-pandemic. And in response, it laid out a billion-dollar plan to capture that shift in consumer behavior, everything from stripping complexity out of the beverage-making process (thanks to the cold-drink rise) to building more drive-thrus to lifting employee pay.

“Simply said, we do not, today, have the adequate capacity to meet the growing demand for Starbucks coffees,” Schultz said at the time.

But how delicate was this notion? The brand on Tuesday reported its worst traffic performance outside of the pandemic or Great Recession. William Blair research analyst Sharon Zackfia called it a “stunning across-the-board miss on all key metrics.”

Traffic slid to negative 7 percent in Q2—the three-month period that ended March 31. Same-store sales declined 3 percent (inclusive of the negative 7 percent transactions and partially offset by a 4 percent bump in average ticket).

Revenue fell 2 percent for the company, down to $8.6 billion. Wall Street predicted it would rise 5 percent. Earnings per share of 68 cents represented a 14 percent year-over-year decline, and 15 percent under expectation. North America’s operating margin was 18 percent in Q2, contracting 120 basis points from the prior year.

Active 90-day domestic Starbucks Rewards members declined 4 percent on a sequential basis as well.

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CEO Laxman Narasimhan, who began his tenure last March, started Tuesday’s call bluntly. “Our performance this quarter was disappointing and did not meet our expectations,” he said.

As for what went wrong, some of those cracks began to deepen as external pressures weighed in, like cautious spending and weather in January (Narasimhan said this hit comp by nearly 3 percent).

More than 60 percent of Starbucks’ morning business in the U.S. flows from rewards members, who, naturally, overwhelmingly order from the app. However, despite strong mobile order and pay sales, Narasimhan explained, Starbucks witnessed a mid-teens percent order incompletion rate within the channel. What that means is customers using the option put items into their cart and chose not to hit send, “citing long wait times of product and availability.”

So returning to 2022 concerns, the friction in Starbucks’ throughput and supply resulted in lost business. Not unlike how customers walking into a casual-dining lobby might turn back when they see a crowd. In 2018, Red Robin, coming off a decision to eliminate bussers and have servers clear tables as they went along, estimated 75 percent of its loss in dine-in traffic stemmed from peak hours as total ticket times out of the kitchen and wait times rose a minute on average. While that seemed minor at first, at peak it added up to the brand’s walkway rate soaring 85 percent on weekends. Guests arrived and saw no tables available, or unclean ones sitting vacant. The point being, customers eyed their options and decided it wasn’t worth waiting, and headed elsewhere.

For Starbucks, in a difficult climate for out-of-home food in general thanks to inflation, it forced a second-guess moment in the journey that flashed in Q2.

Narasimhan said there’s opportunity, however. “We’re intensely focused on actively working on improving operational throughput by providing our partners with the right processes and tools and on giving our customers a better sense of when the order will be ready,” he said. “Rollout of our equipment-driven Siren system is on track, but we’re also fine-tuning the store processes that underpin this new equipment.”

For the past six months, Starbucks in its Tryer Center has worked to unlock additional capacity at peak. “And what we saw through store tests was a real near-term opportunity to fundamentally improve how we operate our stores,” Narasimhan said. “The Siren Craft system, as we’re calling it, requires no capital.”

Starbucks wants to roll it out to North American stores over the coming months. In units where this “Siren Craft” system was deployed to optimize operations, there’s been an increase in peak throughput, which the brand estimates could be worth nearly a comp point annually. The aim is to get it to 10 percent of stores by year’s end.

The Siren System was unveiled in September 2022 as a new kitchen layout with equipment intended to speed drink production and make baristas’ jobs easier. It cut the need for workers to open refrigerators while making cold drinks. There are features like a custom ice dispenser, faster blenders, and a milk-dispensing system. The blockbuster is Starbucks’ Clover Vertica system, which can serve a cup of coffee on demand in less than 30 seconds. Each machine is topped by six hoppers and brewers don’t require paper filters.

Previously, every 30 minutes, employees would need to grind coffee beans, batch it in paper filters, and brew. They threw away anything unsold each half hour—a cycle of grind, batch, dump, do over.

Narasimhan said Tuesday Starbucks’ will scale the rollout of Clover Vertica. It provides guests choice between six sperate coffee roasts and blends, including teacups. That’s being paired with the global launch of Starbucks Milano Duetto light and dark roast options.

Narasimhan added Starbucks is revamping and investing in its “Deep Brew” technology to improve wait time estimates and provide more transparency for guests, suggesting customers were showing up after ordering ahead and still having to wait.

He added the brand’s potato cheddar and chive bakes were a hit, but demand was so strong Starbucks currently can only offer them in 2,000 U.S. stores. “In summary, we are working to increase throughput and improve product availability to enhance the customer experience, improve convenience and better capture existing demand. Over time, we believe these improvements will attract a larger subset of customers,” he said.

Starbucks feels it has unmet demand overnight, too. In Q1, it mentioned testing a program to serve consumers between 5 p.m. and 5 a.m., when stores traditionally close. During the pilot, Narasimhan said, Starbucks doubled its business. It’s now actively pursuing options to build what he said can be a $2 billion business over the next five years.

“Overnight opportunities are incremental and create a complement to our existing delivery business, which grew by double digits in the U.S. this quarter with both ticket increase and transaction growth,” he noted. “In addition to the overnight, we have unmet weekend demand potential.

And here’s where the other problem surfaced …

The chatter around Starbucks, rightfully so, often surrounds its rewards platform, which grew overall in the U.S. (not active) by 6 percent in the quarter to 33 million members. Mobile order and pay represented 31 percent of all transactions. Sequentially, the rewards base figure was down 4 percent, although transactions remained at an all-time high of 59 percent of company-owned sales.

Yet Starbucks has spoken often in recent periods about the “occasional customer.” Narasimhan said routine guests arrive all week throughout the morning and afternoon. And although the weekend is no different, the brand wants to court more families and kids by launching product offerings, collaborations, marketing, and enhancements to the store experience.

So there’s morning, afternoon, overnight, and weekend business Starbucks can still capitalize on, he summed up.

The thing about “occasional guests,” though, is they don’t spend as much as loyal ones. Narasimhan said Starbucks needs to reach and demonstrate more value to this cohort, as well as non-Starbucks Rewards users in general. “We have loyal customers in the U.S., and they stay truly loyal in terms of frequency, transactions, and the level of customization they sought with their purchases,” he said. “We are a brand known for the premium value we provide.”

Throughout the quarter, Starbucks’ brand perception of “value for what I get” on average, Narasimhan said, was strong. But in this environment, he continued, “many customers are being more exacting about where and how they choose to spend their money, particularly with stimulus savings mostly spent.”

“We saw this materialize over the quarter as customers made the trade-offs, being food away from home and food at home,” Narasimhan said.

Starting in May, Starbucks will add new and exclusive in-app offers that create additional value, Narasimhan explained. It will also launch upgrades to the app that include “significant improvements” to its wait time algorithms (going back to that point). Then, in July, it will begin opening the Starbucks app for all—not just loyalty members—while making mobile order and pay available in places outside its app.

This will power customers to see Starbucks’ offers, including those who use guest checkout. “And more customers will discover the strong value we provide,” Narasimhan said, “value that they will not see otherwise.”

Starbucks plans to invest $600 million over the next three years to further digitize stores and better target customers via personalized deals. This comprises digital menuboards across all U.S. company stores in the U.S. and China.

With AI, Starbucks said it expects to curate offers timely, relevant, and flexible to location, inventory, and weather. The investment boasts a new revenue management solution as well.

Narasimhan said the “occasional customer” today, clearly, makes choices based on economic pressures. With Starbucks, they seek variety and the core. “Fifty percent of what we have, in the afternoon, as an example, is coffee,” he said. “So obviously, coffee is really important, and distinctiveness of coffee is very important, but they are looking for variety, and they’re looking for value. And what we’re focused on is ensuring that we find a way to connect with them, to bring them into our app ecosystem, in order for them to see the value that we provide insight there.”

Opening the app for all in July, Narasimhan said, will clarify value points for customers who aren’t already loyalty users.

Starbucks said it’s flowing forward an omnichannel campaign to remind customers “that the best offers are in the app”—an effort that will target occasional and non-rewards guests.

Although weather concerns in Q2 were transitory, Narasimhan admitted a more cautious consumer could persist. But Starbucks feels “much is within our control.”

That breaks down across the levers mentioned—additional daypart capitalization; more product innovation with a focus on core coffee-forward options; and reaching and demonstrating value for “occasional” and non-Starbucks Rewards customers.

“At our best, we bring in customers with distinctive coffee and a great experience. We convert them to Starbucks Rewards members. We build interest with new coffee innovations, and we encourage more frequent visits and food attached. But we currently have a challenge meeting our peak morning demand in the U.S.,” he said.

Starbucks this winter brought back its Pistachio Latte, introduced the olive oil-infused Oleato nationally, and launched a new core iced-shaken espresso. While some products did well and drove buzz, not everything met expectations, Narasimhan said.

That, coupled with guest feedback, points to opportunity across coffee and non-coffee platforms, like Refreshers (a spicy lineup recent launched), matcha, and chai, as well as food, to drive greater reach.

Later in Q2, product response improved thanks to the lavender platform, which Narasimhan said compared to some of the most successful launches Starbucks has had and performed nearly as well as the Pumpkin Spiced Latte. “But to cut through, we’re working to drive even more buzz-worthy products and on strengthening the supply of products that become popular [like the chive bakes],” he said.

Looking to the second half of the year, Starbucks’ first texture innovation, “Pearls,” will land in the summer. It’s the first of more to come. And Starbucks will also bring a low-calorie, handcrafted energy beverage to market, opening “entirely new vectors for additional future innovation,” Narasimhan said.

Additionally, five sugar-free customization options will hit menus later in the year and provide a lower-calorie option for about 80 percent of beverages. Starbucks’ product innovation pipeline will include more plant-based options, like a ready-to-drink Frappuccino that recently launched in grocery stores. A food example is a reimagined blueberry muffin. Starbucks’ egg pesto and mozzarella sandwich is coming this summer, as well as expanded grab-and-go choices in store lobbies with additional vegan, vegetarian, and gluten-free choices and kid-friendly products. “Our pipeline is significantly stronger than last year and product builds are being developed with partners and simplicity in mind. We’re also investing in our supply chain to lower cost, and ensure products are available and in-store for our customers,” Narasimhan said.

Starbucks shared, as a result of our investments and focused efficiency efforts, employee turnover reached a new low in the quarter. Store manager turnover also improved. Average hours of employees continues to improve by double digits year-over-year, Narasimhan said, increasing engagement and their take-or-pay.

The company opened 364 net new stores in Q2, ending the period with 38,951: 52 percent company-operated and 48 percent licensed. U.S. and China comprised 61 percent of the company’s global portfolio, with 16,600 and 7,093 stores in the U.S. and China, respectively.