Digital speed, in-store style seen driving Starbucks

by Keith Nunes
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Management sees Starbucks’ financial performance accelerating.

SEATTLE — Like many other food service operators, Starbucks Corp. is attempting to achieve balance between those consumers who demand the speed and convenience of digital with consumers who want the experience of visiting a store and enjoying a beverage and a bite to eat. As the company exits the first half of fiscal 2017, management sees Starbucks’ financial performance accelerating as changes implemented to further refine that balance take hold.

Kevin Johnson, Starbucks
Kevin R. Johnson, president and c.e.o. of Starbucks

“The critical transformative components required for any brick-and-mortar retailer to survive, let alone succeed, in the future are: An engaging, digital and mobile relationship with customers that is threaded into a branded, immersive, experiential retail destination,” said Kevin R. Johnson, president and chief executive officer of Starbucks, during an April 27 conference call with securities analysts. “The attributes of the destination will vary. It may include theater, intrigue or romance, but the common denominator will be the creation of a consumer experience that evokes human emotion and connection. I firmly believe that these are the ingredients that will determine which brick-and-mortar retailers thrive in the future and which become victims of the current trend.”

On the digital front, the company is working to improve the performance of its mobile order and pay program.

Starbucks mobile order and pay
Starbucks is working to improve the performance of its mobile order and pay program.

“As we enter Q3, mobile order and pay continues to be a powerful driver of comp, revenue and attach, and we are maintaining sharp focus on further increasing throughput,” Mr. Johnson said. “Our action plan includes three ways to unlock growth in all dayparts and particularly at peak. Wave 1 actions have largely been completed and included additional training and reallocation of partner roles to mobile order and pay during peak; testing of additional labor at peak in select stores; implementation of new approaches to order consolidation at the hand-off plane; and new tools and processes to support beverage and food production.”

In store, Starbucks management sees opportunities to accelerate performance by focusing on specific dayparts.

“Our strategic focus on the bakery case and breakfast sandwiches has paid off and is contributing to sales,” Mr. Johnson said. “In fact, in Q2, food represented 21% of our U.S. revenue and contributed 2 points of comp. We have demonstrated that by focusing on a specific daypart, we can create new customer occasions that add to the branded experience and become long-term drivers of growth.”

Starbucks cauliflower salad
Starbucks' Mercato menu features a cauliflower tabbouleh salad with chopped parsley, mint, cucumber, tomato and riced cauliflower with fresh lemon juice on arugula.

To achieve similar results during the lunch daypart, Starbucks introduced its Mercato menu in Chicago during the quarter. The menu features such lunch items as a za’atar chicken and lemon tahini salad that features such ingredients as herbed chicken with za’atar spice blend, ancient grains, chunky cucumber tzatziki, marinated carrots, chopped romaine and lemon tahini dressing; a cauliflower tabbouleh salad with chopped parsley, mint, cucumber, tomato and riced cauliflower with fresh lemon juice on arugula; and a smoked pork Cubano sandwich with smoked pork loin, pulled pork, Swiss cheese, jalapeño whole grain dijonaise and dill pickle on flatbread.

“ … We are extremely encouraged by the customer response to Mercato, so much so that we are accelerating plans to deploy Mercato to a second market over the next two quarters,” Mr. Johnson said. “We view Mercato as an opportunity to provide our customers with a fresh, healthy and delicious lunch menu that we believe has the potential to drive increased traffic and attach and ultimately help us achieve our long-term goal of 1 to 2 points of U.S. comp growth from food, once deployed across a significant portion of the Starbucks platform.”

Starbucks pork Cubano sandwich
Starbucks' Mercato menu features a smoked pork Cubano sandwich with smoked pork loin, pulled pork, Swiss cheese, jalapeño whole grain dijonaise and dill pickle on flatbread.

Net income during the second quarter of fiscal 2017, ended April 2, was $652.8 million, equal to 45c per share on the common stock, and an increase of 13.5% when compared to the previous year. 

Sales for the quarter rose 6% to $4,195.4 million, which compared with sales of $3,944.2 million the previous year.

“The largest contributor to revenue growth came from the 2,240 net new stores we opened over the past 12 months, followed by 3% global comp growth comprised of a 4% increase in average ticket and a 1% decline in traffic that after a 1% adjustment for transaction splitting nets to flat traffic,” said Scott Maw, chief financial officer.

Starbucks announced a strategic review of its Teavana business, primarily focused on stores that have been opened in malls in the United States.

Teavana mall store, Starbucks
Starbucks announced a strategic review of its Teavana mall stores.

“Because Starbucks is a customer destination, profitability in our Starbucks mall stores has largely been unaffected, but our Teavana mall stores have not been immune, with many reporting negative comps and operating losses for some time,” Mr. Maw said. “Since acquisition, we’ve invested in new store designs and improved merchandising, but the rate of the decline coming through last holiday and into Q2 is worse than we had forecast and we are expecting further declines at a number of at-risk Teavana mall stores.

“We are currently evaluating strategic options for the at-risk portion of the Teavana mall store portfolio, and we’ll update you over the coming quarters as we set our course of action. It is important to note that we do have a meaningful subset of profitable Teavana mall stores.”

Mr. Maw added that Teavana products sold in Starbucks stores are performing well. He noted that globally, Teavana sales in Starbucks stores grew by almost 10% with strong performance in such traditional tea drinking markets as China and Japan.

Starbucks Teavana beverages
Teavana products sold in Starbucks stores are performing well.

Starbucks’ net income during the first half of fiscal 2017 was $1,404.9 million, equal to 96c per share on the common stock and an increase of 11.3% compared with the same period of the previous year.

Sales during the first half of the year were $8,664.7 million, a 6% increase compared with the first half of fiscal 2016 when sales were $8,154.8 million.
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