Starbucks Chairman and CEO Howard Schultz speaks at the Annual Meeting of Shareholders in Seattle, Washington on March 22, 2017.
Jason Redmond | AFP | Getty Images
Starbucks on Tuesday outlined its plans for automated ordering in stores, new coffee-making equipment and an expanded loyalty program as part of its push to reinvent itself and better suit changing customer habits.
The new strategy is meant to address how the coffee giant’s business has transformed in recent years. Its menu has expanded, and cold coffee drinks now account for 60% of orders year-round and often include add-ons like cold foam or flavored syrups. Rather than ordering at the counter, customers are going through the drive-thru or using Starbucks’ mobile app.
Outgoing CEO Howard Schultz said Tuesday the company was making “self-induced mistakes” and had lost its way, despite seeing record demand in the U.S. and abroad.
As it implements its reinvention strategy, Schultz told investors that the company is projecting double-digit growth for revenue and earnings per share. The company also plans to build roughly 2,000 new U.S. stores between fiscal 2023 and 2025, accelerating its current development strategy.
The forecasts for revenue and new U.S. stores were slightly better than its previous long-term projection, which was given in late 2020. Chief Financial Officer Rachel Ruggeri is expected to provide more details later Tuesday in her presentation during the company’s investor day in Seattle.
The company’s previous long-term forecast had projected adjusted earnings per share growth of 10% to 12%, a revenue increase of 8% to 10%, and global same-store sales growth of 4% to 5% for 2023 and 2024. In May, Starbucks suspended its fiscal 2022 forecast, citing lockdowns in China, investments in its U.S. employees and high inflation.
Shares of the company fell as much as 3% during morning trading in anticipation of expensive investments, but the stock bounced back, declining less than 1% in afternoon trading.
Updating Starbucks cafes
In its fiscal 2023 starting in October, Starbucks plans to invest roughly $450 million to upgrade its cafes with new equipment that will simplify operations and speed up service.
“Our physical stores were built for a different era and we have to modernize to meet this moment,” outgoing Chief Operating Officer John Culver told investors.
With its new cold beverage system, for example, baristas will no longer have to scoop ice, pour milk from a gallon jug or bend down for whipped cream when making drinks. The dispenser system cuts down the time to create a Mocha Frappuccino from 86 seconds to 35 seconds. It’s already been tested in a store, and a second test is planned for January after making improvements based on feedback.
Starbucks is also working on technology so making cold brew coffee isn’t as labor intensive and the results are more consistent. The current process requires more than 20 hours of brewing in-store, with more than 20 steps, like grinding beans from a heavy bag. The new technology automatically grinds and presses the coffee beans and reduces waste by 15%. Cold brew is now a $1.2 billion business for Starbucks.
A more efficient way of brewing hot coffee will also roll out next year. Even as cold drinks take over, the company still sees 15 million customers every month who order brewed coffee. The new Clover Vertica machine grinds and brews a single cup of coffee in 30 seconds, removing the need for baristas to batch brew coffee every half hour.
Food preparation is also changing. Items like Starbucks’ premade sandwiches and egg bites will now be batch cooked and placed in packaging that retains humidity.
Automated ordering will roll out as well in U.S. stores in the next few years, according to Culver. The company said the shift toward automation is meant to give employees more time to interact with customers and relieve them of the more mundane parts of the job.
Linking loyalty programs
One major change in consumer behavior has been the growth of mobile order and pay. A quarter of Starbucks transactions now come from mobile app orders.
The shift in ordering has been driven by Starbucks Rewards, the company’s loyalty program. The U.S. version had 27.4 million active members as of July 3.
To keep growing its base of loyal customers, Starbucks will link its rewards program to outside loyalty programs, like those for airlines and retailers. Consumers will be able to earn “stars” by shopping elsewhere or turn their rewards points into airline miles.
Chief Marketing Officer Brady Brewer said the company will announce the first U.S.-based partnership in October.
This autumn also marks the start date for incoming CEO Laxman Narasimhan. He’ll join the company in October, learning more about its operations and undergoing 40 hours of traditional barista training. In April, he’ll officially take the reins from Schultz.
Narasimhan made a brief, surprise appearance during the investor day, speaking about his upbringing, his love for writing poetry and what drew him to Starbucks. He told investors that he uses the name “Laks” when ordering coffee from Starbucks to avoid misspellings.
Changes for baristas
The changes in customers’ ordering habits have made cafes less efficient and added stress for employees. Turnover rates peaked in 2021, according to Frank Britt, Starbucks chief strategy and transformation officer.
Over the last year, Starbucks baristas have also been unionizing, expressing dissatisfaction over pay for tenured employees, understaffed stores and other working conditions. More than 230 company-owned Starbucks locations in the U.S. have voted to unionize as of Monday, according to the National Labor Relations Board.
Starbucks has sought to curb the union push by offering better wages and benefits to nonunion workers. Those improvements have also helped with turnover rates in the last five months, Britt said.
As the company met with employees to craft its new strategy, Britt said it’s been looking at fixing the barista experience through the lens of product management.
“You assess the needs of consumers, you segment the needs of consumers, you do a test-and-learn agenda to figure out which of the things you thought could be true work,” he told CNBC.
The upcoming changes for U.S. baristas is just “phase one” of a multiyear plan, according to Britt. The company is also looking to improve the experiences of baristas overseas and for the employees who harvest its coffee beans, work in its supply chain and provide customer support.