Customer connection: The new Starbucks experience

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Despite reporting sales declines for Q4, Starbucks Corporation President and CEO Kevin Johnson was pleased with the chain’s finish to the fiscal year. The company did see a change in transactions and quickly pivoted to meet customer needs.

Although sales declines for Q4, Starbucks Corporation President and CEO Kevin Johnson said he was pleased with the chain’s finish to the fiscal year, citing the fact that the chain was seeing “faster-than-expected recovery” in the U.S. and China, its largest markets.

“We finished the quarter with the comparable store sales decline of 4% for the month of September, a vast improvement from the approximately 65% decline we experienced at the depth of the pandemic only five months ago,” he told investors during an earnings call. “Fourth-quarter comparable-store sales declined 9% in the U.S. relative to the same quarter in the prior year well above the better end of our guidance range. Importantly, transaction volumes in the U.S. climbed steadily throughout the quarter as we methodically and carefully restored in-store seating with approximately 63% of our U.S. stores offering limited seating as we exited the quarter.”

The chain reported GAAP earnings per share of 33 cents, which were down from 67 cents in the prior year but said the drop was mainly related to the COVID-19 outbreak totaling about -35 cents per share. Non-GAAP earnings per share of 51 cents, down from 70 cents in the prior year, but that was higher than the market expectations of $0.31.

The new Starbucks experience
As customers continue to adapt to work- and study-from-home lifestyles, Starbucks has pivoted to meet those needs, Johnson said.

“We’ve seen U.S. transactions migrate from dense metro centers to the suburbs, from cafes to drive-thrus, from early mornings to mid-mornings with outpaced recovery on the weekends,” he said. “We’ve adjusted our operations to match these new customer behavior patterns including multiple, new protocols to provide a safe experience for our partners and customers.”

That included rolling out curbside pickup to nearly 800 U.S. company-operated locations along with plans to offer it from 2,000 U.S. stores by the end of 2021. The chain also introduced handheld point-of-sale devices to about 100 stores with plans to add them to 400 additional stores by the end of Q1.

“This has resulted in customer connection scores, which are well above prior-year levels,” Johnson said. “U.S. sales comps were solidly positive for our drive-through locations and suburban stores for the fourth quarter and the month of September, respectively.”

Nearly 75% of U.S. sales volume in Q4 came from drive-through and mobile orders, which is why the chain is still investing in contactless experiences, despite the fact that Q3 saw 90% from those channels.

“As we progressively restored seating in our cafes, this is notably higher than pre-COVID levels at approximately 60% of sales,” Johnson said. “Moreover, our mobile order transactions continue to grow, increasing from 18% in Q2 to 24% in Q4 aided by continued improvements to our mobile app as well as an increased messaging across our marketing channels to drive further awareness introducing more customers to our mobile app which drove engagement to mobile order and benefited us operationally.”

Another key driver of increased digital customer engagement was the Starbucks Rewards program. In Q4, it drove 47% of U.S. company-operated tender for a second consecutive quarter, up from 43% in fiscal Q1 prior to the onset of COVID-19. Importantly, Starbucks Rewards contribution improved throughout the quarter and returned to pre-COVID levels mainly driven by a recovery in member spend and higher mobile order and pay usage.

“Additionally, our 90-day active rewards member base increased by 3 million members in Q4 approaching pre-COVID levels at $19.3 million, up 10% from the prior year,” Johnson said. “The successful launch of Stars for Everyone in mid-September was a key highlight in the quarter. The momentum we saw and the number of customers who downloaded the Starbucks app in Q3 continued throughout Q4 and the number of active customers who joined the Starbucks Rewards program grew slightly in Q4 relative to Q3, likely helped by the late quarter launch of Stars for everyone.”

What about China?

Starbucks China, which has over 4,700 Starbucks units, reported that comparable-store sales dropped 3% with comparable transactions decreasing 7%, partially offset by a 5% rise in average ticket. Its mobile order sales mix more than doubled in the last 12 months to 26% in Q4, with 13% coming from delivery and 13% from mobile order and pay. Before the pandemic, the total hovered in the mid-teens.

“This was in line with our expectations led by initiatives very similar to what I described in the US, outstanding customer experience, new product innovation, notably, our new tea cloud platform and continued expansion of our digital platform, but what’s most remarkable about the recovery in China, in my view is the rapid reacceleration of new store development which is our number one driver of growth in China,” Johnson said.

The chain opened 259 stores in Q4, which Johnson called an “incredible achievement” considering that he temporarily paused store development for a couple of months starting in late January.

“Our disciplined approach to store development is paying off as these new stores are off to a strong start with early returns substantially in line with pre-COVID levels,” said Johnson, pointing out that the China team created “Starbucks Now,” a retail format that caters to convenience, similar to Starbucks Pickups in the U.S. “With speed and agility Starbucks China opened 40 Now stores in fiscal 2020 with the presence in nine Chinese cities,” he said. “Early results are very encouraging. And the team is increasing the pace of development for this innovative concept. On the digital front, we saw continued strength in our mobile platform in China with mobile order sales mix more than doubling in the past 12 months to 26% in Q4, with 13% coming from delivery and 13% from Mobile Order & Pay well above the mid-teen levels we saw pre-COVID.”

Like in the U.S., the chain’s investments in digital innovations in China continue to pay off. Those include its chat-ordering feature, an enhanced Starbucks Rewards program and a partnership with Alibaba for mobile pay. In Q4, China’s 90-day active members increased 36% over Q3 to 13.5 million representing 34% growth over the prior year.

“As of the U.S. business, I’m incredibly proud of the continued recovery and industry-leading innovation in China,” Johnson said. “The customer trends we are seeing in specialty retail extend to Coffee at Home, where demand remains elevated through the pandemic.

Going forward
Starbucks said it would open 1,100 stores next year, including 600 in China and 50 in the Americas.

Q4 fiscal 2020 highlights

  • Global comparable store sales declined 9%, driven by a 23% decrease in comparable transactions, partially offset by a 17% increase in average ticket.
  • Americas and U.S. comparable store sales declined 9%, driven by a 25% decrease in comparable transactions, partially offset by a 21% increase in average ticket.
  • International comparable-store sales were down 10%, driven by a 15% decline in comparable transactions, partially offset by a 7% increase in average ticket; China comparable store sales were down 3%, with comparable transactions down 7%, partially offset by a 5% .increase in average ticket; International and China comparable store sales are inclusive of a benefit from value-added tax exemptions of approximately 2% and 4%, respectively.
  • The company opened 480 stores in Q4, yielding 4% year-over-year unit growth, ending the period with 32,660 stores globally, of which 51% and 49% were company-operated and licensed, respectively.
  • Stores in the U.S. and China comprised 61% of the company’s global portfolio at the end of Q4, with 15,337 and 4,706 stores, respectively.
  • Consolidated net revenues of $6.2 billion declined 8% from the prior year primarily due to lost sales related to the COVID-19 outbreak.
  • Lost sales of approximately $1.2 billion relative to the company’s expectations before the outbreak included the effects of modified operations, reduced hours, reduced customer traffic and temporary store closures.
  • GAAP operating margin of 9%, down from 16.1% in the prior year primarily due to the COVID-19 outbreak, mainly sales deleverage, material investments in retail partner support and other items; GAAP operating margin was also adversely impacted by the Americas store portfolio optimization expenses.
  • Non-GAAP operating margin of 13.2%, down from 17.2% in the prior year.
  • GAAP earnings per share of 33 cents, down from 67 cents in the prior year primarily due to unfavorable impacts related to the COVID-19 outbreak totaling approximately -35 cents per share.
  • Non-GAAP earnings per share of $0.51, down from $0.70 in the prior year
  • Starbucks Rewards loyalty program 90-day active members in the U.S. increased to 19.3 million, up 10% year-over-year

Full-year fiscal 2020 highlights

  • Global comparable store sales declined 14%, driven by a 22% decrease in comparable transactions, partially offset by a 10% increase in average ticket.
  • Americas and U.S. comparable store sales declined 12%, driven by a 21% decrease in comparable transactions, partially offset by an 11% increase in average ticket.
  • International comparable-store sales were down 19%, driven by a 23% decline in comparable transactions, partially offset by a 5% increase in average ticket; China comparable store sales declined 17%, driven by a 21% decrease in comparable transactions, slightly offset by a 5% increase in average ticket; International and China comparable store sales are inclusive of a benefit from value-added tax exemptions of approximately 1% and 2%, respectively. Consolidated net revenues of $23.5 billion declined 11.3% from the prior year primarily due to lost sales related to the COVID-19 outbreak.
  • Lost sales of approximately $5.1 billion relative to the company’s expectations before the outbreak included the effects of temporary store closures, modified operations, reduced hours and reduced customer traffic. GAAP operating margin of 6.6%, down from 15.4% in the prior year primarily due to the COVID-19 outbreak, mainly sales deleverage, material investments in retail partner support and other items.
  • Non-GAAP operating margin of 9.1%, down from 17.2% in the prior year.
  • GAAP earnings per share of 79 cents, down from $2.92 in the prior year primarily due to unfavorable impacts related to the COVID-19 outbreak totaling approximately -$2.01 per share(1) (2)
  • Non-GAAP earnings per share of $1.17, down from $2.83 in the prior year.

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