Starbucks is proud of serving specialty coffee beverages at its stores, made of whole beans of coffee, freshly roasted. It declares offering 30 blends and single-origin of premium coffees. Yet, the Starbucks company has built its reputation moreover on cultivating customer experiences that espouse good hospitality, welcoming attitude by employees (‘partners’), convenience of ordering and comfort of sitting in their coffee houses. The Starbucks Experience is probably an even greater attraction for many consumers than the coffee itself for visiting and staying at the chain’s coffee stores / houses.
From his early days of leading Starbucks, Howard Schultz advanced and developed the primary position of customer experience in the identity and operation of the company, its brand (with the Siren logo), and chain of coffee stores. Schultz wanted customers to see Starbucks as ‘a third place between home and work’ — a place for resting, relaxing, and social gathering; this remains the prominent motto of Starbucks to these days. Three tenets of the Starbucks Experience are quality service, an inviting atmosphere, and an exceptional beverage (Starbucks Company Profile).
- Howard Schultz has served over the years as chairman, president and CEO of Starbucks Corporation. Schultz became an owner of Starbucks in 1987. He acted in practice as Chief Executive Officer of the company during 1987-2000 and 2008-2017. The current CEO, since early 2017, is Kevin Johnson, while Schultz remains acting as executive chairman.
Starbucks finished the fiscal year (FY) 2019, at the end of September 2019, with 31,256 stores. The stores are divided about equally between company-operated stores (50.7%) and licensed stores (49.3%). Starbucks identifies two segments: The Americas (USA + Canada + Latin America) and International (Europe, Middle East & Africa, China / Asia Pacific). There are more stores in the Americas (58%) than International (42%). Specifically in the US, the home market, fiscal 2019 ended with a little more than 18k stores. It should be noted, however, that the majority of stores in the Americas are company-operated (55%), located in the US and Canada, whereas the majority of International stores are licensed (56%)(e.g., UK: 288 company-operated and 707 licensed). In FY2019 Starbucks added net nearly two thousand stores, about three quarters of them licensed (Annual Report 2019).
Nine months later, at the end of June 2020, Starbucks had 32,180 stores. Even during April to June (fiscal Q3) of 2020, at the midst of the first wave of the Corona pandemic, Starbucks added net new 130 stores (166 international but minus 36 in Americas)(Fiscal Q3 2020 Results). The stores include a few more retail brands in addition to the core Starbucks Coffee (e.g., Evolution Fresh, Seattle’s Best Coffee, and Reserve Roastery to be addressed shortly).
The approach of Starbucks to coffee beverages, in quality and variety, must have been novel and refreshing to consumers in the US and other countries (e.g., East Asia). But in many countries with previously developed coffee cultures (e.g., in Europe, most notably Italy), the coffee beverages of Starbucks may have been perceived by consumers as an odd ‘interpretation’ of coffee (e.g., served in large cups or mugs, too watery, intensity variable). Nevertheless, the concept, atmosphere and style of the coffee stores were innovative and appealing, especially to younger consumers, prominently for meeting with friends, but also for sitting alone reading a book or working on a laptop (mid-1990s onwards). Whatever has been the attitude of consumers to the coffee, there was greater positive consensus about the experience. Still, Starbucks also makes popular ‘free-going’ coffee beverages to anyone’s taste in coffee — the ready-to-drink blended (cold) beverages under the strong product brand Frappuccino.
During the first decade of the new millennium, when Schultz stepped aside from the CEO position for the first time, the Starbucks chain was expanding quickly in the US and abroad. The company had growing difficulties to preserve the concept and principles of customer experience it set (e.g., in service and comfort), drawing strong criticism. For instance, stores did not necessarily provide the desired conditions of comfort for customers to remain in the coffee store as a coffee house (e.g., leather seats, sitting corners). This is more consistent with an approach not to encourage customers to stay on-site in order to increase circulation. Schultz himself feared that this process was leading to dilution of the Starbucks Experience he had nurtured, bringing him back to the CEO position.
In 2014 the company launched a sub-chain of top-tier stores: Reserve Roastery & Taste Rooms (13 stores at the end of June 2020). The Roastery brand is assigned to the stores while the Reserve brand is related to premium whole-bean coffee types to be used (or sold for home brewing) in the Roastery stores as well as at Reserve bars in dozens of Starbucks Coffee stores (the brands are intertwined, seemingly somewhat confounded). The intention was to create a higher quality offering of coffee that will be taken seriously and appreciated by greater coffee connoisseurs, especially in countries with stronger coffee cultures and traditions. One of its goals was to improve acceptance of Starbucks in the latter countries (e.g., its Roastery branch in Milano). The design of Roastery stores is well-invested, creative and sophisticated, with a more top-notch appearance (e.g., see this post by Retail Dimension agency). The Roasteries (e.g., Seattle, Chicago, New-York, Shanghai, Tokyo, Milano — currently 8 in the Americas, and 5 international) are designed to stage immersive theatrical experiences for their visitors; a taste of the experience is applied to stores with Reserve bars.
Close observation of activity in stores-cafés, augmented by additional performance data on operations, marketing and service in the retail chain, are key to best design and orchestration of customer experiences. Rosalind (Roz) Brewer, Chief Operation Officer (COO + group president, Americas), is taking this approach to guide her in streamlining and improving customer experiences at the various stores-cafés (Fortune, October 2019 *). She is said to spend “a good chunk of her time” visiting stores in person. Here are some brief examples of her lessons and actions:
- Allowing customers to order coffee in advance on Starbucks mobile app, and then arrive to a store nearby to pick-up the beverage, added a layer of convenience and time-saving; but in practice baristas were unable to cope with frequent surges in orders in-store and via mobile. The surges created bottlenecks, put employees under stress, and made customers upset rather than more pleased. Brewer learned about the situation and acted to remedy the problem. It may have been possible to use real-time data on the flow of orders via the mobile app and number of customers already at destination stores to avoid superfluous orders, but it was reasonably undesirable to turn down the ‘excessive’ customers. Brewer chose to add a separate counter with a barista dedicated to prepare for customers their advance-ordered beverages. Some tasks were also simplified, postponed or automated to reduce pressure on employees in peak periods and enable them to attend more to customers.
- Brewer discovered that afternoon traffic at Starbucks Coffee stores was populated more heavily with occasional customers (visiting one to five times a month) whereas the proportion of loyal customers, members of the Rewards club, was biased downwards. This situation was considered troubling because the Rewards members, while constituting just a quarter of monthly visitors, generated 40% of sales revenues and were primary contributors to its sales growth. She also found out that post-2pm customers were ordering mostly cold beverages. In response, her team focused on the afternoon visitors and their preferences: re-deploying to the afternoon more experienced baristas who would be able to produce even better cold beverages, and turning to occasional customers via Wi-Fi with request for contact information and proposition to join as members of the Rewards programme. Starbucks reportedly saw subsequently its first improvement in afternoon business in three years.
- Brewer set three priorities: beverage innovation, store experience, and digital business. She worked towards eliminating business lines that were considered under-performing, redundant by being inconsistent with the company’s core business and image, or involved efforts distracting from her key priorities. Hence, for example, Brewer decided, after a detailed analysis by her team, to terminate the line of fresh-food (Mercato) offered at Starbucks stores.
- Note: It seems probable that Brewer also contributed to the tough decision of Starbucks, for similar reasons, to put an end to the sub-chain of tea stores Teavana (288 company-operated stores and 25 licensed stores were closed in 2018, and the remaining 12 licensed stores closed down in 2019); the tea product line branded Teavana prevails, however.
In FY2019, the last full ordinary fiscal year before the Corona pandemic, Starbucks generated total net revenues of $26.5 billion (7.2% increase from previous year). The large majority of revenues (81%) came from company-operated stores. Operating income in FY2019 reached $4.1 billion (operating margin of 15.4%) — overall in the last four years operating income hovered closely around four billion US dollars.
- Note for reference: Store operating expenses in FY2019 accounted for 40% of net revenues whereas cost of sales (reframed in FY2020 as product & distribution costs) accounted for 32%. Starbucks proposes a more specific metric relevant to stores: The store operating expenses have taken nearly half (48.7%) of related revenues.
The third fiscal quarter (Q3) of 2020 is likely to end up as the worst hit quarter in the year — it took place while the first wave of COVID-19 reached its peak (April 2020) and lockdowns were enforced in many countries. The total net revenue in Q3/FY20 of $4.2 billion is 38% lower from the same quarter the previous year. This quarter has taken a stronger blow than Q2/FY20 (revenues declined ‘just’ 4.9% year-over-year). The third fiscal quarter is the only one so far to see an operating loss ($709 million).
Looking at comparable stores sales in company-operated stores (i.e., stores open for 13 months or more to the end of a quarter), it is revealed that during fiscal Q3/2020:
- The global comparable store sales fell 40% year-over-year, driven by 51% decrease in number of transactions, but partially offset by a rise of 23% in average ticket (i.e., ‘purchase bill’);
- The figures in the Americas are similar (41%, 53%, and 27%, respectively), reflecting in particular the situation in the US;
- But in the International segment, while the comparable store sales dropped by 37% year-over-year, the number of transactions fell by 44%, and partially offset by an increase of just 13% in average ticket.
- Note: These figures are dramatic, worse than in Q2/FY20 when effects of the coronavirus just emerged, and hardly resemble figures seen, for example, for the full FY2019 (overall increase of 5%, driven by 1% increase in comparable transactions and 3% rise of average ticket). The figures for full FY2020 will not be as dramatic as in FQ3 but they are bound to be less bright than in FY2019.
It could be of significance to note that during the critical period of lockdowns and the shutdown of stores, the product and distribution costs in Starbucks’ stores were reduced in Q3/FY20 by 32.5% compared with Q3/FY19, but store operating expenses dropped by merely 4% (these costs correspond primarily to company-operated stores). While the product and distribution costs fell with the drop in sales, it was apparently much more difficult to cut the fixed operating expenses at the coffee houses. This observation is corroborated by the rise in proportion of store operating expenses as a percentage of store sales in company-operated stores from 48% in Q3 of fiscal 2019 to 74% in this fiscal year 2020.
It can be expected that Q4/FY20 (July to September 2020) has not been as bad as the former since in most countries activities of work and leisure resumed to a comfortable level. Starbucks reports that most of its coffee stores re-opened but with modified (reduced) opening hours and limited seating. Based on consolidated results of the first three quarters of FY2020, and assuming that Q4/FY20 has been more similar to Q2/FY20 (when the troubles started) than to Q3/FY20, fiscal 2020 could conclude with a drop of 10-15% in total net revenues. The damage will be felt mostly in operating income, being positive but possibly just a quarter of its level in the past four years. The company expected in July (Fiscal Q3 2020 Results) that global comparable store sales in full FY2020 would be 17% lower than the previous year.
Starbucks makes the following descriptive statement in its Annual Report 2019 on experience: “The Starbucks Experience is built upon superior customer service and seamless digital experience as well as clean and well maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty” (p.3).
This description actually includes commitments on key dimensions — they are highlighted by adding bold typeface. In addition to service and store, there is the digital scene in which Starbucks invests increasingly in recent years to complement the store scene (e.g., ordering and payment with the mobile app + earning Stars in the Rewards programme). Yet furthermore important is making stores more closely accustomed to the customers in communities in which they operate, based on shared traits. In Starbucks’ viewpoint, these are the four building blocks of customer loyalty.
The Corona pandemic crisis introduces a major challenge to Starbucks to protect and preserve the experience it sets for customers, as perceived in their eyes. That is because key elements in the relationships between the retailer and its customers are broken. Starbucks is taking steps to facilitate the continuation of this relationship (e.g., adding locations that allow drive-through and pick-up of orders, adding payment options with its Rewards programme as well as more options for gaining Stars not contingent on purchases). However, it will be more difficult for Starbucks to recover the social facet of the experience at its stores-cafés, where customers meet together in the European-style atmosphere that is important for the company to instill. Since customer experience is so essential to the company, it will take special effort to resume and preserve.
Ron Ventura, Ph.D. (Marketing)
[*] “How Starbucks Got Its Buzz Back”, Beth Kowitt, Fortune (Europe Edition), October 2019 (Vol. 180, Number 4), pp. 52-57