Can Delivery Keep Starbucks Growing?

Starbucks (SBUX -1.02%) has expanded its pilot delivery program in the United States to more cities. Working with Uber Eats, the chain has added more areas. Delivery is also a major part of the company's efforts in China as well, but its overall upside remains unknown.

In this segment from Industry Focus: Consumer Goods, host Shannon Jones and Fool.com contributor Daniel Kline discuss the coffee titan's delivery ambitions.

Check out the latest Starbucks earnings call transcript.

A full transcript follows the video.

This video was recorded on Jan. 29, 2019.

Shannon Jones: Another strategy that Starbucks is employing to drive more traffic, especially in those daypart hours that traditionally don't get a ton of traffic, is with the delivery model. I actually had a conversation with Chris Hill just this week about delivery. We both pretty much agreed. I think delivery is going to become the expectation rather than something that's an extra perk or added benefit. For any quick service restaurant, you need to have a delivery model. Let's talk about how Starbucks is planning to capitalize on that.

Dan Kline: Starbucks tested delivery in partnership with Uber Eats in the United States in Miami last year. They're rolling that out to, I want to say six more cities, maybe it's seven, very slowly, with the idea that they're going to eventually deliver maybe not everywhere, but certainly in dense urban markets.

I have been a delivery skeptic. Vince Shen and I often did shows talking about McDonald's. And I would say, "I don't understand who wants McDonald's delivered when the lifespan of a Big Mac or a Chicken McNugget is like three minutes before it becomes absolutely inedible and not enjoyable in any way." And in some ways, I feel like that about Starbucks. Why would I want a coffee that's 25 minutes old? I think they promised 30-minute delivery. On the other hand, I do think, in a business setting, Starbucks makes some sense. I'm sure you've been in an office where someone takes a Starbucks order, and it takes like 25 minutes to get everything specifically down. If you could actually just pass around a phone and have people input their own ridiculous drinks, that's going to speed up a system and make it easier for the intern you're making take your drink order go take your drink order.

That said, I think there's going to be an explosion of it, an expectation of it, and then a fallout of, "Hey, wait a minute, there's a Starbucks two minutes from here. Maybe I don't need to place a delivery order."

Jones: You know what I think will be the key to that collapsing, Dan? When the millennials, who are definitely the ones who actually are trying out deliveries, when they see that $5 delivery fee or however much it will be. It'll be when they see that delivery fee tacked on to the already very expensive cup of coffee.

Kline: It's $2.95 for Starbucks, and I don't believe there's a limit to order size. Again, very useful for quasi-catering, where we're all having a meeting and the coffee machine's too far away, we want to get some Starbucks. That's great! I think that's going to work.

I think this will be incremental. Because it's Uber Eats, this isn't adding any work to Starbucks other than that they have to make the drinks. And that's all within the Starbucks system. The tags for these delivery orders are popping up the same way a tag pops up if I walk into the store and have put a mobile order in. They're handling this very smart. This is one of those areas where Johnson focusing on workflow is absolutely going to let stores increase their same-store sales without increasing personnel, without building a bigger store, having to add a second production line. They're going to be able to serve these online orders without slowing things down for customers in the store.

Jones: Speaking of Johnson, this is also an area where, to your point, Dan, nobody wants a cold cup of coffee when it does arrive. This is where Johnson is really starting to push, in terms of innovation. How can we make delivery work for many of our menu items? On the packaging side, you're talking about splash-proof lids, tamper-proof packaging for something like their sandwich offerings, and even hot and cold delivery containers. They'll have to figure out a way to make this work, then figure out which menu items are best served via the delivery. I think that's a part of this pilot as they're rolling it out to these major cities.

Kline: Yeah. Right now, they're testing 95% of the menu. They might figure out, take something like a crumb cake, they might find out that the crumb cake falls apart when you deliver it, and maybe you should not offer that for delivery. I think they'll figure out the hot and cold issue, though they have to balance that with the fact that they've also made promises on the environmental front. It's not like they could just throw it in a heavy Styrofoam cup. They have to create reusable, recyclable packaging, as well.

It's a challenge, but it's not anywhere near the challenge that the food companies face. If you get a breakfast sandwich from Starbucks and you have to throw it in the microwave for 20 seconds, breakfast sandwiches microwave much better than, say, French fries or chicken wings. It's not as big of a problem for Starbucks as maybe it is for some of the other food retailers.

Jones: I think this will be an even bigger thing for Starbucks, especially as they expand in China. The start-up that they're competing against is called Luckin Coffee. Basically, they sell on-demand coffee via their app delivered to customers in 30 minutes or less or it's free. You can easily see with a start-up like this, which has been growing quite tremendously in China, why this delivery model is so important, especially there. I know they also announced a partnership with Alibaba's platform to get up and running on their delivery model. The Alibaba partnership also gives them access to their 600 million users within their ecosystem. I think delivery makes sense, not just from a brand-awareness perspective, access to a much larger customer base, but also to keep up with the competition.

Kline: I think there's more of an expectation of delivery in China based on where Starbucks already is in terms of being able to deliver. But I won't hazard a guess. Maybe it's harder to get places, maybe transportation is more of an issue. But, yeah, they're going to figure out how to use third parties to deliver in every market where delivery is an expectation. I mention third parties because that becomes scalable. If this is only a 2% add to stores, great! They didn't hire anybody. This isn't Pizza Hut hiring thousands of drivers to deliver their pizza. This is just another method where really, the Uber Eats driver is no different than me when it comes to picking up an order. They're grabbing the order at the counter, putting in their thing, and leaving. This is just Starbucks doing business as Starbucks, figuring out every possible way to get their products out there.

Jones: Very good point, Dan! To close out our show today, I want to throw one question to you. This is something that's been debated among many the analysts even here at the Fool. Do you see Starbucks still as a growth story? Or, is Starbucks now settling into a more mature, slower-growing company overall?

Kline: The day Howard Schultz left is the day I started to worry about Starbucks as a growth company. They're too far into the Roastery building to scale that back, but that's only going to be a handful of Roasteries. What we talked about earlier with scaling back the Reserve stores, and more importantly, adding Reserve bars, I do think that tempers Starbucks as a growth company. If you don't find a way to add something truly new that changes the experience, you're going to max out in the U.S. There's only so much efficiency. There's only so many more people you can serve. So, unless they test the Reserve program, and then figure out, "OK, here's how we're going to get to that 20%. It's just going to be a smaller rollout," then, yeah, I do think once China tops out, Starbucks won't be a growth company anymore.