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How Starbucks Plans On Using What It Learned in China From COVID-19

By Nicholas Rossolillo – May 1, 2020 at 6:57AM

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Get ready for a slow recovery, and the new norm may favor digital and to-go like never before.

As expected, Starbucks (SBUX -2.67%) had a rough go of it during its fiscal 2020 second quarter (the three months ended March 29). The global coffee powerhouse was facing a shutdown in China, its most important growth market, and that shutdown extended to the U.S. and the rest of the world by March. As a result, global comparable-store sales fell 10% from a year ago, revenue fell 5% to $6.0 billion, and adjusted earnings per share fell 47%.  

But the recovery is already well under way on the other side of the Pacific, and attention is now being turned to how Starbucks' reopening in the U.S. will play out. The process will be slow, and investors can safely assume growth won't return until 2021 once the coffee empire starts to lap this year's ugly numbers.

Starbucks drinks sitting on a counter for pick up in a store.

Image source: Starbucks.

The playbook in China is normalizing

Starbucks in China recorded a 46% year-over-year decline in revenue to $384 million during the second quarter. While a handful of new stores opened to offset some losses, comps at existing locations tumbled 50%.  

The recovery in traffic has been rapid, though. After nearly completely shuttering operations in February, CEO Kevin Johnson had this to say on the quarterly conference call:  

Today, almost 100% of our stores in China are open, many with limited seating, reduced hours, and other safety protocols in place. Starbucks stores that remain closed in China are primarily located in cinemas and enclosed entertainment venues, along with the international travel hubs and certain tourist zones where restrictions are still in effect. Since we started reopening stores in late February, we have seen meaningful improvements in China comparable-store sales in commercial, residential, and office locations.  

As to specifics, comps reached a low of negative 90% in mid-February but were down about 35% in the month of April. CFO Patrick Grismer said that the 50% comps decline last quarter should improve to the negative 35% to 25% range in the third quarter, and improve again to the negative 10% to flat range by the fourth quarter (which corresponds with the calendar quarter ending in September). Along the way, the company is still expecting 500 new store openings during the fiscal year with 100 more that had been planned for this year getting deferred to 2021.  

Talk about a rapid rebound. It will more than likely equate to lower revenue compared with fiscal 2019, but there's an outside chance Starbucks still manages some sales growth in China this year. How's that possible?

Even though social distancing and reduced seating sound like bad news, the Chinese market's adoption of digital ordering and delivery is on average far higher than the rest of the world's. That is helping Starbucks make a rapid recovery in the wake of the coronavirus crisis. The company had been rolling out mobile ordering and payments in China last year -- it even struck a delivery partnership with Alibaba. Those are fortuitous business decisions that will only increase in importance once the coast is clear for Starbucks. Even those new store openings are really part of the digital strategy, as adding real estate helps make pick-up and delivery quicker and more convenient.

The U.S. is looking like a different story

American consumption of coffee is quite different, though. Like China, on-the-go coffee is still the preference. Johnson said nearly 60% of U.S. locations had a drive-through, which has been a benefit to the chain in the midst of social distancing and stay-at-home orders. And even before the crisis, over 80% of all orders were to-go. Nevertheless, with about half of all Starbucks stores closed, the declines were severe.  

Comps had been trending toward an 8% year-over-year increase through February but reversed course and ended the quarter down 3%. Among locations open as of April 28, comps are down 25% from the year prior, but 90% of company-operated Starbucks are expected to be in operation again by early June (with modified hours and social distancing measures still in place). Thus, fiscal third-quarter U.S. comps will be even worse than they were last quarter, and the pain could persist into the end of fiscal 2020 and into 2021.  

To put it simply, the trough in COVID-19 disruption will be shallower in the U.S. than in China thanks to drive-through infrastructure, but the aftershock will last much longer.  

But this is where Starbucks' digital chops will come into play. Active Starbucks Rewards members in the U.S. increased 15% year over year to 19.4 million -- a small number if comparing it to the undisclosed but likely massive number of digital users in China. For reference, Yum China -- licensee of KFC and Pizza Hut in the Middle Kingdom -- just reported having a staggering 250 million loyalty rewards members via its app at the end of March.  

In the wake of the coronavirus, continued social distancing and reduced dine-in service are likely. California said to expect as much in its latest update on its gradual reopening plans, with other states echoing that sentiment. Digital Starbucks, where ordering ahead for pick-up or delivery via Uber Eats, is quickly becoming the rule rather than the exception.

For those who are looking for an even more traditional coffee experience than what Starbucks offered pre-crisis, the company's retail business via its partnership with Nestle and Pepsi could help round out the top-line recovery. That segment grew 16% during the second quarter, helping offset the red everywhere else.  

While China is quickly getting back to its digital-first business-as-usual ways, Starbucks' early indication is that life in the U.S. will be altered. It will be a turbulent transition, but Starbucks is in exceptionally good shape to adapt.

Nicholas Rossolillo owns shares of Alibaba Group Holding Ltd., Starbucks, and Yum China Holdings, Inc. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. and Starbucks. The Motley Fool recommends Nestle and Uber Technologies. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
$84.26 (-2.67%) $-2.31
Pepsico, Inc. Stock Quote
Pepsico, Inc.
$163.26 (-2.01%) $-3.35
Nestle S.A. Stock Quote
Nestle S.A.
$107.61 (-1.08%) $-1.18
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
$79.99 (1.18%) $0.93
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
$26.50 (0.30%) $0.08
Yum China Holdings, Inc. Stock Quote
Yum China Holdings, Inc.
$47.33 (-1.09%) $0.52

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