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The Decision That May Be the Key to Starbucks’ Recovery

By Adria Cimino – May 3, 2020 at 6:00AM

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Starbucks will make sure customers get their coffee -- and their space.

Starbucks (SBUX -2.67%) will be giving its customers exactly what they want when the company reopens its stores. Coffee? Yes. But also social distancing. The coffee shop giant said in its earnings call this week that it is putting the focus on drive-through, curbside delivery, and other techniques that will assure the safety of customers and employees.

That could be the decision that drives recovery at Starbucks, whose revenue declined 5% to $6 billion for its fiscal second quarter (which ended March 29). Sales fell as Starbucks temporarily closed stores throughout the world, including in its second-biggest market, China, and its largest market, the U.S. Most Starbucks stores have reopened in China, and the company expects to reopen 90% of company-operated U.S. stores by early June.

An entrance to a Starbucks shop is shown, with a sign saying "Please wait here."

Image source: Starbucks.

Monitor and adapt

But those reopened stores won't be exactly like the pre-coronavirus Starbucks. The company calls its strategy "monitor and adapt." Using digital tools, it will assess the coronavirus situation and tailor its services to what best suits local customers. Some of the options Starbucks plans on offering include drive-through, curbside delivery if parking is available, and even at-home delivery.

Starbucks is already working to expand its drive-through and delivery services and is launching an entryway handoff option as well. Stores will begin the reopening process next week. But only about 30 will allow customers to order inside -- and they won't offer seating.

These efforts may be exactly what will bring customers back. COVID-19, the illness caused by the novel coronavirus, still remains a threat as worldwide cases total more than 3 million. Even as the crisis begins to lift, consumers are unlikely to forget the severity of the outbreak and may be hesitant about entering a crowded coffee shop.

Some of us may think back to Starbucks' earlier days and the experience of meeting up with friends in one of the shops. This new Starbucks experience seems vastly different. But it actually suits Starbucks' U.S. business today, even prior to the coronavirus crisis. Starbucks said that more than 80% of its transactions prior to the crisis were on the go, and most of those orders were drive-through or placed on the Starbucks app. Nearly 60% of company-operated stores include drive-through.

Ordering on the go

So, if we think of the Starbucks customer's usual habits -- ordering on the go -- and the extra concern about contact with others during the current health crisis, the effort to ramp up contact-free services sounds like the ideal way to reopen stores.

Now we might wonder: Will this be temporary or will drive-through, delivery, and pickup actually become the new face of Starbucks? Starbucks hasn't commented on that, but only emphasized the importance of monitoring and adapting the business as necessary.

For an investor, this is great news. It means Starbucks is proactive and ready to change in order to meet customers' needs. Growth in the Starbucks Rewards loyalty program shows that the company already is in a position of strength in spite of the quarter's drop in revenue. In the second quarter, U.S. active members in the loyalty program reached 19.4 million for a 15% gain year over year.

Starbucks still may have difficult days ahead because the coronavirus crisis isn't over. But the coffee chain's emphasis on social distancing will be a significant element driving long-term recovery.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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