Starbucks' Digital Business Is Powering Its COVID Recovery

Starbucks (SBUX -1.02%) has had a rough time during the pandemic as many people worked from home and ended up skipping their morning run to the coffee giant's stores. But that's starting to change. On a Fool Live episode recorded on June 16, Fool contributors Toby Bordelon and Brian Withers discuss the coffee house's recovery and how its digital assets will play a role in its customers' lives going forward.

Toby Bordelon: Let's talk about Starbucks. I like this company. I really like this company after their Q2 earnings. I'm going to recap that really quickly. Nine percent same-store sales growth in the US, 91% same-store sales growth in China. Those are really different numbers. That's going to tell you something about maybe where at least the near-term focus is on this business.

Total sales overall grew 15%. On other hand, if you take 9% and 91%, you're coming down at 15%, you can see that the U.S. business is probably far larger than the overseas business, the China business, and that's correct. A lot of opportunity in China, but still very young right now. In the U.S., one thing we saw in the last quarter was a decrease in the total number of transactions but an increase in the average ticket. That's a little bit of a concern, but as we came out of the pandemic, perhaps that resolves itself. China, on the other hand, saw an increase in both total transactions and the average ticket. So you're seeing growth in both areas there. The number of people who are buying and the amount of money they are spending, that's really good.

Total revenue up 11%, they're at $6.7 billion now for the quarter, and the margins went up from 9.2% to 16.1%. That's great. We're seeing a nice rebound here from the pandemic. All of this is really good. The reopening should help Starbucks. Their stores are starting to fully open across the United States, I know my local one right around the corner, it's fully reopened now. You can actually go in there and sit down if you want, which is a change from the recent past.

Interestingly, they're using the pandemic, they have a strategic shift. They were shifting to account for customer behavior. They were closing some stores in their more urban, higher-cost areas, opening up stores in more suburban areas including a separate drive-thru. Obviously, what we're seeing is people are buying more of their coffee close to their home, than at their workplace during the pandemic. They expect that trend to perhaps continue. People are wanting coffee near home, so they're shifting their store mix to account for that.

International expansion is a focus like we talked about. Ninety-five percent of their planned stores for 2021, the new stores, are international. That's really where they're putting their growth efforts right now. A bit of trivia, this year's shareholder meeting which just happened, they marked the 50th anniversary for the company. So 50 years of Starbucks, guys. I'm looking forward to the next 50 years. I think this is a great company, has been a great company, and will continue to be a great company.

Brian Withers: Great update, Toby. I think one of the keys is that Starbucks, to me, being a tech guy, I look at the tech side, it's got a great digital business. In the most recent conference call, the CEO highlighted and he said digital continues to be a significant driver for our sales recovery in the U.S. and the Starbucks Reward contribution is to the business exceeded pre-COVID levels, and for the second quarter is displaying all-time high across all key metrics.

To me the question is, are there indications that customers' habits have changed, and this level of digital ordering, will it continue? As stores fully open, is this a headwind or a tailwind?

Bordelon: Yeah, I think there is some evidence there. I mean anecdotally, I'll say my habits have changed. I don't think I ever ordered on the app before the pandemic. I mean, I use the app to pay in the store with the rewards program, but I don't recall ever ordering on the app. I do it all the time now. Even now that they reopened, then I can actually go in there and order more easily, I still order on the app.

I'll say, look, see this is a gift card I got at Starbucks because it takes a long time for them to give me my order, I haven't used it yet. I got it about a month ago. I haven't used it yet because I can't use it in the app. I have to go in in person and order. But even though I have free money sitting on my desk, I'm so used to ordering on the phone, I haven't even used that yet.

But let's look beyond me. Let's look at some metrics. In the last quarterly report, they did say that their 90-day active members and rewards program in the U.S. grew 18%. They're up about 23 million now, 51% at company sale, company-operated, company-owned stores, 51% of company sales in Q2 were from rewards members. Most of those are probably using the app. Management said digital ordering exceeds pre-COVID levels in the last quarter. That continues to trend from the first quarter. Hopefully, that continues to build. This is positive news and I can say it really looks like habits have changed a little bit and are probably going to stick.

Withers: Yeah, I absolutely love the order-ahead platform. It's even such to the point where it can tell you how long it's going to take to prepare your order versus how long your drive is to the store, so [laughs] you can verify that you'll get there and your coffee will be just coming off onto the delivery tray for you. Great update.