Starbucks (SBUX -0.17%) is enjoying a spike in demand for its coffee beverages, even compared to soaring sales results a year ago. While that boost would normally be great news, it has strained many of the chain's stores beyond their capacity.
Howard Schultz, who recently stepped back into the CEO spot, said this week that Starbucks is struggling to catch up to huge changes in the way shoppers are interacting with its brand today.
Let's look at that shift and Starbucks' plan for getting back ahead of consumer demand for its beverages.
Drive-thru and delivery
Shoppers prioritized home delivery, drive-thru, and mobile ordering during earlier phases of the pandemic, and that shift has only accelerated even as social distancing restrictions fade. In fact, Starbucks saw a 30% spike in delivery demand over the past two quarters.
More than two-thirds of its store orders occur in the drive-thru lane or on smartphones today rather than in face-to-face interactions at the counter. Starbucks was surprised by that shift, and the pandemic also made it harder to invest in building a better infrastructure to support it.
The result has been a drop in service levels. Schultz said higher demand, plus "algorithms built for different customer behaviors, has placed tremendous strain on our U.S. partners."
Changing investment priorities
Now we know more about why Starbucks decided to pause stock buyback spending. Schultz sees the chain as far behind in needed investments in things like wages, training, and new drive-thru locations. The chain is hoping to implement handheld device checkouts and better store designs, too, that should speed service back up.
Most of the cash will go toward the digital platform, though, with improvements to the loyalty program, mobile ordering and payment, and home delivery on the way. While Schultz estimates that the company gains about a 10% return from stock buyback spending, its returns are far higher in these other areas. "With Starbucks' treasure trove of global assets, a 10% return is not satisfactory to me," he said.
Righting the ship
Starbucks didn't mention competition in its call with investors, and that's likely added to the market share pressure that the company is feeling today. Rivals like Dunkin' and McDonald's are eager to pounce on any opening the company leaves in the coffee and to-go food niches.
It's also unclear whether Starbucks is losing some of its market power at a time when most consumers are opting for quick service over a café experience. Fast-food titan McDonald's might be better-suited for this environment, given its grip on the drive-thru niche.
But the good news is that demand is still strong for Starbucks' products. And there's over $1 billion sitting on pre-paid Starbucks cards, waiting to be spent at its stores. "We have demand everywhere we look," Schultz said.
The company's challenge now is to meet that demand while raising the bar so that its customers and employees are as happy with their experiences as they have been in the past. "We must reintroduce joy in the customer and emotional connection back into the partner experience," Schultz said.