Howard Schultz is back in the CEO role at Starbucks (SBUX -0.97%), the coffee chain he built into a powerhouse restaurant company. He's diving straight into renovating the company to meet changing consumer behaviors and "record demand."
To those of us on the outside, the local Starbucks store may not feel different or out of date. But the information churners on the inside are discovering new preferences and habits that could significantly impact Starbucks' model. And you might be surprised to hear what they're saying.
The dawning of a new era?
Starbucks worked up a sweat trying to manage throughout the beginning of the pandemic, opening new drive-thrus, ramping up mobile ordering, enabling curbside pickup, and doing anything else a digitally powered restaurant giant could do with closed dining rooms. Now that it has emerged on the other side, the landscape looks quite different.
Schultz, who started his third stint as CEO in March as the company searches for its next leader, mentioned a number of differences in how customer demand has changed over the past few years, and what Starbucks is doing to address the changes.
To begin with, he said that customers are using the stores in different ways, and Starbucks has been "operationally challenged" to shift along with those new ways, hampered by pandemic closures and limits. Despite that, demand has been "relentless." That means that someone will jump in and grab the opportunity -- and if not Starbucks, it'll be another company. Schultz noted that it's every company's dream to have unmet demand without heavily investing to create it, and Starbucks is moving in to capture it. Starbucks' size, cash, and customer recognition give it a first-mover's edge, and Schultz is creating a strategy to transform the company and bring it into the next era.
This is the sentence that made me look twice: "The business, as I mentioned, has changed dramatically in terms of Mobile Order & Pay. Cold beverages is now almost 80% of the business."
Meeting new demand
I'll explain why this is so significant. When Schultz came back to take over the company for the second time in 2008, the company was faltering and needed a new vision. He revamped the store model to be a "third place" for people to meet after home and work. This new image was a boon for Starbucks, and along with other changes to boost this vision, it came back with new energy and increasing sales.
Since the pandemic, consumers are demonstrating less enthusiasm for sitting and enjoying a hot drink, and more interest in handcrafted, cold beverages on the go. That requires a different approach. In the near term, it's translating into high, unmet demand. If not addressed, it will turn into frustration and lower sales.
The new model that Schultz envisions has several elements and runs across the company's entire business. It includes improvements in store design, technology, equipment, payments, and beverage selection. Nine out of ten new stores will feature drive-thrus. There will be more handheld point-of-sale devices and newer digital technology for faster and more efficient service. These improvements should enhance the customer experience, as well as boost profitability. There also isn't enough equipment to handle the newfound interest in cold beverages, pressuring both customers and workers. In the wake of efforts to unionize, management is also investing in the worker experience, including increasing wages. The wage boost should filter down to better serve customers as well.
How Starbucks is winning
Despite what looks like unaddressed behaviors and unmet demand, Starbucks posted a 15% sales increase in the second fiscal quarter (ended Ap. 3). Prior investments in mobile, delivery, beverage innovation, and its membership program have generated loyalty, giving the company leverage to analyze the demand and shift accordingly.
No company ever stays on top without changing along with consumers. Under Schultz's leadership, Starbucks has done this before. I'm closely watching the search for a CEO who can continue to lead the company into its next phase.
