Financing

Brian Niccol wants to make Starbucks a coffee shop again, but also a faster one

On his first earnings call as CEO of the coffee chain, Niccol outlined plans to improve the comfort of its shops, a “full-court press” for improved speed, the return of condiment bars and the elimination of charges for non-dairy modifiers.
Starbucks
Mobile orders can quickly overwhelm Starbucks baristas. | Photo: Shutterstock.

In some respects, the Starbucks envisioned by its new CEO, Brian Niccol, will be both faster and slower. 

Niccol, in his first earnings call at the helm of the Seattle-based chain, on Wednesday described a strategy that effectively makes the company a coffee shop again, with comfortable seating and ceramic mugs for those who want to spend some time inside, much like they had for most of the chain’s history. 

“We’re reclaiming the third place, so our cafes feel like welcoming coffeehouses our customers remember,” Niccol told analysts. And it’s not just customers. Baristas also want that coffee shop feel. “They like leading the coffeehouse. I think there’s a moment of pride saying, ‘This is my place.’”

But the company will also be quicker for those customers who have no intent on sitting anywhere but their office chair or their automobile. Niccol wants every customer to get their drink within four minutes of ordering, a goal the company currently meets about half the time. 

He’s intent on that achieving that goal. Niccol mentioned “four minutes” 13 times on the earnings call, according to a count of the call’s transcript posted to the financial services site AlphaSense. “We are going to be a great craft coffee company that has really good throughput,” he said. “We have a great group of engineers, a great group of people that can solve any kind of bottlenecks.

“I’m putting a full-court press on solving four minutes.” 

Starbucks is in clear need of a major set of improvements. The company released its full earnings report from its fiscal fourth quarter, revealing a 10% decline in transactions in the period. 

Traffic declined both among loyalty members and non-loyalty members and across all dayparts, though it was particularly pronounced in the afternoon. 

That quarter is a key one for Starbucks, given that it’s the one in which the chain traditionally introduces its ultra-popular Pumpkin Spice Latte. Yet not even that popular drink could save the chain’s sales and traffic numbers. Starbucks losing 10% of its traffic during Pumpkin Spice Latte season is akin to Target or Walmart losing customers during the holidays. 

“Our product innovation and offerings, as well as promotions, did not create sustained excitement or the stickiness we planned,” CFO Rachel Ruggeri told analysts. 

The traffic challenges put pressure on the company and its finances, including both its revenue and profitability. Profit margins declined 370 basis points in part because of the weak sales and traffic. 

Starbucks’ challenges are strong enough that the company plans to sacrifice some revenue in the short-term to get there.

The company announced on Wednesday, and on the earnings call, that it plans to stop charging customers who order non-dairy beverage modifiers for their drinks, such as oat milk or almond milk. 

Starbucks generates $1 billion in revenue per year from the modifiers customers use to customize their drinks. Non-dairy creamers undoubtedly make up a substantial portion of that.

The company plans to bring back the condiment bars that were a casualty of the pandemic, which will help speed service because baristas will be able to simply hand customers their coffees right at the point of sale. 

While removing those charges will cost the company some revenue, Niccol believes that allowing customers to add their own almond milk will improve throughput and help traffic in the long run. And customers will probably like what amounts to be a 10% discount on their drink. 

“We should charge for the things we should, and don’t charge for things we shouldn’t,” Niccol said. “Everyone is going to feel a lot better about the beverage they created.”

“We have a pretty good idea of what the alt-milk implication will be. But we’re confident it’s the right investment.” 

Starbucks has been focused for much of the past two years on improving operations inside its stores, with investments in store design and equipment to improve in-store processes. Niccol has picked up on that since he took the helm early last month. 

“We have to make it easier for our customers to get a cup of coffee,” Niccol said.

One of the problems is mobile order and pay, which now accounts for 30% of the chain’s sales. The orders can overwhelm stores during peak hours, which makes the stores feel more transactional and less like the coffee shop the chain was designed to be. 

Starbucks is working on a new algorithm that supports the chain’s four-minute goal and ensures orders are delivered on time. The company also plans “guardrails” on the process to improve the experience. 

“When it works well, it’s great,” Niccol said. “But sometimes it can be a challenge for both customers and partners.” 

The improvement in the company’s cafes, to make them feel more like a “community coffeehouse,” will also require a redesign. Starbucks plans to cut back on new store builds and remodels to make way for that redesign, which will also provide the cash to support other investments in its turnaround plan. But executives still believe there’s room to grow in the U.S., and that new units generate better sales.

Starbucks’ operations improvement, meanwhile, features reductions to the menu, including both drinks and food. It’s too early to tell exactly what items could be eliminated, though the chain is already planning to ditch the olive oil-infused Oleato line introduced nationally earlier this year.

“There’s definitely room to eliminate some products that, frankly, add to that complexity, have a lot of waste and really don’t add a whole lot to the experience,” Niccol said. “We’ve got to clear the way so that we can get to the big movers that people really interact with.” 

As for the four-minute goal, Starbucks plans continued efforts to improve staffing at the store level. But it also has many of the tools to accomplish that goal. It just needed a goal, Niccol said. “It’s very doable,” he said. 

“We have four access points,” he added. “The café, mobile order and pay, drive-thru and delivery. Now we have three lines, hot, cold and food. But we haven’t had operating standards for time of service we want to provide for each of those elements. That is the problem we need to solve.” 

There is one other change Starbucks plans to make under Niccol that we did not mention: It plans to bring back the Sharpie markers that its baristas have traditionally used to mark cups with customers’ names, to bring back the “human touch on every coffee experience.” 

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