When Brian Niccol took over as CEO of Starbucks in 2024, he labeled his comeback plan “Back to Starbucks,” embarking on a months-long strategy to pull the company out of a brutal slump largely by focusing on the chain’s in-store service quality.
It’s safe to say now that Starbucks is back. The company’s U.S. same-store sales grew 7.1% last quarter, driven largely by traffic. That traffic came from all cohorts, including low-income consumers.
But more importantly it came from the type of younger consumer that all brands covet, and which Starbucks appeared to lose during its two-year march through the weak sales wilderness. Investors and media had questioned Starbucks’ pull with that crowd in particular as they seemed to shift their spending to hot new brands like 7 Brew and Dutch Bros.
The company credited its service. But it can also credit cold foam. The most popular part of Starbucks’ $1 billion beverage modifier business, cold foam sales grew 40% in the quarter, led by Gen Z consumers. The company added new flavors and infused it with protein and then watched customers roll right in.
“More and more customers are interested in drink experiences, whether that’s morning rituals or afternoon experiences,” Niccol told analysts on the company’s fiscal second quarter earnings call on Tuesday. “You’re also seeing customers at all different age cohorts wanting to have a third-place experience.”
Starbucks’ top-line sales growth was not just limited to the U.S. The company’s 10 largest international markets generated positive same-store sales all at the same time for the first time in nine quarters.
And the company can now boast earnings growth. Earnings per share grew 32% last quarter to 45 cents, which was also the first time that happened in two years. Starbucks has been arguing for months now that the investments it has been making in reorganizations, remodels and additional in-store workers would ultimately generate sales growth that will yield earnings growth over time.
The company’s performance was so strong that it upgraded its expectations for both sales and earnings this year, which sent the company’s stock price up 5% during off-hours trading.
“We said we would grow the topline first and margin earnings would follow,” Niccol said. “Q2 is proof our strategy is working.”
Starbucks’ sales challenges emerged in late 2023 amid a social media backlash over unionization and Middle East politics and appeared to worsen at the outset of 2024. Tuesday’s earnings call came two years after Niccol’s predecessor, Laxman Narasimhan, led a brutal call following an ugly quarter that would elicit widespread public criticism over the chain’s direction, including from Howard Schultz.
The company responded later that year by hiring Niccol away from Chipotle, handing him a massive incentive package. Starbucks focused on the in-store service that appeared to be abandoned coming out of the pandemic.
Workers started writing on cups and self-serve creamer stations returned to stores. The company added free coffee refills. Later it let managers add workers during busy periods and started remodeling locations to make its stores more inviting. It has also changed its mobile ordering algorithm to prevent backups.
It has also cut corporate overhead, made plans to open new corporate offices and is now adding bonuses for workers at high-performing locations.
On Tuesday Starbucks reported what Niccol called a “milestone” quarter, one that revealed the company’s vision for that service and its impact on sales and now earnings.
Customer experience scores are rising and the company said service times remain “on target” despite higher transaction volumes.
“We continue to make great progress,” Niccol said. “I think our customers are feeling seen in the café and more importantly, getting their orders on time and in the right amount of time. And then in mobile order and drive-thru, customers are seeing their orders show up on time and at the speed requirements they would hope for.”
Back to Starbucks indeed.
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