Howard Schultz, in his third go-round as CEO of Starbucks, on Tuesday promised an additional $200 million in investments in the company’s workforce, much of it in the form of additional raises slated for this summer, as part of a full-throated defense of the business and its growth potential both in the U.S. and internationally.
But not all stores will get these investments. Stores that have opted to form a union, now 50 in number, will not get the additional raises and benefits. “Federal law prohibits us from promising new wages and benefits at stores involved in union organizing,” Schultz said in his prepared remarks. “And by law, we cannot implement unilateral changes at stores that have a union.”
He added, however, that the company “will negotiate in good faith” with the stores that voted to form a union. “Starbucks will not favor of discriminate any partner based on union issues, and we will respect the right of Starbucks partners to make their own decisions when exercising these rights,” he said.
The additional investments come on top of raises and other benefits announced in October—which will be provided to those union stores—that are slated to bring the average wage at the chain’s company-operated shops to $17. They bring the total amount of investments to $1 billion, the company said.
This time, the company expects to give raises to more tenured partners this summer, including at least 5% increases to those with two to five years of experience, and raises for those with five years or more experience to get them to 10% above market rates. The company also plans to boost pay for store managers and shift leaders. It is planning additional changes, notably the ability for more customers to tip workers when they’re not paying with cash.
Starbucks is promising other benefits that it will announce in September, such as additional training, student loan refinancing, profit sharing and skills recognition programs, Schultz said.
The additional investments come weeks after Schultz arrived and immediately opted to suspend Starbucks’ share buyback program. On Tuesday, Schultz defended that decision, arguing that investing in the workforce would provide better returns than would buying back shares. “It was not symbolic,” Schultz said.
He said that share buybacks would provide a 10% return. “A 10% return is not satisfactory to me,” Schultz said.
“We’re not making symbolic decisions,” he said. “We’re making strategic decisions that we think are in the best interest of our shareholders. And the investments that we’re currently making are going to drive a better return than the current way we look at buybacks.”
Schultz’s return comes amid an odd set of circumstances. On one hand, Starbucks is thriving. Same-store sales rose 12% in the U.S. in the company’s fiscal second quarter, which ended April 3. Those sales came from a 5% increase in transactions and a 7% increase in average check. On a two-year basis, same-store sales are up 23%.
On the other, the company is facing a historic run of unionization virtually unprecedented in the restaurant business. Some 50 stores have voted to form a union, according to Starbucks Workers United. The company has won only three votes held so far, and another 200-plus stores are planning votes.
As such, former CEO Kevin Johnson retired and Schultz agreed to replace him, with a replacement expected to be named this fall. Schultz, who built the company into the world’s second-largest restaurant chain, has now been CEO for three separate tenures.
On Tuesday, he said the problem at the company is due to capacity. Starbucks has changed rapidly in recent years, with customers ordering more cold beverages, customizing more orders, and making a lot more of them through digital channels. Drive-thru and mobile order and pay now account for 70% of sales while delivery is up 30% in the first half of the company’s fiscal year.
Yet it’s grown so much that Starbucks stores can’t handle all of it.
”COVID presented unprecedented operating challenges to consumer brands,” Schultz said. “COVID also drove dramatic changes in customer behavior that Starbucks stores and systems were not designed or built for. The challenges have been amplified by record demand for Starbucks coffee in our U.S. stores, which has accelerated with the lifting of COVID restrictions.”
Schultz says the company is planning to accelerate new store development, with 90% of the stores having drive-thrus. The company also plans technology and equipment improvements to improve efficiency and speed. It will add additional technology to take some tasks out of employees’ hands.
Schultz defended many of the company’s metrics, noting that mobile order and pay is now a $4 billion business and that the Starbucks Card is in the hands of 120 million people—making it larger than the entire gift card category—with some $1 billion loaded on those cards, “waiting to be spent.” He also noted that there are 27 million U.S. members of the Starbucks Rewards loyalty program.
“Strong underlying demand means the productivity and efficiency investments I’ve described represent literally low-hanging fruit available to us right now,” he said.
But Schultz also went on a defense of the company’s benefits and argued that they have historically been better than anything found in a union contract.
“Compare any union contract in our sector to the constantly expanding list of wages and benefits we have provided our people for decades and the union contract will not even come close to what Starbucks offers,” Schultz said.
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