Starbucks loses the occasional customer

The coffee giant reported strong results from its loyalty members, who came into its shops more often and spent more in the process. But everybody else was a problem.
Starbucks saw weak sales from occasional customers. It has a plan to get them back. | Photo courtesy of Starbucks.

In some respects, Starbucks had two completely different quarters in the last three months of 2023.

On the one hand, there is the quarter from its loyal customers. Membership in its Starbucks Rewards loyalty program increased 13% in the period, the company’s fiscal first quarter, the company said on Tuesday. There are now 34.3 million members of the loyalty program in the U.S.

Those customers came into the company’s shops more frequently and they spent a lot when they did, representing some 59% of total spend at the chain’s corporate locations.

But Starbucks missed sales estimates largely because of everyone else. “We had a softening of U.S. traffic, specifically occasional customers who tend to visit in the afternoon,” CEO Laxman Narasimhan said on the company’s earnings call.

And that softness hit in mid-November, which the company blamed on “misperceptions” of its position on the conflict in the Middle East, which led to calls for boycotts from both sides of the Israel-Palestine crisis and vandalism at some of the chain’s shops.

Traffic declined in the low single digits in the month. Executives said that traffic improved in December, thanks to a popular holiday promotion. That was enough to keep the chain’s traffic growth in positive territory. Same-store sales in the U.S. rose 5% in the quarter, with traffic up 1%.

“What we saw in the U.S. was a strong quarter until mid-November,” Narasimhan said.

The issues in the U.S. were part of a trio of “unexpected headwinds” that hit the chain last quarter. Those headwinds included problems in the Middle East as a direct result of the conflict there. “I’m deeply distressed by the violence shaking that region,” Narasimhan said, noting a “significant impact” on sales and traffic in the area.

In China, meanwhile, the chain’s sales struggled, which the company blamed on a more cautious consumer. But executives continue to express confidence in the market, the chain’s biggest and most important growth market.

And they defended their premium position in the market, arguing that it will win the day in the future. “We’re not interested in entering the price war,” said Belinda Wong, co-CEO of Starbucks China.

Starbucks executives also hinted at a “softer than planned January,” but insisted that many of these headwinds are “transitory.”

Executives lowered their guidance for revenue and same-store sales growth this year to reflect the weak quarter. The company now expects U.S. same-store sales to grow from 4% to 6%, down from the 5% to 7% growth it had been projecting.

The weakness also overshadowed some otherwise strong numbers at the chain. Operating margin in North America, for instance, increased 290 basis points in the period, to 21.4% of sales.

Starbucks also sold a lot of gift cards. The company sold a record number of gift cards in the period and customers loaded $3.6 billion onto those cards.

And customers are using mobile order and pay. Some 30% of sales in the quarter were over mobile order, a fundamentally more profitable method of ordering for the chain.

The company does have plans to use more marketing and product innovation to change that narrative. Starbucks just released its olive oil-based Oleato beverages nationwide. It plans three more beverage platforms, still to be named, over the next few months.

Executives promised that they would be popular in the afternoons where the company’s business is weakest, as would new snack items.

It is also planning new partnerships. It plans to bring in Bank of America as a partner on its loyalty program, which the company hopes will generate further loyalty program growth. Starbucks is also using more analytics and technology to drive more sales among occasional customers.

And mobile order and pay can help, too. “There’s high demand for mobile order and pay even among occasional customers,” CMO Brady Brewer said.

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