Starbucks probably hoped things would be better by now.
It certainly has a right to think that. The company’s fiscal second quarter ended March 30 was comparing itself to what was a landmark period for the chain a year ago, one in which everybody realized that something about the Seattle-based coffee giant was off.
This time, however, the company was coming in with a new, high-paid CEO in Brian Niccol, several new members of its management team, new marketing, a renewed focus on its coffee shops and customer services and promises to improve mobile ordering.
Yet sales results didn’t quite show that. Same-store sales in the U.S. fell 2% in the quarter, its fifth straight quarterly decline and the sixth straight period in which that key number fell below expectations. Transactions declined 4%. At a time when Starbucks should be showing top-line progress, the numbers looked much like they’d looked throughout 2024.
“Our Q2 results were disappointing,” Niccol said at the end of the company’s fiscal second-quarter earnings call on Tuesday. “Our turnaround is going to take a little time.”
Of a particular focus was the earnings-per-share figure of 34 cents, which came in well below consensus expectations of 50 cents per the website Earnings Whispers. “I believe there are better measures than EPS right now to track the progress we’re making to turn around the business,” he said.
Niccol believes there are numerous early signs of progress in the business that hearken to better days ahead in the company’s turnaround.
The company has spent much of the seven-month period changing much of the way Starbucks is operating. The chain has overhauled management, cutting staff in Seattle to speed decision-making. It instituted a dress code and instituted a new code of conduct inside its stores to improve the environment and make it more friendly to in-store customers. It had its baristas handwrite names on cups and bought time during the Super Bowl pregame and postgame shows to advertise those changes and offer free coffee the following Monday.
Some of those efforts are taking hold. The company’s marketing appears to be resonating, Niccol said. Transactions from non-loyal customers have “stabilized,” CFO Cathy Smith told analysts. Much, if not all, of Starbucks’ sales and transaction problems last year came from those customers, who typically represent about 40% of the chain’s sales. Past management had leaned on loyalty customers to solve the chain’s sales challenges. Under Niccol the marketing became much broader to target more of those customers.
Niccol on Tuesday revealed planned labor improvements inside stores to speed service and throughput. The company said that investments in labor in 700 coffee shops led to improved service and transactions.
“We’re finding that investments in labor rather than equipment are more effective at improving throughput and driving transaction growth,” Niccol said.
On a video after Starbucks earnings were released, Niccol promised a “green wave of hospitality.”
“We’re not just building back our business, we’re building back a better business,” he said.
The company also tested a new order sequencing algorithm on its app that improved speed of service in the drive-thru times by two minutes and resulted in 75% of order wait times in stores to be four minutes or less.
Niccol’s equipment comments in particular are notable because of the contrast with the management he replaced last year. The company spent two years, first under interim CEO Howard Schultz and then under Laxman Narasimhan, creating a new “Siren System,” featuring equipment improvements and operations changes designed to improve service in stores.
Yet that system hasn’t been rolled out quickly enough, and under Niccol Starbucks has been pulling back on that rollout. That system will only be added to the busiest stores that need it. “It’s not something we need to be rolling out across all 10,000 [company-owned] stores,” Niccol said.
Niccol believes that improving service and getting back to the chain’s “third place” as a friendlier destination for customers will be key going forward, even in an environment in which consumers are cutting back. He said Starbucks is an “everyday luxury” that customers can enjoy “regardless of the economic challenge.”
“If it’s a major step backwards, we’ll be impacted,” he said of the economic environment. “The best way to go at these things is with your best offense.”
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