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Starbucks takes on a changed consumer

By building more drive-thrus in suburbs and changing its urban strategy, the coffee giant is hoping to catch consumers as they use restaurants, says RB’s The Bottom Line.
Photograph courtesy of Starbucks

The Bottom Line

Earlier this month, Starbucks revealed a plan to overhaul some of its urban markets. The chain plans to close 400 locations in these markets and replace many of them with stores in different locations, and often with takeout-only units known as Starbucks Pickup locations.

But that’s not where the chain’s growth is.

Rather, the Seattle-based coffee giant is planning to take over the suburbs with more drive-thru locations.

“The drive-thrus are positioned as a growth engine for Starbucks,” CFO Patrick Grismer told analysts on Wednesday, according to a transcript on the financial services site Sentieo. Drive-thrus, he said, get the company into newer trade areas, which includes the suburbs. “Drive-thru development in suburban markets remains a priority for us,” he said.

To be sure, drive-thrus are nothing new for Starbucks. About 60% of the chain’s locations have such a window.

Those locations have become vital during the pandemic. The company shut down all of its restaurants that didn’t have such a window back in March. With consumers still feeling less than confident about dine-in and access to drive-thrus seemingly safer, the crisis has made such windows more popular than ever.

And drive-thrus are important to suburban development, where car commuters dominate, and many are in a hurry and not all that eager to go into a location. Indeed, even before the pandemic, 80% of Starbucks’ new-unit development featured a drive-thru location.

There’s another reason Starbucks likes those locations: They pay off. Grismer told analysts that the company can get a cash payback on a drive-thru unit in less than two years, which certainly justifies the financial model.

“Those units deliver, as you would expect, higher average unit volumes and superior operating margins, because of the higher volume and the leverage we get with that,” Grismer said. The company generates a quicker return on its drive-thru units than it does its traditional cafes.

Grismer said that the company is focusing its development of these units in the Southeast and central regions of the country.

Much remains uncertain about the potential impact of the coronavirus on commuting patterns and overall consumer behavior. One challenge for a concept like Starbucks, which relies heavily on morning business, is that more Americans work from home long-term, which can reduce the effectiveness of those suburban drive-thru units—and, of course, that quick payoff.

At the same time, it can be reasonable to assume that drive-thrus will become more important to the restaurant business long-term, as consumers will be more likely to get takeout one way or the other and, of course, will feel safer in the process. It’s also possible that Americans opt to leave central cities in the aftermath of the pandemic, worried about the health effects of living so close together.

Starbucks is also shifting its approach in those urban markets. By deciding to close 400 urban locations over the next 18 months, and ultimately replace them with Pickup stores, the company is hoping to improve its overall service in those markets and bolster its growth there.

Consumers in urban markets have changed, just like they have everywhere else.

They are ordering from their phones more often and getting their coffees and Frappuccinos to-go. But that shift has periodically interrupted Starbucks’ in-store business, hurting traffic in the process.

While Starbucks before the pandemic largely fixed its traffic problem with tech-driven operational improvements, it still views that as a potential challenge. Redeveloping its urban markets with a mix of takeout stores for those on-the-go customers and traditional cafes for those who want to sit and use the Internet over a latte is the way to go.

“The pickup stores [are] serving more as a vehicle to transform our dense urban markets, effectively to optimize our sales capture and improve profitability of those businesses, which are fairly well-established trade areas,” Grismer said. “Blending the pickup stores with traditional Starbucks stores in the dense urban markets will elevate the customer experience and, as I mentioned before, position Starbucks for long-term growth.”

Starbucks’ moves, which also include its comments that it wants to move away from malls, and its request to renegotiate deals with landlords, show that the company is more quickly shifting its development strategy during the pandemic.

The chain’s success in doing so will be worth watching. The pandemic is certain to change consumer behavior for good, and probably in ways that are difficult to tell at the moment. That will have major implications, both in central cities and the suburbs.

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