Financing

Starbucks works to keep pace with its customers

Once known for being a “third place” between work and home, the coffee chain has evolved into a convenience-focused giant serving increasingly complex, customized beverages. Keeping pace can be difficult.
Starbucks works to keep pace with its customers. | Photo illustration by Nico Heins

This is the first in a three-part series on the reinvention of Starbucks.

Today: Starbucks works to keep pace with its customers.

Part 2: Laxman Narasimhan takes the helm of a changing Starbucks.

Part 3: After a critical self-assessment, Starbucks pursues a labor course correction.

Starbucks is not the same company it once was. And by “once,” we mean about four years ago.

The pandemic, combined with broad, long-term shifts in consumer demands and Starbucks’ own desire to expand and grow its menu, have evolved the brand into far more than your average coffee shop.

Once known as a “third place,” where consumers mostly bought hot beverages on their way to work or as they did homework or met with friends in the café, it is now mostly a massive, convenience-focused beverage concept.

A company that patterned itself after Italian coffee shops where people gathered during the afternoon now mostly connects with customers on their mobile apps or in the drive-thru. And those customers are most likely ordering a customized cold beverage that looks more like a milkshake than a macchiato.

Yet all that evolution has come with some real conflict. Starbucks’ desire to serve more customers more often with the beverages they want in the manner they want them has clashed with its desire to be a top employer. And it has put pressure on the world’s largest coffee chain to balance all these issues without losing the “romance” on which it was founded.

Il Giornale

Howard Schultz's coffee shop was initially called il Giornale. | Photo by Jonathan Maze


Barista wrist

It doesn’t take long to find the conflict between the company’s popularity and its employees.

Starbucks was founded by a trio of University of San Francisco students, who sold Peet’s Coffee out of a retail shop in Seattle’s popular Pike Place Market. Today that market is a destination for tourists who will form long lines to buy a latte and a bag of specialty coffee beans.

Howard Schultz came aboard as marketing director in 1982. He soon got the idea of turning Starbucks into a coffee shop after visiting Italy, and created his own concept called Il Giornale. Schultz bought Starbucks in 1987, converted his own concept to Starbucks and began opening locations elsewhere.

The company went public in 1992, which fueled more growth. The brand had 140 locations that year, sold shares at $17 and raised $25 million. Starbucks grew so rapidly in the ensuing years that it almost became a joke, especially when the chain opened locations across the street from one another to satisfy customers afraid of making a dreaded left turn during their commutes.

But as its stores grew in popularity, all the customers and all those espresso drinks took their toll on the company’s baristas.

Starbucks used a typical espresso machine in its early years. But those machines can be tough on users. Baristas so frequently developed repetitive use injuries from twisting and pounding the portafilter from the espresso machine that there’s a name for the condition: Barista wrist.

It also took time to make the espresso. So the chain shifted to an automated La Marzocca machine. The machine helped the company generate the efficiency needed to grow quickly. But the machine was also tall, effectively creating a barrier between the customer ordering the latte and the barista making the beverage.

“We overlooked the fact that we would remove much of the romance and theater that was in play with the use of the La Marcocca machines,” Schultz wrote in a now-famous 2007 memo to his executive team. Starbucks didn’t ditch the automated machines. It simply made the equipment shorter.

The company would face similar conflicts 15 years later.


The Cold Beverage Revolution

Today, Starbucks operates more than 38,000 locations worldwide, more than any other chain but McDonald’s. It has a market value of $100 billion and is one of the world’s most recognizable brands.

But that growth is nothing compared with the evolution inside the chain’s locations. A decade ago, customers went to Starbucks before or after work and typically ordered a latte, a mocha or a cappuccino.

Today the typical Starbucks user is more likely to order a beverage they create, such as a cold brew with toffee nut syrup, milk, vanilla sweet cream cold foam and caramel drizzle. And they’re more likely to be a young person who got the idea from social media.

Sbux Oleato

Starbucks Oleato cold brew. Cold beverages are now the dominant choice of Starbucks customers. | Photo courtesy of Starbucks


That’s been an amazing business for Starbucks. While numbers fluctuate, as many as 75% of its beverage sales are cold. Rather than get cup sleeves to protect their hands from the hot coffee, today customers get the sleeves in the winter so their fingers don’t freeze.

The modifiers that customers use to order their beverage have also become a big business. For a Starbucks customer, who is already paying perhaps $4 to $5 for a drink, it is nothing to add another 80 cents or $1.50 to make sure the drink is just the way they want it.

The company generates more than $1 billion in highly profitable revenue from the sale of beverage modifiers in the U.S. every year, a number that is growing. 

“People fall in love with their drink,” CMO Brady Brewer said.

But the modifiers and the cold beverages have made Starbucks the most complicated simple concept on earth.

The brand’s locations were not built or organized to handle the number of cold or customized cold beverages even though, as Brewer noted, the company could see the demand for cold drinks steadily increase over the years.

The publication Bloomberg estimates there are some 383 billion possible beverage combinations at Starbucks. That makes life difficult for the baristas responsible for crafting those beverages.

But it also requires some heavy lifting, such as ice. A typical store keeps an ice machine in the back and stores that ice in a cooler up front. Baristas would carry a 25-pound bucket of ice from that ice machine to the cooler.

As cold beverages took over, they had to do that more often. These days, they make that trip 75 times.

Equipment changes

On the ground floor of Starbucks Seattle headquarters, a former Sears warehouse, is the Tryer Center, a 20,000-square-foot space with movable cardboard walls and equipment on wheels.

It’s designed to spur innovation, test ideas and solve problems. Baristas are brought in to help test things. The lab once created a proposed design for an ultra-busy Starbucks in New York City’s Penn Station and found that the workspace wasn’t workable for partners, so it was changed.

There, along one makeshift store, a cupboard above one of the counters features a new ice machine, connected with hoses and wires to a larger device on the ground a few feet away.

Partners using this ice machine can press a button and get nugget ice, which customers prefer to the old square ice. The nugget ice is distributed based on the size of the drink. More importantly, partners no longer have to lug that 25-pound bucket 75 times a day. The ice machines will be delivered to most of the chain’s locations this year.

That isn’t the only innovation. The growth in cold foam has also put some pressure on the use of stand blenders. Starbucks last year developed a handheld, portable cold foam blender, which looks like a dumbbell with a cup on one side.

Baristas pour the cold foam mix into the cup and press a button on the handle, which blends just enough foam for a drink, which is then poured onto the top of a beverage.

And then there’s drip coffee. While preparing drip coffee for a customer is relatively easy, the act of making that coffee every 30 minutes becomes a distraction when baristas are busy making venti Iced Lattes with coconut milk, three pumps of sugar-free vanilla, three pumps of sugar-free cinnamon dolce, three scoops of vanilla bean powder and sweet foam.

Starbucks for years has been developing a boxy fix for that problem: The Clover Vertica, a single-serve coffee maker with a variety of beans that makes coffee based on size. The device reduces waste, because baristas no longer have to throw out old coffee after 30 minutes. And they don’t have to make the new batch of coffee, either.

Clover Vertical - Starbucks

The Clover Vertica enables baristas to make single-serve brewed coffee. | Phot courtesy of Starbucks


The implementation of new technology and new beverage and food stations, all designed to simplify the process for making food and beverages, is known as the Siren System. The company developed that system at Tryer Center.

Starbucks demonstrated this system at a 2022 Investor Day presentation. The new system reduced the time it takes to make a Mocha Frappuccino from 83 seconds down to 35.

“My favorite part about the new station is that there is less movement involved, so there’s no bending,” Jaelyn Proctor, a partner at the Tryer Lab, said at the presentation. “There’s less straining. And usually after a long day of doing all of those movements, I’m pretty exhausted. So, this helps prevent that.”

 

Starbucks Pickup

Starbucks is opening more of its takeout-only Pickup stores. | Photo by Jonathan Maze


The shift to convenience

On the corner of University Street and 1st Avenue in downtown Seattle is a symbol of Starbucks’ evolution.

It’s a Starbucks Pickup unit, just a couple of blocks away from the chain’s first location in the city’s Pike Place. There is a screen on a wall showing the status of customers’ mobile orders and a counter where customers can get those orders. There are no seats.

But this location at one point was a Starbucks Reserve store, an experiential destination location designed to show off the chain’s coffee bonafides, with “coffee-inspired” beverages and Princi pastries.

That Reserve store was closed during the pandemic. It reopened as a pickup location serving only customers who preferred consuming their coffee somewhere else.

The pandemic accelerated an industry shift toward convenience. Customers grew accustomed to using mobile orders. They frequent the drive-thru more often. And they’re more likely to use delivery. For certain concepts, they are simply less likely to consume their purchases on-site.

About three-quarters of the chain’s U.S. revenues now come through convenience channels, mobile order and pay, drive-thru and, increasingly, delivery.

“What started as a café evolved to add a drive-thru in the late 1990s and mobile order and pay in 2014 and 2015 and now delivery,” said Jon Liechty, SVP of U.S. retail operations.

As such, Starbucks is opening more of those pickup units to cater to customers who simply want to get their beverage and leave. Those units account for about 1% of its locations.

And more of those locations are delivery-only units. Less than 1% of Starbucks locations are delivery-only restaurants, including some that the company is testing with the ghost kitchen provider CloudKitchens. Delivery accounts for about 4% of sales.

Expect that to grow rapidly: Starbucks predicts delivery sales will soar, and about 40% of its sales are forecasted to come through delivery-only units by 2025.

The company uses delivery-only and pickup stores in what it calls “lighthouse markets,” or heavily penetrated markets where its stores are busy, and where specific types of stores can ease the burden for existing shops. “There are infill opportunities where you can open channel specific stores in areas where you’re going to get growth,” Liechty said.

Speed and human connection

This shift to convenience has made speed vital. A customer going through a drive-thru will wait only so long. Customers making a mobile order, meanwhile, expect that order to be ready by the time they arrive.

That can be difficult when the barista is busy making a Cold Brew with salted cream cold foam, two pumps of caramel syrup, three pumps of toffee nut syrup and almond milk, as they warm an order of Sous Vide Egg Bites.

Much of the company’s efforts to improve efficiency, particularly through the Siren System, have helped speed service. “We’re seeing decreased drive-thru times at peak, which is wonderful,” Trilling told analysts.

Yet, as important as speed is, Starbucks continues to talk almost constantly about “human connection.” During the company’s Investor Day presentation in early November, for instance, executives used that phrase 13 times, according to a transcript of the conversation. They mentioned “speed” just three times.

CEO Laxman Narasimhan explained that the company’s presence and the frequency customers use its shops give it the ability to have an impact on people’s lives. “We can make a big difference," he said. “We not only help people connect with others, we help them connect with themselves.”

While speed is important, it is more important for brands to connect with their customers on a more personal level.

The consumer strategist Lisa Miller noted that surveys show customers more likely to value friendly service over speed. “Friendly, attentive service was statistically higher than prompt service,” she said. And that’s why brands like Chick-fil-A or In-N-Out can get strong sales despite generally slower service.

How that consideration takes place has simply changed. Much of the company’s connection is taking place through its mobile app, where its Starbucks Rewards loyalty program has 75 million active members globally. When counting those who are not active, that number triples.

“Starbucks has direct digital relationships with hundreds of millions of customers,” Brewer said at the Investor Day presentation. “Hundreds of millions of customers that we can reach with personalized messages that engage, activate and uplift them, and in a way that also drives our business.”

That gives the company the ability to do a lot more to convince more of those customers to come in more often. “Our options are infinite,” Brewer said in an interview.

And sometimes that connection happens during those brief interludes when a barista hands a customer their morning drink.

At a recent investor conference, Narasimhan told the story of working in the drive-thru in a store on Chicago’s South Side at 7 a.m.

A woman ordered a customized beverage, rolled down her window and only had about half her makeup on.

“She looked at me with a combination of anxiety and relief to see what she was getting,” Narasimhan said, according to a transcript on the financial services site AlphaSense. “I just said, ‘I hope you had a great weekend and I hope you have a great day at work.’ That moment mattered because I was probably the first person she was talking to all week. I think we cannot really take away from this idea that there is a point of human connection.”

Tomorrow: Laxman Narasimhan takes the helm of a changing Starbucks.

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