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Financing

Why Starbucks is shifting its attention to the suburbs

Changing consumer habits have the company rapidly adapting its development strategy and its services.
Photograph: Shutterstock

Starbucks isn’t waiting for central business districts to get back to normal.

The Seattle-based coffee giant has shifted much of its development strategy during the pandemic, accelerating its move to the suburbs where drive-thrus are more prevalent, while it shutters some of its urban locations that have been slower to recover—and which face considerable uncertainty in the coming years.

“There will be a cohort [of locations] that will, for some period of time, be under pressure until the environment normalizes,” CFO Patrick Grismer told investors this week, according to a transcript on the financial services site Sentieo. “We don’t know when that will be. We’re not waiting for that. And so we are rapidly innovating in order to capture new demand, new occasions that we didn’t have before that tied to how customers are currently leading their lives.”

That, he said, is “why we have moved quickly to open up new channels of distribution at our existing stores, primarily in the suburbs because there’s significant latent demand, there’s unmet demand.”

Starbucks had previously announced plans to close 400 locations in the U.S. over the next 12 to 18 months, most of them urban locations.

The performance of the company’s more urban locations has been a drag on the chain’s performance. Starbucks says its same-store sales declined 11% in August, which has continued its steady improvement—they declined 14% in July—but remain behind many of its competitors, like McDonald’s and Dunkin’.

Drive-thru locations, which represent about 60% of Starbucks stores, have generated positive same-store sales. The rest have been negative, and the biggest problem have been at central business district locations, many of which remain closed.

Grismer said consumers are still going to Starbucks. They are just going at different times of day than before the pandemic. But they are also going to different locations, opting to visit stores closer to home. “Increasing numbers of customers are working from home,” he said. “That’s why we have low levels of traffic in central business districts. But we are seeing very significant increases in customer traffic at our suburban drive-thrus.”

To handle the shift in demand, Starbucks has been getting more aggressive in providing newer services in suburban areas.

For instance, the company plans to start using handheld point-of-sale devices in its drive-thrus and is quickly rolling out curbside service “where we have convenient parking.” The shift in its Starbucks Rewards loyalty program to let customers get rewards no matter how they pay is also aimed at getting newer customers.

“We are rapidly shifting our business in response to shifting consumer behavior in the near term,” Grismer said, adding that the company is still looking to accelerate the pace of its takeout-only Starbucks Pickup stores.

Starbucks at the outset of the pandemic asked all of its landlords for breaks on rent as the pandemic hammered sales.

Grismer noted that the company is “seeing success in those conversations with landlords,” but “not necessarily in the way that you might expect.”

For instance, he said, the company is getting more favorable terms for existing locations and for new locations. “Even though we’re accelerating the closure of stores, we have a very robust new store development program focused on our drive-thru assets, largely in the suburbs,” Grismer said. “We’re able to bring to bear the current environment to secure favorable rent terms for those new locations.”

What’s more, he said, the company is getting concessions, such as extra parking spaces for curbside service. Starbucks expects to have curbside service in 2,000 stores in the coming months, up from the current 800.

And, Grismer said, Starbucks is getting flexibility in its leases to provide for early termination. “Circumstances, as we’ve learned, can change,” he said.

“So I think we’ve been able to capitalize on the current environment in a way that is very helpful to our current operations and to our future operations,” Grismer said.

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