Business/Economy

Starbucks adapts to market changes with focus on convenience

SEATTLE -- Starbucks’ unveiling of new stores and more efficient automated machines this month marked the 51-year-old company’s definitive shift in focus from community building to convenience.

The changes included a turn to drive-thru and pickup-only stores, a forecast of slower cafe-only store growth and the addition of efficient machines such as one that shortens a 20-step cold brew process to four steps.

The focus on the convenience model contrasts with a community-building model, said Temple University professor Bryant Simon, who wrote a book about Starbucks.

“More weight is on convenience than ever before,” Simon said.

Starbucks’ own term for its new initiatives is “experiential convenience.”

These changes are part of the company’s “Reinvention,” a plan announced at Starbucks’ 2022 Investor Day at its Sodo headquarters this month. The plan is focused on company growth, according to Starbucks, with a revenue growth estimate ranging from 10% to 12%.

Starbucks is also undergoing leadership changes with a new CEO, the exit of its chief operating officer and the elimination of the COO role.

Outgoing COO John Culver said in a statement that the company needs to deliver on “reducing the level of complexity and making work easier for our partners, enabling stronger engagement and connection between our partners and the customers they serve, and delivering experiential convenience.” “Partner” is Starbucks’ term for its employees.

Changing behaviors

Starbucks is adapting to different consumer behaviors, which changed in part due to COVID-19, said Motley Fool analyst Emily Flippen. Instead of sitting in a coffee shop during the high-infection levels of the pandemic, people favored ordering at drive-thrus more than before.

Stores with drive-thrus accounted for 86% of all 450 Starbucks’ store openings in 2022. Pickup-only stores were 7% of store openings, while cafes made up 3% of all store openings.

Starbucks’ reinvention plan rolls out next month and runs for the next two years. According to the plan, 35% of its new stores will be drive-thru-only stores, while 14% will be pickup-only and 5% will be delivery. Cafe-style store openings will be 2% of all openings from fiscal year starting 2023 to 2025.

Starbucks plans to open 2,000 U.S. locations over the next three years, partially by adding new delivery-only stores.

Traditional cafes with counter and seats make it easier for Starbucks baristas to talk and build connections with customers, said Arthur Pratt, who works at a unionized store in Portland. Starbucks said the new machines installed at cafes will allow workers more time to connect with customers.

Digital “Third Place”

Existing stores were built for a different time, and they need to change to meet customer demand, Culver said. He said he expects a 50% return-on-investment from stores; drive-thru stores deliver stronger sales, but there aren’t enough of them to meet customer demand.

For years, Starbucks has claimed the role of the “Third Place” — a place between home and work. The term was coined during a time when Americans were seeking community in the early 2000s, Simon said. Starbucks offered that space, along with a sophisticated coffee experience.

But in recent years, social media fueled personalized orders, and customers began to view Starbucks as a place for a quick, cold drink. Starbucks’ new Third Place, according to the company, is now digital. Cold drinks accounted for $1 billion in sales in the previous quarter.

Starbucks “is responding to a desire of the consumer that is to be a bit faster and a bit less formal,” Flippen said.

The challenge after the pivot, she said, is to maintain Starbucks as a premium brand. Starbucks drinks are more expensive than those from McDonald’s and Dunkin’ Donuts, but people are willing to pay more for the experience, Flippen said.

“If they feel like the Starbucks experience is being diluted by whichever way they’re engaging with the company, through drive-thru, pickup, then they’re going to be more price sensitive,” Flippen said.

The person soon to be executing Starbucks’ reinvention is its new CEO, Laxman Narasimhan. Appointed early this month, he will be getting acquainted with the company until next year. He said during Investor Day that he will become a certified barista, which takes 40 hours of training. Current interim CEO Howard Schultz, who is on his third stint in the job, will continue on the board of directors.

In the midst of a reinvention rollout, Starbucks sought an executive who could execute the plan rather than someone who would pitch innovative ideas, Flippen said.

The pace of this leadership transition is slow, said Flippen. It is “an extension of Howard Schultz 2.0,” she added.

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