Starbucks Chairman and CEO Howard Schultz speaks at the annual shareholder meeting in Seattle, Washington on March 22, 2017.
Jason Redmond | AFP | Getty Images
Starbucks raised its long-term financial forecast on Tuesday after outlining a series of changes coming to the coffee shops as part of a reimagining plan.
The Seattle-based company forecasts earnings per share growth of 15% to 20% annually over the next three years, up from its previous long-term outlook given at the end of 2020. Global and U.S. same-store sales are expected to grow 7 % to 9% per annum.
Shares of Starbucks rose more than 2% in extended trading.
Earlier on Tuesday, the company outlined plans to expand its loyalty program and speed up operations at its cafes, in part with new coffee-making equipment and automation. The changes are meant to respond to how Starbucks’ business has transformed in recent years. Its menu has expanded and cold coffee drinks, which often include additives, now account for 60% of orders throughout the year. Instead of going to the counter, more customers go through the drive-thru or use its mobile app.
Despite record demand in the U.S. and abroad, outgoing CEO Howard Schultz said the company was making “self-inflicted mistakes” and lost its way.
As it executes its reinvention strategy, Starbucks said it also plans to build about 2,000 new stores in the U.S. between fiscal 2023 and 2025, accelerating its growth strategy. By the end of fiscal 2025, it plans to have 45,000 locations worldwide.
Starbucks will also begin buying back shares at the start of the next fiscal year, which begins in October. Schultz suspended the buyback program in April, instead using those funds to invest back into the business.
The company’s previous long-term forecast called for adjusted earnings per share growth of 10% to 12%, revenue growth of 8% to 10% and global same-store sales growth of 4% to 5% for 2023 and 2024. In May, Starbucks suspended its forecast for fiscal 2022, citing a lockdown in China, investment in its U.S. employees and high inflation.
Update on Starbucks coffee shops
In its 2023 fiscal year, Starbucks plans to invest about $450 million to upgrade its coffee shops with new equipment that will simplify operations and speed up service.
“Our brick-and-mortar stores were built for a different era, and we need to modernize to meet that moment,” outgoing COO John Culver told investors.
With its new cold beverage system, for example, baristas will no longer have to scoop ice, pour milk from a gallon jug, or bend over for whipped cream when making drinks. The new system uses dispensers and cuts the time to create a Mocha Frappuccino from 86 seconds to 35 seconds. It has been tested in a store and a second test is planned for January after improvements are made based on feedback.
Starbucks also streamlined its process for making iced coffee, which is now worth $1.2 billion in business for the company. The current process requires more than 20 hours of brewing, with more than 20 steps. The new process automatically grinds and presses the coffee beans and reduces waste by 15%.
And instead of baristas making hot coffee every half hour, a machine will be launched next year that grinds and brews a cup in 30 seconds. Although cold drinks are taking over, the company sees 15 million customers each month ordering brewed coffee.
Food preparation is also changing. Items like pre-made Starbucks sandwiches and egg nogs will now be made in batches and placed in packages that retain moisture.
Automated ordering will also roll out to U.S. stores in the next few years, according to Culver. The company said the move to automation aims to give employees more time to interact with customers and free them from the more mundane parts of the job.
Linking Loyalty Programs
A quarter of Starbucks’ transactions now come from mobile app ordering, driven by the company’s loyalty program. The U.S. version of Starbucks Rewards has 27.4 million active members as of July 3, and they account for more than half of the company’s orders.
To continue growing its loyal customer base, Starbucks has expanded its loyalty program technology to licensed coffee shops that include airport locations and retailers such as Barnes & Noble. Roughly 20 percent of its roughly 7,000 licensed stores in the U.S. already use the technology.
In addition, Starbucks will link its rewards program to external loyalty programs, such as those for airlines and retailers. Users will be able to earn “stars” by shopping elsewhere or converting their reward points into airline miles.
Chief Marketing Officer Brady Brewer said the company will announce the first US-based partnership in October.
This fall also marks the start date for incoming CEO Laxman Narasimhan. He will join the company in October and learn more about its operations before officially taking over from Schultz in April.
Narasimhan made a brief surprise appearance during the investor day, talking about his upbringing, his love of writing poetry and what drew him to Starbucks. He told investors he uses the name “Laks” when ordering coffee from Starbucks to avoid spelling mistakes.
Changes for baristas
Changes in customers’ ordering habits have led to additional stress for employees. Turnover rates peaked in 2021, according to Frank Britt, chief strategy and transformation officer at Starbucks.
Over the past year, Starbucks baristas have unionized and expressed displeasure over employee pay, understaffed stores and other working conditions. More than 230 company-owned Starbucks locations in the U.S. have voted to unionize since Monday, according to the National Labor Relations Board.
Starbucks tried to limit union pressure by offering better wages and benefits to non-union workers. Those improvements have also helped turnover over the past five months, Britt said.
As the company met with employees to craft its new strategy, Britt said he was looking to adjust the barista experience through the lens of product management.
“You assess user needs, you segment user needs, you do a test and learn program to find out which of the things you think might work,” he told CNBC.
Starbucks Chief Technology Officer Deb Hall Lefebvre said the company is working on an app for baristas that will allow them to manage their schedules and pay, as well as encourage two-way communication with the company and help with career growth.
The upcoming changes for American baristas are just the “first phase” of a multi-year plan, according to Britt. The company is also looking to improve the barista experience overseas and for the employees who harvest its coffee beans, work in the supply chain and provide customer support.