Starbucks’ Killer Quarter Overshadowed by Store Closures in China

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Starbucks’ Killer Quarter Overshadowed by Store Closures in China

By Jamie Grill-Goodman - 01/29/2020

While Starbucks has reported what CEO Kevin Johnson called “an exceptional quarter,” it also has closed 2,000 stores in China as the coronavirus situation unfolds.

The global coffee retailer intended to raise its full year financial outlook for fiscal 2020, but instead announced on its recent earnings call it was not revising guidance at this time due to the new coronavirus outbreak in China. Starbucks currently has over half its 4,292 stores closed in the market.

Shares of the company fell 1% in extended trading, Reuters reports.

“We are assessing this each and every day,” said John Culver, group president, International Channel Development & Global Coffee & Tea. “We do have delivery available to customers from stores that are remaining open. But again this is something that we continue to assess every day.”

Starbucks’ China revenues increased by 15% in its first quarter 2020, excluding a 2% impact of foreign exchange, fueled by a 16% increase in net new stores over the past 12 months and a 3% increase in comp.

China's mobile orders jumped to 15% of total revenue up from 10% the past quarter, while its 90-day active Starbucks Rewards members grew 40% over the prior year when the program was relaunched. For comparison, in the U.S., Starbucks’ ended the quarter with 18.9 million active rewards members, a 16% increase over prior year.

At present, we are unable to reasonably estimate the impact to the business,” CFO Pat Grismer said. “Notwithstanding, the fact that our China business represented only 10% of our global revenues in the first quarter of fiscal 2020, we expect these events to have a material impact on our international segment and consolidated results for the second quarter and full year of fiscal 2020. In any event based on what we currently know, we expect the impact to our business will be temporary.”

Starbucks Q1 Fiscal 2020

  • Comparable store sales up 5% globally, led by 6% comp growth in the U.S. and 3% comp growth in China
  • Consolidated net revenues of $7.1 billion grew 7% over the prior year
  • Starbucks Rewards loyalty program grew to 18.9 million active members in the U.S., up 16% year-over-year
  • The company opened 539 net new stores in Q1, yielding 31,795 stores at the end of the quarter, a 6% increase over the prior year

Despite the current situation, Starbucks enjoyed a positive first quarter, fueled by comparable sales growth and new store development, as well as the expansion of its Global Coffee Alliance with Nestlé.

U.S. revenues grew 9%, led by comp sales growth of 6% driven equally by transactions and ticket.

“With a two-year sales comp of 10% for the past two consecutive quarters, it is clear that our focus on the customer experience, beverage innovation and digital customer relationships is working,” said Johnson.

In the U.S., customer connection scores reached another all-time high in the first quarter.

“We realize this is a key differentiator for Starbucks and we continue to make investments in partner hours, benefits and training,” said Johnson.

“We also know that Starbucks is increasingly valued for convenience as the mix of Mobile Order & Pay transactions in the U.S. grew to 17% in Q1,” he continued.

While U.S. Starbucks’ customers are acclimating to mobile ordering, the delivery “adoption rate is still pretty modest in the U.S.,” said Roz Brewer, COO & group president, Americas. The retailer has been aggressively expanding its delivery option in the states, currently at 75% U.S. coverage of all Starbucks stores, while this time last year, Brewer said the company offered delivery in about 115 stores with no marketing against it. Now, with a national marketing program, Brewer said the company is “encouraged to continue to see what happens when we alert the customer that delivery is available at their favorite location.”

“Our stores are equipped from a technology standpoint,” she noted. “The partners are well-trained in terms of how to handle the tradeoff between the transition of the beverage to the pickup delivery person. So operationally it's working extremely well.”

Additionally, Brewer gave an update on Deep Brew, the company’s artificial intelligence (AI) program. Brewer said the company installed around 1,900 of its AI-enabled Mastrena II machine units last year and plans to install 4,000 this year.

“That is where we'll see the most significant deliverable around how we will integrate AI into understanding how to deliver the best coffee experience and also reducing the amount of time it takes to deliver and then giving us a chance to provide a variety of coffee to our customers,” said Brewer.

“There's also other innovation happening around Deep Brew, it will show up in various aspects of the business, but the equipment position is our strongest position right now. In addition to that, when we talk about the things that have happened in our loyalty program, we did see some significant improvement in this quarter.”

AI is enabling Starbucks to do “really creative work with how we reimagine our Happy Hour performance making sure that we are understanding what the customer needs,” said Brewer. “There's a lot of customer insights that come out of the work that we do as we grow our member base.”