Starbucks became something of a victim of its own success last quarter, with its CEO saying loyal customers were abandoning purchases due to long wait times and product availability.
In the second quarter of 2024 earnings call Yesterday, Starbucks confirmed that net revenue fell 2% to $8.6 billion, citing a “challenging operating environment.”
CEO Laxman Narasimhan dropped the call making it clear he was not thrilled with the results, he told investors: “Let me be clear from the outset. Our results this quarter were disappointing and fell short of our expectations.”
A variety of issues contributed to the results, but Narasimhan identified a particular phenomenon among regular customers who downloaded the Starbucks app but abandoned their orders before purchasing. More than 60% of Starbucks’ morning business comes from rewarding members who use the company’s app—many of whom are likely commuting to work and need their first hit of caffeine.
“However, interestingly, despite strong mobile order and pay (MOP) sales, we saw a backlog rate in the order channel last quarter,” he added. “In other words, customers using MOP add items to their cart and sometimes choose not to complete the order, citing long product wait times and availability.”
According to mathematical calculations, one in seven or eight customers abandon their order because of how busy their particular Starbucks location is.
Narasimhan, who is keen to ensure these customers stay, outlined a number of ways in which the brand is adding efficiencies to speed up the customer experience.
First is the ongoing rollout of the world’s second-largest restaurant chain’s “siren system”, a drink machine equipped with dedicated ice and milk dispensers and a range of blenders, all within easy reach of a single barista.
These efficiencies are coupled with increased supply availability, he said.
“Another reason customers choose not to fulfill their order is product availability,” he explained. “For example, our potato cheddars and onion casserole have been a big hit with customers. But demand has been so strong that we can currently only offer them in our 2,000 U.S. stores.”
As a result, the Seattle-based company is ramping up investments in its supply chain to ensure the brand’s most popular products end up in the hands of in-demand customers.
Cautious consumers
While efficiency and supply issues are under Narasimhan’s control, he has made it clear that some impediments are beyond his purview.
Among these factors is the “cautious consumer,” which particularly affects “casual customers.”
“The worsening economic outlook has impacted customer flow and the impact has been felt across the industry,” he added.
It was a similar story with McDonald’s, which also released its first-quarter earnings yesterday.
the fast food giant said Low-income consumers in the US are retreating. CEO Chris Kempczinski said, “As consumers become more discerning about every dollar they spend, we will continue to earn their visits by providing leading-edge, reliable, everyday service and outstanding execution at our restaurants.”
While bank executives say consumers overall are still holding up reasonably well, it’s customers at the lower end of the income scale that have begun to falter first. According to Citigroup CEO Jane Fraser, this is where “cracks” are starting to appear.
Night demand
Apart from the morning discussion, Narasimhan highlighted that overnight demand also presents some opportunities.
Currently, pent-up overnight demand represents a “huge and untapped additional opportunity,” he said.
In the first quarter, Starbucks announced a pilot partnership with retail delivery company GoPuff, which meant customers could receive orders outside company hours, from 5:00 pm to 5:00 am.
“We doubled our business during this pilot,” Narasimhan said. As a result, he added: “We are actively looking at options to create a $2 billion business over the next five years.”
Another option besides weekday travel? Weekend. That’s why Narasimhan said the company is committed to meeting the needs of families who are increasingly visiting on Saturdays and Sundays.
“We are working to realize this demand potential for new product offerings, collaborations, marketing and improved in-store experiences,” he added.