Photo: iStock | JohnFScott
Will New CEO’s Plan Give Starbucks a Pick-Me-Up?
New Starbucks CEO Laxman Narasimhan is putting his own spin on Starbucks’ business improvement plan, naming several pain points he hopes to address to reinvigorate the coffee chain.
During his first earnings call in his new role, Mr. Narasimhan highlighted areas where he believes Starbucks needed improvement, CNN Business reported. He said that the food “could use more work,” that innovation could be “more purposeful and targeted” and that there was a problem with out-of-stocks and a need for behind-the-scenes streamlining.
“We need to think of our business as having theaters to the front, with a factory in the back,” Mr. Narasimhan said on the call.
Mr. Narasimhan’s tenure appears to be off to a good start as far as The Street is concerned. Starbucks’ same-store sales in the U.S. were up 12 percent and store traffic jumped six percent in the second quarter, CNBC reported earlier this week. The chain’s loyalty program memberships in the U.S. increased 15 percent to 30.8 million.
Mr. Narasimhan did not address the ongoing unionization effort at Starbucks. The union push and Starbucks’ opposition to it have represented one of the most visible points of conflict for the new labor movement amid a renewed interest in organized labor throughout the U.S. workforce.
Pricing at the chain also continues to be a thorny issue as consumers remain price-conscious in the face of ongoing inflation.
Sean Dunlop, equity analyst at Morningstar, discussing Starbucks’ earnings call with Yahoo! Finance, said it is unlikely that Starbucks will continue to raise incremental prices after a recent round of hikes on the menu. Mr. Dunlop pointed out that the core Starbucks customer tends to trade out of category by not visiting the chain as frequently rather than trading down to cheaper items when price hikes reach an unacceptable level.
Starbucks increased its prices by six percent in 2022, according to an Associated Press report.
Discussion Questions
DISCUSSION QUESTIONS: Will addressing food, innovation, out-of-stocks, and back-of-house issues improve significant problems at Starbucks? Where does labor issues rank among the problems that Starbucks needs to address?
Poll
Loading …BrainTrust
Cathy Hotka
Principal, Cathy Hotka & Associates
Neil Saunders
Managing Director, GlobalData
It is good to see Mr. Narasimhan focus on food as this has always been a relatively weak offer for Starbucks. Some day-parts, like breakfast, are reasonable but lunch and snacks could be improved significantly. Another area to focus on is automation: the biggest complaint I hear from staff at Starbucks is that customization means the average time to make a drink has increased, putting pressure on them. This also needs to be addressed as it’s important both to staff and for customer satisfaction.
While these are important, if not obvious, issues that should be addressed, it’s disappointing that the new CEO did not address the labor issue. I understand that this is a very thorny issue with plenty of downside risk if he said the wrong thing but, by addressing it, he would have demonstrated his willingness to deal with the more challenging issues. Saying that the food “could use more work” doesn’t say anything. The new CEO is still in his infancy with Starbucks–we’ll know better in a couple of quarters.
Yes. While I agree that out-of-stocks are an issue, the union issue is not going away and won’t — even if the CEO ignores it.
Richard,
Especially if the CEO ignores it.
Starbucks is so macro now that it’s truly hard to say–but there’s definitely a lot of immediate fixes, like menu simplification and employee satisfaction, that would really help their case. It’s like the old saying, no one can screw them up but themselves. Built-in, addicted consumers lined up for a fix with only smaller dealers as competition, it’s hard to screw that up. But you know, it’s certainly possible!
I’m not sure these are the problems that keep Starbucks from growing their business. Labor issues have to affect a subset of their patrons and prices in the face of inflation are high — and easily something lots of people can do without.
The biggest opportunity Starbucks has is to improve its food offerings, particularly for lunch. That’s the best way to leverage its locations and maximize revenue.
Watching their Japan operation when I was there in March was fascinating – plenty of competition but they excel at real estate and rotate new beverage and food offerings through every 3-6 weeks. They’d just wrapped up the Sakura wave, were in a Hawaii-themed set while we were there, and transitioned into an “American Diner” theme the last day of our trip. Each wave had a specialty Frappuccino, hot coffee drink, and a couple food offerings in addition to merchandise assortments. The stores had fresh interior and window signage for each wave and even little giveaway extras like stickers or coasters, all backed up by the .JP app of course.
The stores were so familiar of course, same sandwiches and wraps we have in the States, but everything just another level up from what we’re used to. Bring some of that energy and cadence over to the US and watch what happens!
That’s impressive!
Sales grew 12 percent while we’ve supposedly been in a recession for the better part of nine months. I don’t think customers find Starbucks’ prices to be anything to worry about. This is a juggernaut brand that is firing on all cylinders. I’ve seen their new fully automated espresso machines which will help reduce repetitive motions but I do wonder what value the barista provides if the expectation is the cashier is on stage and the rest is a drink factory. As to labor concerns, they were clearly a target for unionization. I don’t see Dunkin’, who does much of the same, facing such headlines.
Your Dunkin’ comment is interesting and generates speculation as to why. Dunkin’ doesn’t make any lists of offering the best benefits for part-time workers or QSR, yet there doesn’t seem to be any union movement against this company.
Gene,
Unions fish where the largest and most visible fish are. With almost 400,000 employees Starbucks is a big target in terms of potential dues and the most visible retailer in the coffee industry.
Also, isn’t Dunkin’ 100 percent franchised? It’s much easier to go after a chain like Starbucks since over 51 percent of its stores are still corporately owned and last year accounted for more than 80 percent of total revenues. Technically of course Starbucks doesn’t “franchise” stores, but it does license to other operators.
I’m a loyal Starbucks customer and other than lapses in what once was consistent quality at home and abroad, I have not experienced many of the “problems” that have been reported. I think addressing any problems that negatively affect the customer experience is a no-brainer for any organization and should be for Starbucks. The real question is somewhat ironic and was not addressed by Mr. Narasimhan. How does a company who prides itself on being the “third place” and known as “progressive” transform itself — and to what?
I really like the “theaters to the front, with a factory in the back” umbrella. It frames the business model very appropriately. It’s about what the customers sees, feels, and tastes versus all the back room operations that it takes to put on the show. I never really thought of Starbucks as providing the same vein of retail theater as a flagship department store, but we now live in an are where Starbucks is a mini-local town square with lots of repeat business. Many years ago it dawned on me how many Starbucks locations I had just walked by over the course of a 15 – 20 block walk in Manhattan. That’s ubiquity. And Starbucks needs to maintain very high execution standards for their very high frequency clientele.
The areas to fix that Mr. Narasimhan highlighted are definitely spot-on. I’m sure his store visits and work behind the counter validated these in spades. The food offerings, in particular, is where I’d place a heavy focus. If he can deliver a fresh, value-oriented array of items, Starbucks can see some big wins in the short term.
I do think the prices are an issue (oddly, not mentioned). Starbucks coffee has always been called “charbucks” in certain circles because it’s so bitter. I feel like Goldilocks. The breakfast versions are too light!
So if there are labor problems, it’s likely because workers see how much Starbucks is selling the coffee for and compare it to their wages and say–uh, nope.
Considering Starbucks’ ubiquitous and omnipresent nature across the U.S. landscape, there is a significant opportunity for CEO Laxman Narasimhan and the team to transform the business and take it to the next level. As we have seen, Starbucks is perpetually bombarded with mobile orders which has overwhelmed baristas, and the foot traffic is at an all-time high. Starbucks is popular across all generations and is a go-to option for many consumers.
However as Narasimhan and the Starbucks leadership team undergo their next transformation, they should focus on the operational efficiencies of meeting the demand of mobile orders and addressing the front-of-house challenges that make the in-cafe experience less than inviting. The food offerings have yet to evolve with the changing consumer preferences for more organic, healthy, and affordable meal options beyond breakfast and pastries.
From what we have seen, clear strategies need to be employed to ensure that mobile orders are fulfilled, that the baristas have the scale and capabilities to meet this demand, and that the coffee giant continues to evolve with the changing times.
I support unionization. In the U.S., the balance of power is mainly skewed in favor of management. The fact is most workers do not have much power. That imbalance hurts the economy and, therefore, the country.
But the entire Starbucks labor issue boggles my mind. In various surveys, Starbucks is among the top of the list for best benefits for part-time workers. They rank even higher for QSR. What will unionization deliver? Will Starbucks say, “Let’s start from scratch on a blank piece of paper”?
They were targeted by bright people. To your point, who else gives as much to associates in retail?
Starbucks needs to focus on workflow and automation. Drink customization has been taken too far, reducing employees’ ability to deliver the service that’s expected. And hot food requires a lot of manual labor and dependencies.
I understand that Mr. Narasimhan’s focus in his visits to many Starbucks stores was to find out what workers’ perspectives were; to hear their thoughts and use them to improve performance. He asked for help and I have to believe that he received some points of wisdom from behind the counters.
These seem like remedial efforts–steps in the right direction, hopefully not too little, too late. Once you get past the “breakfast” items the food picture at Starbucks is dismal. I’m not sure what innovation looks like in the coffee business, but it seems that when it comes to new offerings Starbucks is its own worst enemy. Starbucks has trained customers to customize to the point of absurdity, so one good move might be to stop “pushing” the beans, partially eliminating the need to put things in your coffee that are normally reserved for ice cream toppings to counteract the bitterness. At my local so-hip-it-hurts Starbucks, customers place phone orders for drinks made at specific temperatures and with, “three quarters of a shot of this,” and “a couple of drips of that.” It makes solving the production problem infinitely more complex than it should be. As to labor, the unionization effort isn’t going away and since what Starbucks is really selling is ambiance and service, labor issues ought to be Mr. Narasimhan’s first priority.
From a customer perspective, Starbucks has two primary issues to work on — first, speed of execution, in other words, the need for shorter wait times, and second, improved food options. While the menu may work for breakfast, the options for lunch and general snacks are not sufficient compared to the myriad options consumers now have everywhere they go.
Starbucks’ new CEO seems to understand these two issues, but it remains to be seen how they will be addressed. No doubt there are some automation approaches that can help the speed issue, but Starbucks also needs to realize that the human factor is still important to many of their customers. It’s possible there is a third issue — Starbucks needs multiple formats to serve the variety of customers they have. In some locations, Starbucks is still the “third place” they have always been known for with people “camping out” at tables with their laptops and other items while spending a lengthy amount of time in the cafe. Other locations are merely pickup spots for customers on the go. The speed issue has a very different context in each of these formats. My suggestion would be for Starbucks to lean in more on developing varied restaurant formats to serve customers.
And yes, it is significant the CEO neglected to talk about the labor issue. Many locations still suffer from a labor shortage, too, and in most reports Starbucks is always listed as one of the better places to work in retail with the best benefits. So the unionization issue is a very interesting one and it’s not going to go away by being ignored!
Starbucks broke the model of the traditional coffee shop. Today there are plenty of alternatives. In order to keep the brand successful, they must always look for ways to update, which includes all the innovations and updates (food, aesthetics, etc.).
The categories of food, innovation, out-of-stocks and back-of-house issues seem exceedingly broad — how do you measure improvement in innovation? But simply put, improving food options without adding complexity and improving operations to reduce staff workload and improving drink turnaround are where you make or break a core retail business. Labor issues are a symptom of the process and operations issues. While labor issues will never completely disappear, improved “employee-first” practices will reduce the intensity…
Laxman Narasimhan appears to have more background in consumer goods than he does with food service or restaurants, but Starbucks is after all a consumer product. It’s too early for predicting if he will be right choice for CEO.
Howard Schultz is a lot like Steve Jobs used to be in that he tends not to stay far away from the brand for too long. I would imagine that Narasimhan will be interacting with Uncle Howard from time to time.
Inflation will not have much effect on premium brands like Starbucks. Customers will not trade down to cheaper lattes, but I agree that some customers might visit Starbucks fewer times.
Food choice have already improved at Starbucks, but in most markets, pastry has taken a step back. Most markets no longer have full-sized scones, which used to be a customer favorite.
Out of stocks have been noticeable and needs improvement. If the supply chain crisis is the real issue, this might not be possible.
Labor problems are affecting every fast food restaurant in the country. Not only are employees hard to find, but recent demands for much higher salaries work against the basic business models and adds to inflation.
Unlike McDonalds, Starbucks can’t replace employees with automation. www.biernbaum.com