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Starbucks Renews Focus on Occasional Customers as Q2 Results Disappoint

Starbucks’s artificial intelligence (AI)-powered personalized rewards efforts, aimed at increasing customer frequency and spending, appear to be facing challenges. 

Following the announcement of “disappointing” second-quarter 2024 results on Tuesday (April. 30), Starbucks shares plummeted by about 8%. This decline was attributed to various factors including a challenging macroeconomic environment, slower-than-expected growth in China (its largest market outside the U.S.), severe weather, and ongoing cautious consumer behavior and spending. 

“The remainder of our challenges were attributable to fewer visits from our more occasional customers,” Starbucks CEO Laxman Narasimhan said on a conference call accompanying the results. 

In terms of financial performance, total company revenue for the quarter stood at $8.6 billion, reflecting a 1% year-over-year (YoY) decline. Global comparable store sales also saw a decline of 4% YoY, driven by negative growth in both North America and China.

On the upside, Starbucks Rewards (SR) loyalty program saw an increase in 90-day active members in the U.S., totaling 32.8 million in Q2, a 6% YoY growth. Additionally, in February, Starbucks launched a loyalty partnership with Bank of America, offering cardholders and Starbucks Rewards members in the U.S. additional benefits by linking accounts.

Regarding digital initiatives, Starbucks executives highlighted the importance of their digital platform’s evolution, adding that they are actively working to expand digital engagement opportunities to double SR members over the next five years. 

As part of these digital efforts, Starbucks also plans to open the Starbucks app to all customers in July, aiming to bridge the gap in reaching non-SR members and enhance customer conversion to SR members. As Narasimhan pointed out, “Upgrades in our queue include a guest checkout feature and sequential improvements that make our app an even more appealing gateway for all customers.”

The coffee giant also announced its intention to invest $600 million over the next three years to further digitize its stores, increase personalization efforts to better target customers. This initiative includes the installation of digital menu boards in all company stores across the U.S. and China.

Moreover, the company disclosed additional investments in its Deep Brew AI and machine learning platforms to refine store operations, aiming to deliver an enhanced digital customer experience and personalized offers tailored to factors such as location, inventory, availability and weather.

Overall, despite facing challenges in certain international markets, the company opened 230 net new stores this quarter, expanding its global footprint to over 39,000 stores across 88 markets. This growth trajectory aligns with the company’s vision of reaching 55,000 stores by 2034, management remarked. 

Looking forward, Starbucks highlighted a pilot program aimed at extending service hours to accommodate overnight customers from 5 p.m. to 5 a.m. According to management, this initiative is pivotal in achieving their goal of building a $2 billion business over the next five years. Furthermore, the company emphasized the complementary nature of these overnight operations with its existing delivery business, which experienced double-digit growth in the U.S. during the quarter.

Beyond the overnight offerings, Starbucks recognized untapped potential in meeting weekend demand, which attracts a different demographic, including families and children. To capitalize on this potential and the opportunity across different time zones, Starbucks is exploring new product offerings, collaborations, marketing strategies, and enhancements to the store experience. 

“As you can see, there is significant demand in the morning. And even more potential during the afternoon, overnight and the weekend. We have yet to realize [this untapped potential] and we are accelerating our execution engines to meet it,” Narasimhan said.