R.J. Hottovy, Head of Analytical Research at Placer.ai, unpacks the recent changes at Starbucks and if the brand refresh has helped the business. Watch!
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00:00The last time you picked up your morning coffee at Starbucks, you may have noticed at least a few
00:04new changes as of late. Could be some new menu items, a personalized greeting on your cup, or
00:10a new uniform for the Starbucks baristas. In recent months, the company has undergone what
00:15some are calling not necessarily a rebrand, but at least a bit of a brand refresh. Here to talk
00:20more about it is the head of analytical research at Placer AI, RJ Hadovy. RJ, grateful for being
00:27here. The stock is up here despite the earnings miss, but the stock is down 9% year to date.
00:33What factors do you think have most contributed to the company's performance in the last quarter,
00:38or how are you assessing Starbucks' current strategies? There's a couple of different
00:43ways to look at it, but I think the important thing is that there are signs of noticeable
00:47change within the organization. Brian Nichols, who's had a long history, both Taco Bell and
00:52Chipotle, really knows a lot about the restaurant experience. I do think little things like writing
00:58names on cups, bringing back the condiment station, changes in uniform policy, these are all things
01:04consumers can see. It hasn't really shown up in the total number of visits and visit frequency,
01:10but they're holding on to the visitors that have been coming in. I think as people start to get more
01:15familiar with what's changing, the hope is that we drive greater visit frequency out of it.
01:19I think even just these little changes maybe have helped to bring back that emotional attachment
01:25to Starbucks, which really long built its brand on being this coffeehouse experience. I think at
01:30least these initial steps are positive. It may pay time for the full results to kick in,
01:34but I think at least it's positive here. We saw a decline in both U.S. as well as global
01:39same-store sales. Is there anything we could already take away from a potential consumer shift,
01:47to consumer pullback, especially given the general market conditions we're dealing with, RJ?
01:52Yeah, what we did see was, at least in the U.S., it was a broad-based pullback in visits,
01:58and really it started to happen late January. As we got into February, it became a lot more
02:02pronounced. Obviously, that coincided with a lot of uncertainty about tariffs and potential return
02:09to inflation. We were seeing egg prices up at that point, a lot of other headline news going on there.
02:14Not just restaurants. Restaurants were certainly impacted in February, but really across the entire
02:19retail space. Almost every sector that we look at saw a year-over-year decline in visitation trends.
02:24Things have normalized and stabilized a bit in March and April, but there's a lot of evidence that
02:28the overall macroeconomy is weighing on consumer mindset right now. I think that that's going to
02:33continue to play out. I think the implementation of tariffs in certain categories certainly could
02:38accelerate that. It's been a tough environment, not just for Starbucks, but really everybody in the
02:42restaurant space, everybody in the retail space. There's a lot of consumer uncertainty right now.
02:47What are your top takeaways so far from what you've seen out of Brian Nichols' leadership style?
02:52What I think is interesting about it, too, is he really knows how to bring the important part of
02:56the business back into focus. Starbucks is a brand that built its brand on being in this experience.
03:02It's third place, and I think the company is really trying to bring it back. Maybe not all locations on
03:07that. I do think that they're trying to serve effectively two different audiences at the same
03:12time. You've got your experienced customers that have grown up with the brand and really like that
03:16third place. At the same time, too, you've introduced mobile order and pay, and you've got some customers
03:20who just want that quick cup of coffee. I think they're doing a better job of distinguishing which
03:25locations address which customer. It's really hard to serve both of those customers in the same group.
03:30I think that's the first step is understanding what need state you're serving with each store.
03:35I think Brian, with his background of being a marketing guy, really good job on some of the ads
03:40they've been running. It really brings back the experience. I think that's really important to
03:45this day and age. I think we'll continue to see more TV ads. I think we'll continue to see more menu
03:49innovation or even just simple repackaging. One of the things that was so successful early on during
03:54his tenure at Chipotle was the introduction of Lifestyle Bowls that really connected well to the customer
03:58that maybe had been staying away from Chipotle because of how good is this for me kind of
04:03concerns. I think so much. I'll start to lean into that with some of the new menu innovations and
04:07some changes in the forward. It is a competitive space. I think the last couple of years, we've seen
04:13the rise of drive-through coffee places like a Dutch Bros or Seven Brew, and it is going to be difficult
04:19to compete with those guys. But I think staying in focus and knowing what really separates the brand
04:23from the rest of the category opens up an opportunity for them.
04:26The Starbucks Workers Union has been very quick to sound off, even in just the last few days. I'm
04:34quoting now from one of their social media posts. Starbucks workers across the country are facing
04:38understaffing, inaccessible benefits, discrimination, and low wages. Instead of fixing these issues,
04:45the union says, the companies decide to introduce an unpopular, more conservative dress code.
04:50Union baristas in Seattle are marching on management in response.
04:54The strife or the general story, RJ, between Starbucks and the union is not new,
05:02but this might be newer fuel to that fire. How big of a headwind or how important of a story is that
05:08as part of where Starbucks is today?
05:11Yeah, I think it's an important one. I think management certainly has the, you know,
05:14it's on their radar screen. I think they're taking it seriously.
05:17I do think that one of the things that we've seen is that understaffing and just being able to get
05:22people through has been a big deterrent to the company. If you look at our visitation data,
05:28the number of total visitors coming to Starbucks really hasn't changed significantly the last couple
05:32of years. It's just visit frequency is down. So people are coming in, but just coming in less
05:36frequently is kind of the main thing we've observed with our data. And I think to correct that,
05:40a lot of that comes down to, you know, getting that throughput down, making sure that you're not
05:44waiting an excessive amount of time. So the company talking about investing more in its labor,
05:49that was one of the central messages coming out of the last second quarter update. I think that is
05:53really going to be focused. And so I think some of these things that, you know, that the unions
05:57talked about, I think they are front center for the company because they are critical to improving
06:01the overall experience. So I think that's one of those things that we'll continue to see more
06:05more news on. I think management's certainly sympathetic to it.
06:09RJ, Starbucks has said that it's now aiming to reduce wait times for customers to under four
06:14minutes. How feasible a goal is that? And any challenges you see that might arise in trying
06:20to implement that type of standard across all locations? And as we know, this is the
06:24company with a lot of locations.
06:26It is. And that's certainly, it's not an easy task. And I think that's probably the number
06:30one challenge or number one obstacle facing Brian Nickel and the rest of the management
06:33team is how to get that, that time down, particularly peak hours, kind of the, the, the morning and
06:38even, you know, to some extent, some of the afternoon day parts where we've seen a bit of
06:42consumer behavior and shift towards that day part. That is a really difficult, and again,
06:47balancing both the experience and that convenient customer. Some people want to come in and sit
06:51down and enjoy their cup of coffee. Some people just want to grab and go. It is really difficult
06:55to balance all that, especially when you do those peak hours. So I think there's a combination of
06:59things that have to be done. One is to better synchronize all the technologies that they use to
07:04make it happen. In a lot of ways, it's training the consumer on this to making sure if you're more
07:09of a convenience customer, you know, to go to a pickup type location, whereas experienced
07:12customers go to a different location. It's not an easy task. It's going to require some
07:16investment in labor technology and probably some, you know, new types of store formats
07:21as well. But I think that that is the number one that I think, you know, as consumers, I've
07:26kind of started branching out to other coffee houses. This is one of the ways to recapture
07:29and bring them back in.
07:31All right, Jay, I'm about out of time, but what is the most interesting part of the current
07:35Starbucks story that you think we're not paying close enough attention to?
07:40I mean, I think above all, I mean, it's a brand that's really well recognized. It's
07:44a brand that generally does well with a younger audience. And some of these more operational
07:48things as they start to, you know, invest and make improvements on it. It's a brand that
07:52can come back. We've seen it time and time again, this really strong brand that, you know,
07:56does capture a lot of visits. And I think that they, as they can implement, continue to implement
08:00these improvements, they can really start to improve on that visit frequency, which is key
08:04to the story here.
08:06RJ Haddavy, Head of Analytical Research at Placer AI. RJ, thanks for the great context on all
08:12things SBUX. Appreciate you being here today.