Starbucks announced second-quarter earnings for the 2016 fiscal year on Thursday, revealing a nine percent increase in revenue — a second-quarter record of $5 billion. So what is Starbucks banking on moving forward? China, customer rewards, and even more K-cups. Below, a few takeaways from an earnings call held shortly after the announcement.
1. Starbucks continues to grow on a global scale — especially in China.
Revenue was up 18 percent in the China/Pacific region, where the company has opened 884 stores over the past year. "Starbucks is committed to China," said CEO Howard Schultz. "We now have 2,000 stores [in China] and are adding ten new stores every week." In June, it will open what Schultz said will most likely become the company's most profitable store, at Disneyland Shanghai. Starbucks also opened its first of 150 stores in South Africa on Thursday. According to Schultz (who is currently in South Africa for the opening), the company remains on track to have 25,000 stores open globally by the end of the year. Starbucks also has plans to eventually open between seven and 10 full-scale roasters [similar to those in Seattle and soon to be in New York City] in global cities.
2. The brand's focus on customer rewards continues.
The company added 900,000 Starbucks Rewards loyalty members in the U.S. in Q2, bringing the total amount of U.S. members to 12 million. The rewards program has been controversial as of late, as recent changes make it harder for many customers to earn free beverages (instead of earning a free drink for every 12 purchases made at Starbucks cafes, regardless of dollar amount, members must now spend at least $62.50 to earn a free beverage). Once-loyal customers flooded the company's Facebook and Twitter feeds with angry messages as a result of the change.
Citing the "noise" around the re-vamped rewards program, which he called "a complicated change for our customers," Schultz said that Starbucks is "building something so enduring and so unique, I think it's going to be one of the most significant changes to the equity of the brand." Starbucks is hedging its bets on the fact that its products have become a habit for people, and though consumers might not like spending more money for their daily habit, they probably don't have the willpower to quit.
One way the brand is aiming to patch things up with customers who dislike the new rewards program? Allow them to earn reward points outside Starbucks cafes. A new partnership with JPMorgan Chase and Visa will include pre-paid, re-loadable debit cards that will allow reward members to earn stars anywhere Visa is accepted (40 million merchants worldwide). The stars accumulated however, can only be used at Starbucks.
3. K-cups remain profitable. And Nespresso pods will be, too.
Starbucks currently has the leading U.S. market share of single-cup coffee and is the leading brand on the K-cup platform. And despite the market souring over K-cups in general (even the guy who invented K-cups regrets creating them), Starbucks plans to expand its use of the single-serve pods.
Saying Starbucks is in a "unique position to leverage its national footprint," Schultz said the company had a strategic advantage on the K-cup platform throughout Asia. "As the category evolves, the biggest prize for single-serve is going to be China."
As it announced in a shareholder meeting last month, Starbucks will also soon begin selling single-serve espresso pods for European Nespresso machines. Schultz has high hopes for the single-serve industry, expressing his belief that the popularity of the espresso-compatible Starbucks pods released in Europe will one day rival that of K-cups in U.S.
4. The use of mobile order and pay continues to beat expectations.
Approximately four percent of sales across all Starbucks stores in the U.S. come via the brand's mobile order and pay feature, which allows customers to order and pay for a beverage via an app, and have it waiting for them when they arrive. "But that's just the beginning of the story," said Chief Digital Officer Adam Brotnam. "Over ten percent of all orders at our busiest stores are made through mobile order and pay. Drilling into that further, for those 300 busiest stores, mobile ordering approaches 20 percent during peak hours." In other words, the use of the mobile ordering system has "meet or beat all company expectations."