To fix Starbucks, incoming CEO Brian Niccol will have to tackle its mobile app problem - Stockxpo - Grow more with Investors, Traders, Analyst and Research

To fix Starbucks, incoming CEO Brian Niccol will have to tackle its mobile app problem

Mobile order and Uber Eats and Doordash delivery pick up area at Starbucks coffee shop, Queens, New York. 

Lindsey Nicholson | UCG | Universal Images Group | Getty Images

It’s become a familiar sight at Starbucks cafes: a counter crowded with mobile orders, frustrated customers waiting for the drinks they ordered and overwhelmed baristas trying to keep up with it all.

Fixing that problem will likely top incoming CEO Brian Niccol’s list of tasks to turn around the struggling coffee giant when he steps into the role on Sept. 9.

Investors and executives alike have pointed to operational issues as one reason the chain’s sales have lagged in recent quarters. Other culprits for its recent same-store sales declines include a weakening consumer, boycotts and the deterioration of the Starbucks brand.

Former CEO Howard Schultz, who lacks a formal role with the company but remains involved, has also pointed the finger at the mobile app. He said it has become “the biggest Achilles heel for Starbucks,” on an episode of the “Acquired” podcast in June.

Mobile orders account for roughly one-third of Starbucks’ total sales, and tend to be more complicated. While add-ons like cold foam or syrups are more profitable for Starbucks, they tend to take up more of baristas’ time, frustrating both them and customers.

“I agree with Howard Schultz,” said Robert Byrne, senior director of consumer research for Technomic, a restaurant market research firm. “This is not in the data — this is in the store. This is where the issue lies.”

Catching up to mobile growth

In late April, the current CEO Laxman Narasimhan said the company was struggling to meet demand in the morning — and scaring away some customers with long wait times.

Schultz said he experienced the problem himself when he visited a Chicago location at 8 a.m.

“Everyone shows up, and all of a sudden we got a mosh pit, and that’s not Starbucks,” Schultz said on the “Acquired” episode.

Making mobile orders more efficient is one of the key ways Niccol can reduce crowding at Starbucks.

When Schultz was building Starbucks to become the coffee behemoth it is today, he positioned it as a “third place” between work and home. Since then, the chain has lost that reputation as more customers lean on the convenience of mobile ordering and prefer not to linger at its cafes.

“Because it’s a beverage, and because I’m frequently consuming it in the car or on the go, it needs to be incredibly convenient,” Byrne said.

But Starbucks also didn’t make significant adjustments to its operations to anticipate that shift in consumer behavior.

In 2017, Schultz stepped down as CEO for the second time, handing the reins to Kevin Johnson. Prior to joining the coffee chain as its chief operating officer, Johnson served as chief executive of Juniper Networks, a tech company. Under his leadership, Starbucks invested in technology and kept growing digital sales, but restaurant operations were already struggling when he left the company.

Schultz stepped back in as interim CEO when Johnson retired in 2022.

“The company did not do a good job of anticipating the technological refinements that needed to be put in place to avoid what was happening. … The stock was at record high, the company was not investing ahead of the curve, not paying attention to the velocity of the mobile app and what it was becoming until it was too late,” Schultz said.

Shareholders have also experienced the frustration with digital orders — and see it as a critical area for Niccol to address.

“The problem you have in New York City, for example, is what is the wait time,” said Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, which owns shares of both Starbucks and Chipotle. “And then the mobile orders taking precedence over the in-store orders. [Niccol’s] going to have to flip that somehow to get people to spend more time and more money in stores.”

The mobile-order issues have added pressure on baristas. Burnout, fueled in part by the app, helped inspire some employees to unionize, beginning in 2021.

This November, Starbucks Workers United, which now represents workers at roughly 450 of the chain’s U.S. stores, pressed the company to turn off mobile ordering when it’s running promotions. (Starbucks said at the time that it was already in the process of making the change possible.)

Channeling Chipotle’s strength

Digital sales aren’t the same albatross for Niccol’s current employer, Chipotle.

In its latest quarter, 35% of the company’s revenue came from online orders. The pandemic fueled a shift to online ordering that has stuck around, as the share of digital orders has jumped from 18% in 2019.

When Niccol joined Chipotle in 2018, most of its restaurants had already installed a second prep line dedicated to digital orders, aiming to avoid bottlenecks as online sales became more important to the business. That same year, it also began adding drive-thru lanes just for online order pickup, which it calls “Chipotlanes.”

In his six and a half years at Chipotle, Niccol and his executives boosted digital sales through different promotions: sports stars’ favorite orders, limited-time deals, a rewards program and the long-awaited launch of quesadillas. In particular, quesadillas became a digital-only option because they would otherwise slow down operations.

Chipotle has also been testing automation to make burrito bowls ordered through its mobile app through a partnership with robotics firm Hyphen.

Mobile makeover

Starbucks has been taking steps to speed up service and improve baristas’ work experience.

In 2022, under Schultz’s leadership, Starbucks introduced a reinvention plan that included tackling bottlenecks through new equipment and other measures to speed up service.

Narasimhan has largely stuck to that strategy. This February, its mobile app finally started showing customers the progress of their orders, giving them a better idea of when their drinks will be ready. And in late July, Starbucks rolled out its “Siren Craft System” across North America, a series of processes to make drinks faster and baristas’ jobs easier.

But the problem for Starbucks, could require more drastic measures.

For example, the equipment rollout has been slow, with roughly 40% of North American locations expected to install the new machines by the end of fiscal 2026. Speeding up that timeline could cut service times in half — as promised at the investor day in 2022 — and reduce the strain on baristas.

“It’s not an easy lift by any means to do that, like that’s going to take time and training and investment and [capital expenditure],” TD Cowen analyst Andrew Charles said.

“In our view, Brian has tremendous credibility, where if he tells investors, ‘This is the answer to the problem we’re having,’ and can explain why he believes that — he’s going to get a pass,” Charles said.

Don’t miss these insights from CNBC PRO

Source

Leave a Reply

Your email address will not be published. Required fields are marked *

scroll to top