Starbucks China Q2 Same-Store Sales Fell 44% as Schultz Prepared a Reinvention Plan

This is an English adaptation of a FoodBud historical article originally published on August 2, 2022.

On August 3, Starbucks reported results for its second quarter, described in the source as the 13-week fiscal 2022 Q3 period ended July 3. Revenue reached $8.2 billion, up 9% year over year.

For Starbucks, the quarter was volatile. The company exited Russia in May, announced an agreement with Bolthouse Farms to sell the Evolution Fresh business, and faced severe disruption in China from Covid-related restrictions.

In China, quarterly revenue was $540 million, down 40% year over year. Same-store sales fell 44%, driven by a 43% decline in transactions and a 1% drop in average ticket. Store count still rose 12% to 5,761 locations.

As of July 3, Starbucks operated 34,948 stores globally. In the United States, its rewards membership reached 27 million, up 19%.

Reinventing Starbucks

Founder Howard Schultz said that after returning in April, he began visiting stores and roasting plants in the United States. In his view, record store performance had masked major underlying issues, including store designs that no longer matched post-pandemic shifts in customer demand.

Schultz said Starbucks’ culture requires honest and transparent communication, but that important signals had been drowned out. In an uncertain environment, store employees were facing challenges and fears in their lives, along with a strong desire for financial security and a sense of belonging.

After returning, Schultz held more than 100 meetings with senior leaders to discuss a plan to reshape Starbucks. He said the initial reinvention plan had been set. The prior month, Starbucks brought together 200 U.S. executives in Seattle to begin the reinvention and transformation work.

Chief strategy officer Frank Britt said Starbucks’ five strategic shifts would begin with the U.S. business:

• Strengthen the connection between employees and the company, create new ways of working, and improve organizational agility and empowerment.
• Fundamentally improve the store-employee experience.
• Redesign the store image, including innovation in store formats and coffee technology to increase throughput and drink customization.
• Redesign employee relations, including new ways to continuously listen to frontline teams and build shared innovation, accountability, and achievement.
• Continue coffee innovation as part of a highly integrated transformation.

Britt added that a key part of the change was to raise store-employee income and deliver a more personalized customer experience. At the store level, Starbucks planned new services, certification models, and training, moving away from one-size-fits-all approaches while preserving flexibility.

Schultz said details of the store reinvention plan would be announced on September 13. Cold beverages were a major focus: in the U.S., cold drinks accounted for 75% of sales, and Starbucks was preparing to upgrade in-store equipment used to make cold beverages.

Schultz also said he paid close attention to Starbucks’ relevance with younger consumers. The age profile of the customer base was one of the indicators he reviewed each year; he wanted to know whether Starbucks’ customers were getting older or younger. He said Starbucks did not want to operate a business with an aging customer base.

China Took the Heaviest Hit

In international markets excluding China, Starbucks posted double-digit revenue growth in the quarter.

China, however, was hit hard by Covid restrictions. Starbucks had more than 940 stores in Shanghai, about two-thirds of which were under lockdown. In Beijing, around one-third of its 150 stores were temporarily closed for nearly six weeks.

Across the quarter, more than 1,300 stores were temporarily closed, representing about one-quarter of the China store base. Starbucks China chair Belinda Wong said recovery in China would be nonlinear.

The disruption made Starbucks China more flexible, agile, and resilient. After Shanghai’s lockdown gradually eased in June, traffic and sales improved immediately.

During the quarter, Starbucks China opened 107 net new stores and entered three new cities. The company expected its China store count to exceed 6,000 by the end of the year. Mobile-channel sales in China reached a record 47% of sales, up 13 percentage points year over year.

Starbucks’ Iced Shaken Espresso, launched in North America the prior year, had become popular with Gen Z consumers. Store sales grew quickly, up 50% year over year, and had more than doubled so far that year. In June, Starbucks China launched its Iced Shaken Espresso series, which was also well received and helped drive traffic and revenue growth.

Starbucks’ CFO expected that, based on the recovery trajectory in China at the time, China’s revenue contribution to global revenue would decline further and account for one-quarter of fiscal 2022 revenue.

Segment Data for the Quarter

• North America: store count increased to 17,050. Revenue was $6.06 billion. Same-store sales rose 9% year over year, with transactions up 1% and average ticket up 8%.
• International: revenue was $1.58 billion, down 6% year over year. Same-store sales fell 18%, with transactions down 15% and average ticket down 4%. Store count increased to 17,898. The same-store decline was mainly caused by the severe impact of Covid restrictions in China.
• Channel Development: revenue was $480 million, up 16% year over year.

Note: forward-looking store-count and fiscal-year revenue-share expectations are historical figures from the August 2022 source article.