Starbucks explains third quarter numbers
July 25, 2016
by Monica Watrous
Starbucks' new Rewards program launch required a significant amount of attention from marketing and digital teams.
SEATTLE — Net earnings attributable to Starbucks Corp. in the third quarter ended June 26 was $754.1 million, equal to 51 cents per share on the common stock, up from $626.7 million, or 41 cents, in the prior-year period. Net revenues totaled $5,238 million, up 7 percent from $4,881.2 million.
Global comparable store sales rose 4 percent, reflecting a 4 percent increase in the Americas segment, a 3 percent increase in China/Asia Pacific, and a 1 percent decline in Europe, Middle East and Africa. Howard Schultz, chairman and CEO of Starbucks, called the US results an “anomaly” compared to historic levels of comparable sales growth for the segment, which have been at or above 5 percent for the past 25 consecutive quarters.
|Howard Schultz, chairman and CEO of Starbucks
“…with candor and humility, we acknowledge that in certain areas we did not execute as well as we could have in the US in Q3,” Schultz said during a July 21 earnings call with financial analysts. “Had we done so, we certainly would’ve reported stronger US comps.”
Here’s what happened, according to Kevin Johnson, president and COO of Starbucks.
|Kevin Johnson, president and COO of Starbucks
“First, we launched Starbucks Rewards in mid-April, which impacted the timing of our annual summer one campaign. And that summer one campaign is what kicks off and launches our Frappuccino Happy Hour season,” he said.
Because the Rewards launch required a significant amount of attention from marketing and digital teams, as well as training and marketing in Starbucks stores, the company delayed its normal early summer campaign a week later, which resulted in a later launch of its Frappuccino Happy Hour promotion.
“Second, and related, was the implication of having two major marketing campaigns, Rewards and our Frappuccino Happy Hour, running simultaneously,” Johnson said. “Unfortunately, having two major marketing messages running simultaneously, we didn’t get as much traction behind Frappuccino Happy Hour. We didn’t get as much social media buzz and that translated into not as many transactions.”
Because of Rewards launch, Starbucks delayed its Frappuccino Happy Hour promotion.
Additionally, he cited industry-wide traffic declines due to weakened consumer confidence as a factor behind slower growth in the quarter.
As Schultz explained, “I think we have a situation where you have a very uncertain election, you have domestic civil unrest with regard to race, and I think the issues around terror have created a level of anxiety. So we are no longer looking at just an economic downturn. There are a number of things that we are facing as citizens and I think the direction of the country. And so I think this is a multi-prong issue that almost every company and every consumer brand is facing as a result of what I’ve just described.”
Despite the disruptions in the third quarter, Starbucks’ US business grew in every day part, driven by increased mobile order and payment transactions, strong performance of core brewed and espresso products, and sales of breakfast sandwiches, which grew 20 percent year on year.
Starbucks' new power lunch has been well-recieved, according to Johnson.
“Our food platform continues to build and drive attach,” Johnson said. “In Q3, food grew 10 percent and contributed 1 point of comp. While the comp growth has slowed, food is at a record 20 percent of total sales, and we actually saw an increase in attach. Our new power lunch has been well received as a convenient, personalized lunch offering, which is increasing customer awareness of our lunch and snack options.”
Looking ahead to the fourth quarter, Starbucks has “an action plan in motion” to drive stronger growth, Johnson said.
“Our summer two marketing campaign launched earlier this month, and we are seeing positive customer reception,” he said. “We are experiencing good early results from our personalized digital marketing, with more customer-focused enhancements to our mobile app in the pipeline, and execution across our seven core strategies for growth continues with progress in each initiative linked to growth.”