Starbucks CEO Howard Schultz took a pause while delivering upbeat news about record quarterly earnings and growth potential for the Seattle-based coffee giant on Thursday to discuss his concerns about consumer behavior, particularly in light of the current U.S. presidential campaign and what Schultz called the ongoing “Amazon effect” on retail.
Starbucks reported $5.7 billion in revenue for the quarter ending Oct. 2, up 16 percent from last year. In a conference call, Schultz said that when discussing the business, Starbucks leadership isn’t in the habit of using the weather or uncertainty in politics as an excuse for how it’s doing in sales. But he admitted, “we are all trying to navigate through a difficult time.”
“I would label this time as just a high degree of uncertainty that obviously is domestically driven but has affected the rest of the world. … I don’t think we’ve ever witnessed such concern about what could happen in the U.S. as a result of the election. And I think there’s no question as I speak to other retailers and other merchants both in and out of our sector, there isn’t one exception where everyone is experiencing I think a very unpredictable and erratic chain of events. It’s very hard to cut through all of the noise and try and get access to the customer and try and get your message out. I think everyone is hoping that post-election there will be a return to a natural state of affairs in terms of consumer behavior.
“But I think there’s another issue on the table that we have not yet discussed that I talked about three years ago and that is the seismic shift in consumer traffic. I was talking to [FedEx CEO] Fred Smith just a couple of weeks ago about his situation at FedEx and he shared with me a piece of research which showed a significant drop in foot traffic on ‘Main Street’ and in malls not only domestically and around the world as a result of e-commerce, the web and what I’ll loosely describe as “the Amazon effect.” As a result of that you’re certainly seeing large companies and small companies not only not open new stores but announce closures.
“Let me just speak to that — I know this is a little long winded, but I think it’s important. There’s no doubt over the next five years or so we are going to see a dramatic level of retailers not be able to sustain their level of core business as a traditional bricks and mortar retailer and their omni channel approach is not going to be sustainable to maintain the cost of their infrastructure and as a result of that there’s going to be a tremendous amount of changes with regard to the retail landscape.”
After opening 2,100 stores in 2016, and while on pace to open a store a day in China, Starbucks’ growth is clearly hitting on all cylinders. And Schultz said while other retailers will face the prospect of closing locations, Starbucks’ innovation will keep it a step ahead.
“We believe as we look down that pipe and look at the future, that our ability to maintain our growth in terms of new stores domestically and internationally, coupled with the fact that Starbucks still maintains a very special place in terms of a sense of community, a third place environment, and people looking for a seeking out human contact and a place to go, that as these store closures occur, and they will, that we are going to be in a very unique position five, 10 years down the road because there’s going to be a lot less people competing for those customers. I’m not talking about the coffee category, I’m talking overall. But we are in the very very early stages of a tremendous change in the bricks and mortar footprint of retailers domestically and internationally as a result of the sea change in how people are buying things and that’s going to have I think a negative effect on all of retail, but we believe that it’s going to have ultimately a positive effect on the position that we occupy and the environment that we create in a our stores. We’re playing the long game in everything we do.”
Part of that long game focuses on bringing the unique “roastery” experience to a wider audience. The Reserve Roastery and Tasting Room that opened in Seattle at the end of 2014 is a point of pride for Schultz and the company. The next three are planned for Shanghai, New York and a location to be named in Europe. Eventual plans call for 20 or 30 of the operations worldwide, with smaller-scale locations playing off the fancier theme and potentially impacting the overall perception of the Starbucks brand.
“For those of you who have seen Seattle, I’ll tell you that Shanghai and New York will be 2.0,” Schultz said. “As good as Seattle is, wait ’til you see what we’re going to do in New York and Shanghai. It’s going to change the company, the brand and everything we do.”