Starbucks reported a “banner” quarter for its smartphone feature that lets customers order coffee and food ahead of time and skip the line in stores. In fact, the feature is doing so well that it’s clogging pick-up areas and forcing the company to consider revamping store layouts.
“We’re going to redesign new stores and existing remodels to reflect the fact that Mobile Order & Pay, although in its nascent stage, is obviously going to be a significant part of the morning business,” Starbucks CEO Howard Schultz said in a conference call with analysts today.
Mobile ordering was a bright spot in the Seattle-based coffee giant’s earnings report. Starbucks posted Q1 2017 earnings of $0.52 per share, which met expectations, and $5.73 billion in quarterly revenue, which was up 7 percent year-over-year but missed estimates and sent shares down nearly 5 percent in after-hours trading on Thursday.
The company’s mobile payment initiatives are seeing more usage; purchases made with smartphones reached 27 percent of all U.S. store transactions, up 2 percent from last year.
Mobile Order & Pay (MOP), the company’s smartphone app feature that launched in 2015 and lets customers skip the line by ordering in advance, represented 7 percent of the company’s U.S. transactions in the most recent quarter. That’s up 3 percent the prior year and 1 percent from the previous quarter.
On a call with analysts after the earnings release, incoming Starbucks CEO Kevin Johnson called it a “banner quarter” for MOP.
However, the company is running into problems as MOP becomes more popular.
There were 1,200 stores in the U.S. that saw more than 20 percent of transaction volume come from MOP during peak hours; that’s up from 600 stores in the prior quarter.
The significant uptick in usage is causing in-store congestion issues for MOP customers trying to pick up their order at hand-off stations. This problem not only affects customers who are picking up items, but also potential customers who may notice the in-store traffic and end up not purchasing anything, Johnson explained.
He said Starbucks can’t specifically quantify how many customers it lost due to the congestion, but Johnson said it was the “most significant contributing factor” to the company’s 3 percent “comp,” or the 3 percent increase in U.S. comparable store sales that missed analyst estimates. Starbucks also saw total number of U.S. transactions dip during the most recent quarter.
Even though MOP was designed to reduce point-of-sale lines and has provided a new way for customers to buy Starbucks products, it is now also driving people away from the company’s stores and sparked new problems.
“Over the last five or six years we’ve had to continuously solve problems of the increased scaling of transactions in our store,” said Johnson, the current Starbucks COO. “This is no different. We are focused on a set of solutions.”
Adam Brotman, Starbucks executive vice president of global retail operations and partner digital engagement, said the company is analyzing how individual stores are making adjustments to alleviate that congestion. Some changes include tweaking barista roles to include duties related to handling customer demand, particularly at the hand-off point for Mobile Order & Pay.
“It’s not about adding labor,” he added. “It’s about redeploying and aligning labor.”
Other solutions include text message notifications for MOP customers to notify them that their food and drink are ready for pick-up, or a “mobile kiosk” specifically for MOP orders.
Schultz, who will hand the CEO reins to Johnson in April, also spent time discussing the congestion problem on the analyst call. He said it’s been a “hot topic” around Starbucks HQ, particularly with many of the company’s architects and designers visiting Seattle this week.
Schultz noted that MOP has been an “unbelievable surprise success” and that Starbucks did not expect to see such a positive response this quickly. That being said, the new technology has “significantly affected the morning ritual and at times created anxiety among existing customers,” he noted.
But, he called it a “great problem,” and one the coffee giant knows how to solve.
“This is not rocket science,” Schultz said. “This is what we do everyday as retailers and merchants. We are in this thing right now, deeply trying to understand specifically what we can do on an interim basis and over the long term.”
Further, Schultz said that the MOP activity and Starbucks’ focus on 1-to-1 personalization and digital marketing “bodes so well for the growth and development of the company,” especially given decreased foot traffic that brick-and-mortar retailers are seeing nationwide.
“I think there is such evidence for us that we are going to be one of the true winners, regardless of what happens with those retailers and especially those retailers that will suffer significantly from the downturn in traffic as a result of e-commerce and mobile purchasing online,” he said.
Starbucks has invested heavily in new technology over the past several years and is adding tech expertise to its leadership team. Last month it hired Tal Saraf, a veteran of Cisco, Microsoft and Amazon Web Services, as its senior vice president of engineering and architecture. And this week the company added Microsoft CEO Satya Nadella to its board.
Starbucks is also now using artificial intelligence and the cloud to drive sales and bolster its personalization technology; in addition, it unveiled a new “innovative conversational ordering system” this past December.
Starbucks also recently enabled social gifting integrations with the popular WeChat app in China that could pave the way for future partnerships with apps like Facebook Messenger in the U.S.