Is this the death of the coffee shop? Starbucks is betting on contactless options

Nicholas Rossolillo, The Motley Fool Published 8:00 a.m. ET Aug. 2, 2020

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Starbucks, the world’s largest coffeehouse chain, announced that U.S. customers will soon be required to wear facial coverings inside its stores. Video Elephant

Starbucks had a pretty decent spring quarter, all things considered. Sure, sales of $4.2 billion (down 38% year over year) and a net loss of $678 million (compared with net earnings of $1.37 billion a year ago) are nothing to get excited about. However, the figures were better than feared, and with 97% of its more than 32,000 global stores operating again in some fashion, the empress of coffee is already on the road to recovery.

However, the biggest news surrounds Starbucks’ plans for its stores. The company continues to talk about its “investments” in new store formats – rather than using language indicating that pickup and delivery are an adjustment to the current state of world affairs. In recent months, ghost kitchens used for fulfilling delivery and pickup orders have been trending, and it’s looking increasingly likely that restaurants and other food-prep outfits favoring on-the-go orders are the way of the future.

PLS news: Starbucks to bring back Pumpkin Spice Latte, launch curbside pickup at up to 1,000 stores

In light of the company’s moves to update its operations, I’m adding Starbucks to my list of stocks that will emerge stronger from the current “redundancy crisis” brought on by the pandemic.

The death of the coffee shop?

For those of us born and raised in the Northwest, drive-thru and walk-up coffee stands are old news. Chains like Dutch Bros. Coffee have been making hay from the coffee-on-the-go model for decades now. And Starbucks itself has been an evangelizer of the format, spreading its drive-thru coffee shops across the country.

But Starbucks is doubling down on new methods of coffee consumption in the new digital era that’s emerging due to the spread of COVID-19. CEO Kevin Johnson spoke extensively about it during the last earnings call. It’s a must-read for restaurant operators and investors alike:

In response to clear shifts in consumer behavior and preferences, we are now accelerating strategic initiatives for the future and positioning Starbucks for continued long-term growth. We have moved aggressively to advance our evolution of the store base, to accommodate trends that we have long seen emerging in our business that were only exacerbated by COVID-19.

Specifically, Starbucks expects drive-thru usage to increase, and is investing in new tools for employees to increase throughput. Curbside pickup capability is also rolling out to no fewer than 700 U.S. stores by the end of the current quarter. And where drive-thru and curbside pickup aren’t workable – specifically in dense urban areas – a new small-footprint “walk-through” Starbucks store has been developed; the company’s goal is to have a few hundred of them (in the U.S. alone) up and running within a few years.

Dunkin’: Company says it may close 800 U.S. stores by the end of the year

Some changes to digital ordering and the Starbucks Rewards app are forthcoming as well. Johnson said this about the adjustment, which will roll out this autumn:

While nearly half of our sales now come from Rewards members who are preloading their store value cards, we’ve heard from many more customers that they would like an option to earn rewards when paying directly with cash, credit, debit, and select digital wallets. By adding this capability to Starbucks Rewards, we will give customers more ways to pay and earn rewards when using the Starbucks app.

A best-in-breed chain

Here’s the incredible part: Starbucks’ weekly comparable sales (a blend of foot traffic and guest ticket size) in the U.S. surged from a year-over-year rate of negative 65% in mid-April to just negative 16% at the end of the quarter. And for the 3,100 or so U.S. stores that never closed, comps are actually positive again in July. All of that business revamping is paying off.

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Here are the supplies you need to make a cup of coffee just like Starbucks and Dunkin. USA TODAY

But what if all these new “investments” are for naught once COVID-19 gets beaten down? Mass shifts in behavior are hard to get rolling, but once they’re in place, good luck trying to slow them down. I’m not saying that the coffee shop (or traditional dine-in restaurant) is dead; on the contrary, there could be pent-up demand for in-person dining once the dust settles. But there will still be plenty of dining rooms left, as the restaurant industry was building new real estate at a torrid pace for years heading into this crisis. That era of overall store traffic cannibalization is hopefully over for the time being.

But whether it’s to maintain social distancing or just for simple convenience, digital ordering, pickup, and delivery are all set to be a major part of the new normal. If I were planning to open a new restaurant or food-prep business – or revamp an existing one – I’d be hard-pressed to justify a large footprint in which a dining room featured prominently. Running a smaller store for on-the-go purposes is trending, not to mention easier to turn a profit on. Starbucks seems to be facing this dilemma and embracing the changes – and getting fantastic results so far.

Nicholas Rossolillo and his clients own shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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