Sara Lebow, Sky Canaves, and Suzy Davidkhanian

Reimagining Retail: Why
Starbucks is struggling
and how they can turnthings around
Audio

On today's podcast episode, we discuss what Chipotle has that Starbucks is trying to gain,
how Starbucks can turn the ship around, and what its struggles tell us about the greater retail

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world. Listen to the conversation with our analyst Sara Lebow as she hosts analyst Sky
Canaves and vice president of content Suzy Davidkhanian.

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Episode Transcript:
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Sara Lebow (00:00):
Partner with EMARKETER on data-driven marketing materials. Our custom reports give
EMARKETER Media Solutions clients the opportunity to generate new category insights
through original surveys and analysis. Visit emarketer.com/advertise to learn more.
(00:19):Hello listeners, today is Wednesday, August 21st. Welcome to Behind the Numbers:
Reimagining Retail, an EMARKETER podcast. This is the show where we talk about how retailcollides with every part of our lives. I'm your host, Sara Lebow. Today's episode topic is
Starbucks.
(00:42):
Before we get into that, let's meet today's guests. Joining me for today's episode, we haveprincipal analyst, Sky Canaves. Sky, what's your Starbucks order?
Sky Canaves (00:51):
It's a hot almond milk latte with an embarrassing number of customizations.
Sara Lebow (00:57):
Also with us is VP of content on our retail desk, Suzy Davidkhanian. Suzy, what's yourStarbucks order?
Suzy Davidkhanian (01:03):
I'm not a customer, so I don't really have an order.
Sara Lebow (01:06):
Okay, so spoilers on how this episode's going to go.
Suzy Davidkhanian (01:10):
Well, no, I think we can admire them as a business. I just don't knowSara Lebow (01:14):
My order is I never go there, but if I'm at the airport, it's a chai latte with a shot of espresso.

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Sky Canaves (01:21):
A dirty chai.
Sara Lebow (01:22):
Dirty chai, yeah.
Suzy Davidkhanian (01:23):
The last time I bought something from Starbucks was their water.
Sara Lebow (01:26):
Was it good?
Suzy Davidkhanian (01:27):
It's water, very expensive water.
Sara Lebow (01:28):
Suzy's Starbucks order is water.
Suzy Davidkhanian (01:30):
Very expensive.
Sara Lebow (01:31):
Okay, now that we know everyone's Starbucks order, let's get into talking about them as abusiness. Starbucks has been the brand to beat for years. They've been top in brandrecognition, loyalty, consumer experience, you name it. But in Q2, same store sales declined
for the second straight quarter, which former CEO Laxman Narasimhan blamed on achallenging consumer environment. I say former CEO because as of last week, Narasimhan isout and former Chipotle CEO Brian Niccol is in at Starbucks.
(02:03):
Let's start off with setting the coffee table here. Sky, why is Starbucks doing so poorly?
Sky Canaves (02:10):

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I think it's a combination of factors. Economic conditions are a big one. It's hard to justify $9,$10 cups of coffee for a lot of shoppers who are looking to cut back. That tends to be one of
the first things people will do to save money, is give up their Starbucks habit. Whereas we'veseen a competitor like Chipotle still doing well because at least it's a filling meal that you're
getting out of it. Then I think other factors are increasing competition and somewhat lack ofinnovation as well in the offerings. And they're also dealing with some bottlenecks in terms of
how their stores fulfill orders, how quickly they can get orders to customers, and that candrive people away as well.
Sara Lebow (02:52):
Are the challenges they're facing in China impacting them as well?
Sky Canaves (02:56):
Yeah, so China's been really the focus of their international growth, and there there's very
weak consumer demand for spending in general. It's been pretty soft due to the economic
conditions there as well. And they also have so much competition, lower-cost competition
from Luckin Coffee that's leading to price wars and also a lot more competition across thecoffee and tea space, across the beverage space, that they have to contend with.
Suzy Davidkhanian (03:24):
I also think they lost their core value. Because it was supposed to be an experience. It's
supposed to be fun, it's supposed to be cool, it's supposed to be different, like a craft, apremium product that they've commoditized because of many, many reasons. There weremany factors that go into the commoditization of coffee and that particular experience. And I
think if it didn't feel like a commodity, people might not have been cutting it out even though,because we talk a lot about the lipstick effect. When times are tough, people still need a little
moment of self-pleasure. It's just like insult and that's ruined for people when your coffee twoyears ago was not $10, it was maybe $6 and all of a sudden it's 10, and now you're like, "Oh, is
it really worth it?" So there's so many things to unpack here when it comes to what is it that's
happened. They have a licensing model. Not all of their stores are owned and operated, which
is difficult. They are probably over-stored in the U.S.
Sara Lebow (04:21):

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Yeah, I feel so silly for, while we're recording this, drinking my $8 coffee that I got in Brooklyn
on the way into the office this morning. Let's keep going with that Chipotle comparison,though. This is apples and oranges, or coffee and burritos, but Starbucks did hire Chipotle'sCEO. What does Chipotle have that Starbucks is trying to gain?
Suzy Davidkhanian (04:42):
So I actually think it's the person they're hiring, this turnaround person, who can come andhelp sort of revive the chain. Starbucks has not been doing well for a long time, and eventhough they've tried to do quote, unquote, innovation, their ex-CEO came in from a CPG
background and they thought maybe that would help at least with a different sort of sense of
products maybe at the grocery store, and even that hasn't really worked in their favor.
Whereas the Chipotle guy has come in after multiple runs of coming in, seeing a problem,
diagnosing it, figuring out how to solve for it and operationalizing super quickly. So I thinkthat's what they're looking for.
Sky Canaves (05:16):
I think having a very innovative and responsive CEO at the helm for the past six years or so isreally what has given Chipotle huge advantage and really had seen their business soar to newheights and continue to do well even as consumers continue to pull back. And Chipotle has
successfully avoided having to do a lot of discounting or value meals even at this time when
consumers are under more financial pressure, as a lot of rivals have done with lower cost
options. Chipotle has been able to position itself a bit more as a premium offering. And I thinkpart of it is that it can benefit from wealthier consumers trading down, maybe trading downfrom dine-in experiences at a restaurant that are a lot more expensive now as well. Whereas
Starbucks consumers are not really trading down to Starbucks. There's not a more expensive
coffee option that they're leaving. They're trading down away from Starbucks to coffee athome or to maybe less expensive options or just doing without.
Sara Lebow (06:20):
Chipotle has also done a lot of interesting things recently. I just saw on TikTok a beauty collab
with E.L.F. They invented or released a Lipotle where you can eat the burrito and the lip stain
doesn't come off. Lots of social content, good targeted ads, and yeah, other things of thesort.
[NEW_PARAGRAPH]Suszy, did you have something to add there?

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Suzy Davidkhanian (06:41):
I did in that I think it'll be really interesting to see what he does. Because Chipotle, like we justsaid, it's such a different experience from Starbucks. Chipotle, you go, you eat, you leave kindof quick, right? It's about turn and being efficient. It's a quick service restaurant after all.
Whereas Starbucks, the original intention was to just hang out there and to get your work
done and meet friends for coffee and spend time there. And that experience is very different.
Starbucks moved away from it a couple... and I'm sure COVID didn't help because people
weren't going to linger at stores, and everybody was expecting everything to be quick andefficient. So obviously this move towards efficiency equals more commoditization, equals
more value driven. Even apparently the loyalty app is all about value driving messages.
Sara Lebow (07:27):
Let's talk about the differences between the Chipotle app and the Starbucks app. Starbucks
has a glut in mobile orders that is slowing down services coming from the app. Chipotle, on
the other hand, has its own second assembly line coming in for mobile orders coming in fromthe app. Which one is a better system?
Suzy Davidkhanian (07:46):
So I think that's interesting because right now we're talking about efficiencies. And theefficiencies, obviously, you want people who are trying to use a convenient service for it to bea good experience and not frustrating. But at the same time, that idea of... Imagine even if
Starbucks got it right, it's still taking away from the original intention. Do you remember backin the day when someone would write your name and then there were lots of pictures of how
they got your name wrong? You don't see that anymore. The fact that Starbucks is trying to
use the apps more to get things done faster is also taking away some of that fun premiumness, whereas at Chipotle they figured out how to make sure everybody's happy, that people
are coming to pick up their lunch to go home or back to the office and the people who want
to stay in. But you know what? Most Chipotles are not beautiful inside. There is nothing aboutstaying in a Chipotle to hang out. There should be at a Starbucks, at least originally.
Sara Lebow (08:39):
Sky, anything to add there?
Sky Canaves (08:40):

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I think the efficiency question for mobile orders is really interesting. It's also one that I think
Niccol has addressed at Chipotle with in-person orders, because they've added expediters towork and help process orders faster, get them paid for and done, and increase the ability tofulfill orders in stores even faster through that. But I think Starbucks has been facing a lot ofchallenges with bottlenecks through its mobile ordering system because it allows so manycustomizations that then complicate the ability to complete those orders or to fill them. I think
Starbucks has also been looking at how it can become more efficient in getting orders tocustomers quickly. Because the whole app ordering process is so seamless and easy until you
get to the post-purchase and you see how long it's going to take to fill your order. If it's goingto take more than five minutes, it's frustrating. And then if that order estimate isn't actuallysatisfied and it takes much longer than the estimate, that's also very frustrating.
Suzy Davidkhanian (09:42):
I do think they're doing some cool things in terms of trying, they have so many stores, they're
trying to differentiate some of the stores and they have different concepts. So there is, notthat new anymore, that's just like mobile pickup store by me that seems more efficientbecause that's all they're worried about, right? But it is weird to think that one store location
can't handle both. Can't you figure out how to make that work in terms of your employee
structure? And just think about the takeout lanes, the drive-through lanes. There are someone
that's filling that order that's separate from the person at the front of the store who's taking
your McDonald's order. So it seems weird that Starbucks can't figure that out.
Sara Lebow (10:26):
One thing Starbucks can figure out or has figured out is Gen Z. They're still doing well withGen Z. According to consulting firm dcdx, Starbucks ranked as number seven among Gen Z's
most magnetic brands of 2023. And this past summer Starbucks added boba, or bubble tea,
which is a clear appeal to Gen Z. Is that popularity enough, though, to help Starbucks turn itaround?
Suzy Davidkhanian (10:50):
I don't think so. I think the problem that they're facing at the depths of the core of the
problem is that the loyal, loyal customers who, let's say, went four times a week are now
pulling back and going two times a week or maybe just once a week or twice a month. It's thatshopper that they're losing. The random teenager, Alpha, Gen Alpha or Gen Z, who's going

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into the store every once in a while when they get pocket money from their parents, I thinkthat's not where the money is going to be. It's the repeat purchasers, which is why they were
trying to do the value meal. But that obviously didn't work, because if you're trying to be a
premium company and charge premium pricing, you can't really have a value meal. It justseems so off brand.
Sky Canaves (11:32):
I think with Gen Z, they're facing so much competition from Gen Z's attention shifting more toboba or tea drinks, and there's a lot of competition there. And I think they were on the righttrack with introducing the Popping Pearls Boba this summer. But I think they've also faced achallenge with scaling that innovation. When they offer innovations, they're challenged toreally scale it and be able to offer it and meet the demand for them, because they mentionedthat they sold out of boba and then they were out of stock. And I see when I order on the app,they're sometimes out of stock of particular things like oat milk or other things that theyshould have in stock, like basic bakery items. So they're also losing sales because they're not
optimizing theirSara Lebow (12:17):
Their inventory.
Sky Canaves (12:18):... their product mix, yeah.
Suzy Davidkhanian (12:19):
Well, and it's scary about the, sorry, I said inventory, but if you meant product mix, that's evena bigger thing, right? Because they seem to have so many SKUs when it comes to drinks andso many combinations, but not that much food to go with it, at least not in the traditional
ones. Because there are a couple of Reserves here, where it's a little bit different and they
have thin crust pizza and other flatbreads and stuff like that. But at a regular Starbucks it
seems like food is so secondary.
Sara Lebow (12:45):
I want to get to the question that I feel like we've been sort of talking around this whole time,
which is that Starbucks' struggle doesn't exist in a vacuum. We're in this greater retail

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Page 9environment where it feels like everyone is introducing a value menu except for maybe
Starbucks, which has pulled theirs back. What does Starbucks' struggle tell us about thisgreater retail environment?
Suzy Davidkhanian (13:06):
I think that's such a good question. And I guess what it really tells us is that if in a challenging
environment, for many reasons, from the economy to an election year to the world is fallingapart, if your brand doesn't stand for something and is not authentic and you don't
understand your customer at the end of the day and what is it that they're looking from you,the competition is so fierce then that it becomes a value driven sort of nobody's going to win
when everybody's trying to cut prices on things, except for the consumer.
Sky Canaves (13:38):
Yeah, I think there's a big challenge because the consumer willingness to spend on expensive
coffee drinks is a bit lower than it was a year or two ago. At the same time, I think Starbucks
has to figure out where do they want to grow the most? They've talked about in their lastearnings call, which may not be valid anymore, because Niccol might come in with acompletely different strategy, but they talked about wanting to target those non-Starbucks
rewards members, so the less loyal, the less active customers, and bring them back to
Starbucks because they felt that was a growth opportunity. But maybe they need to aim
higher and aim for their premium most loyal higher income consumer and provide products
and offerings and store experiences that really speak to them.
(14:24):
Suzy, you mentioned the Starbucks Reserve stores and the Roasteries. These types ofenvironments might hold more appeal and might ultimately generate better margins for
Starbucks, even though it's harder to scale that type of business, because it's a higher service
level enterprise and it involves higher quality products and even expanding into better food
options as well.
Sara Lebow (14:46):
And more space.
Sky Canaves (14:47):

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Yeah.
Sara Lebow (14:48):
Physically, that they don't necessarily have.
Sky Canaves (14:51):
Yeah, but when I was in Italy this summer, in Milan, one of the coffee capitals of the world, I
could not get into the Starbucks Reserve store because the line was around the block, andthey had security to keep people like me from just walking in and saying, "I just want to have alook around and not even buy anything because I'm just doing research." But that was reallyan eye-opening experience, that there still is that kind of interest and demand in the brand,
and they really need to capitalize on it and leverage it to really position themselves as thatpremium coffee offering to differentiate themselves from all the other competition that is
growing.
Sara Lebow (15:32):
Yeah, I don't know which one of you made this point, but I think that it was a really good point,that people are trading down to Chipotle, but there's not necessarily that consumer that's
trading down to Starbucks. It feels like it's a really good time to be a retailer to which people
can trade down, but if you are already a premium retailer and no one can trade down to you,then you're going to have a little more trouble, except for with those ultra wealthy consumers
that aren't as impacted bySuzy Davidkhanian (16:00):
That was Sky and it is a hundred percent. It's true. I also think the other added layer is thetrade down, and also there's this movement to local. So if you are a super premium sort ofnational or global brand and there's a movement to more sustainable local, how do you
manage that?
Sara Lebow (16:20):
Yeah, and that's something that's really important to Gen Z. Now, Gen Z is full ofcontradictions and they'll say they like local and buy from Shein, as many will. That's not Gen Z
specific, but we know that Gen Z does like local. So if you are Starbucks, if one of yourappeals has been being cool, being young, how do you keep that up? And that's also where

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Page 11there's the difficulty scaling, right? Because you can do what Barnes & Noble did and have allof your stores have their own individual local feel, but that's expensive and it's difficult toscale.
Sky Canaves (16:52):
And I think that's where the product innovation and the collaborations come in. So looking at
the Chipotle app today, I saw a lot of featured meals with Olympians featured and young
Olympians, of course. So it's really speaking to Gen Z and generating some more buzz andinterest. And, as you mentioned before, Sara, Chipotle has been really innovative with its
collaborations, working with brands like E.L.F. on cosmetics collaborations that really speak
to Gen Z and their interests and their love of both Chipotle and complementary brands thatare part of the Gen Z universe. And they would love to see that. We haven't seen Starbucks do
as much on the collaborations front.
Suzy Davidkhanian (17:32):
And if you think about all of that sort of, and maybe one of the reasons why they picked
Niccol, is because he's been really good at bringing people back in the different, whether it's
Chipotle or Taco Bell, and it's that repeat visitor. It's an already acquired customer. So that's
what he's leaned very heavily on. So to your points, if there's more experiences and it's moreomni-channel, how do you drive people to the store and how do you get them to buy more ina nice, authentic way? He might really win and turn them around.
Sara Lebow (18:04):
I think that's a good note to end on. So thank you for being here, Sky.
Sky Canaves (18:09):
Thanks for having me again, Sara.
Sara Lebow (18:11):
Thank you, Suzy.
Sky Canaves (18:12):
Thanks.
Sara Lebow (18:12):

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Thanks to our listeners and to Victoria, who edits the podcast and keeps things grande. We'll
be back next Wednesday with another episode of Reimagining Retail, an EMARKETER
podcast, and tomorrow join Marcus for another episode of the Behind the Numbers Daily.

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