Here’s How The Success Of Mobile Order And Pay Is Negatively Impacting Starbucks

by Trefis Team
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Starbucks‘ (NYSE:SBUX) has had a challenging Q1 2017 with its revenues missing the consensus estimate and slowdown in its comparable sales. (Fiscal years end with September.)  The company’s Mobile Order & Pay app showed rapid customer adoption, leading to operational challenges. This tool, which was designed to reduce long queues at Starbucks’s restaurants, is now creating congestion at the handoff plane due to high volumes. This is resulting in walk in customers not making a purchase due to the heavy rush, impacting comparable sales negatively.  With a larger number of orders placed via the mobile app, Starbucks restaurants are unable to cope with this demand causing operational challenges. Ironically, the success of Starbucks’ tool aimed to reduce longer waiting times has now created congestion at its stores, driving customers away. This is being attributed by the company as one of the reasons for slow comp growth in Q1 2017, along with a challenging macro-economic environment.

According to our estimates, the average daily customers at its restaurants is one of the key value drivers for Starbucks. We expect this number to increase steadily and reach 531 average daily customers at its company owned restaurants at the end of our forecast period.

Starbucks 20170130

A scenario where this number increases significantly and reaches 730 customers, as Starbucks enters new beverage segments, can lead to a nearly 20% upside to our price estimate. This indicates that Starbucks’ valuation is quite sensitive to this metric. The Mobile Order & Pay app was developed by the company to increase customer traffic through quicker service and avoid instances of customers walking away without placing an order due to long lines and wait times. However, it now appears that this app is creating the same problem it was meant to avoid.

However, Starbucks’ management is clear that it is laser focused to solve this challenge. The company is introducing new in-store procedures and tools, adding new roles and resources to specifically support Mobile Order & Pay and testing new digital enhancements such as sending text messages when the order is ready for pick up. The company has solved high traffic challenges in the past and is confident that it will be able to solve the challenges presented by Mobile Order & Pay as traffic increases.  In Q1 2017, Starbucks experienced the congestion at the handoff plane in 1,200 of its stores. This is double from 600 stores last quarter. This shows that as, Mobile Order & Pay becomes popular, the company’s stores are not equipped to handle the growing traffic. Although the company is looking to add and better deploy resources in these stores, the exact impact of these changes will be visible in the next quarter.

While Q1 2017 saw the negative impact of Mobile Order & Pay in terms of slowing comp sales, we believe Starbucks is taking steps to resolve the operational challenges and the congestion issue should be resolved in the next few months without impacting its revenues significantly in the next quarter.

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