Coffee juggernaut Starbucks outperformed earnings expectations last quarter, sending the stock shooting up 12% since Thursday when it reported results for fiscal 2023. That was good for a single-day jump of about $10 billion in Starbucks’ market cap on Thursday. Executives attributed much of the coffee chain’s success this quarter to a new plan to improve working conditions in stores meant to help employees do their jobs better. Starbucks improved pay and scheduling headaches for in-store employees, replaced old equipment, and lowered turnover, all part of an effort to “reinvigorate the partner culture at Starbucks,” CEO Laxman Narasimhan told investors on an earnings call. Given the results Starbucks posted it appears to be working, and could be emblematic of a trend across the economy.
Starbucks saw strong results across the board in terms of revenue, same store sales, transactions, and check size, which it attributed in part to its ability to be more productive. It’s a trend that’s been prevalent across the economy in the third quarter as productivity rose alongside worker pay. As the Axios Markets newsletter pointed out, economists have been surprised after years and years of stagnating productivity, including two straight quarters of decline in 2022, but Starbucks’ blowout quarter is an early sign that this won’t be business as usual.
When reached for comment Starbucks directed Coins2Day to a copy of its earnings release and call transcript.
Since October 2022, when Narasimhan took over as CEO from founder Howard Schultz (and inherited a toxic dynamic between the company and a restive union movement), the new chief has undertaken an extended effort to rehabilitate the company’s relationship with its in-store employees. He visited stores across the country, took 40 hours worth of barista training, and even worked as one—something he pledged to do once a month moving forward. This past quarter, Narasimhan said, was a testament that the company’s efforts to rebuild that relationship were paying off. And he has put his money where his mouth is, implementing a $450 million plan meant to make its stores run more smoothly and help baristas do their jobs faster.
This was a point reiterated by CFO Rachel Ruggeri. “The investments we’ve made are fueling growth—investments in our partners, in wages, in training, in our new store, in equipment,” she said.
A blowout quarter and a big investment in workers
Starbucks’ strong quarter saw it outperform expectations on revenue, which was $9.37 billion compared to an expected $9.29 billion. The $36 billion in revenue it had in fiscal 2023 represented a 12% increase over the previous year. The better working environment and investments in working conditions led Starbucks to report an 8% increase in comparable store sales globally driven by a 5% increase in average ticket and 3% increase in comparable transactions.
“We did all of this by investing over 20% of this year’s profits back into our partners in stores through wages, training, equipment, and new store growth,” Narasimhan said. “All this is further evidence that our strategy is working.”
Last fall, the company rolled out a plan to overhaul its in-store operations and make it easier for baristas to make its many famously complicated and time-consuming iced drinks, which were also a key source of union discontent. In this last quarter, the company installed 550 new nugget ice machines, 600 single cup brewers, and rolled out portable cold foamers to all U.S. Stores, according to Narasimhan. The idea behind the plan was to give back more time to baristas—and by extension, to customers. The key was to increase speed, while still letting customers have endless options for customization, which comes with a higher price point. “Our customers continued to favor more premium beverages, creating a new normal as it relates to mix and customization,” Ruggeri said during the earnings call.
The increased efficiency in U.S. Stores was one of the primary factors in operating margin shooting up by 3.1 percentage points from the year before, to 18.2%, according to Ruggeri.
All this has helped improve conditions for Starbucks employees. The company pointed to a 10% drop in employee turnover and a 16% boost in the length of barista tenure. Baristas also saw material improvements in working hours, which were up 5% in the quarter, and take-home pay, which was up 20%.
Productivity is increasing across the economy
The trends at Starbucks point to similar directional trends across the U.S. Economy where productivity increases have coincided with growth in hourly wages.
Overall productivity grew in the U.S. In the third quarter by 4.7% compared to the second quarter. That’s the highest quarterly growth rate since the third quarter of 2020, which came right after the economy cratered in the second quarter of that year due to the pandemic. Meanwhile, hourly compensation grew 3.9% in the third quarter.
When productivity, which measures the output of the economy against total hours worked, goes up, it implies more goods and services being produced with the same number of hours worked. That generally helps everyone in the economy because companies can produce more without hiring more workers, which means they don’t have to pass along their increased labor costs to consumers. But it’s been decades since productivity was on a steady trajectory of growth, both in the U.S. And globally. Coinciding with the productivity slump has been a widespread, decades-long pull back on capital expenditures—exactly the kind of thing Starbucks is bucking here.
For instance, Starbucks plans to invest $1 billion in wages, employee training, and new equipment for its stores next year, and it has separated out a further $3 billion for capex, about 85% of that spent toward opening new stores and renovating existing ones. The company expects to renovate about 1,000 stores in the U.S. Starbucks has company here, as research from Bank of America shows that S&P 500 firms have i ncreased capex spending for nine straight quarters.
One of the reasons companies, like Starbucks, may have to make such substantial investments is that the labor market is especially tight at the moment. Often when unemployment is low companies have to invest in ways to make their business run more efficiently, because they can’t rely on more manpower alone, to deliver more goods and services. The unemployment rate in October was 3.9%. In January of this year it stood at 3.4%, the lowest monthly rate since May 1969.
On its earnings call, Starbucks said that staffing and scheduling would be “areas of focus” next year, when the company plans to increase its store count by 4% in the U.S. To about 17,000 stores. By 2030, it plans to build 17,000 new stores globally for a total of 55,000 locations. And Starbucks is counting on happier, higher-paid, and more productive workers when it opens those stores.
