Starbucks CEO Kevin Johnson on the effects of Coronavirus

Starbucks CEO Kevin JohnsonImage source: CNBC Video Screenshot

Starbucks Corporation (N ASDAQ:SBUX) CEO Kevin Johnson Speaks with CNBC’s “Squawk on the Street” Today

WHEN: Today, Wednesday, January 29, 2020

WHERE: CNBC’s “Squawk on the Street

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Watch CNBC’s full interview with Starbucks CEO Kevin Johnson

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JIM CRAMER: Let’s bring in Starbucks Kevin Johnson on--from Seattle. Kevin, there is a key line in your conference call. And the line is, you would have taken numbers up, if it were not for the obvious. So, could you walk us through what could have been and what was?

KEVIN JOHNSON: Well, Jim, good morning. You know, we just came off of one of the strongest holiday quarters in the history of Starbucks. And if you look at what we delivered in this last quarter, certainly a 5% growth in same store sales globally, led by our U.S. U.S. grew 6%, comp with 3% growth in customer cases, in traffic. China grew 3% in same store comparable last quarter with 1% growth in traffic. So, you know, our retail business is really firing on all cylinders. We grew net new stores by 6%.

Our channels business grew by 5%. You put that all together, you know, we had one of the strongest holiday quarters in the history of the company. You know, customer confidence and customer connection scores are at an all-time high. Beverage innovation accounted for 5 points of that 6-point comp growth in the U.S. And we grew our digital active rewards members by 16% to 18.9 million.

So, coming off of Q1, you know, that momentum continues to build. Now, as you point out, we’re now managing a very dynamic situation in China, related to the Coronavirus. And, you know, we have been in China for 20 years. We realized this is a temporary issue that we have got to deal with. And we’re doing it responsibly. We’re doing it by prioritizing the health and well-being of our Starbucks partners.

We’re working closely with local health officials and government to help ensure that they’re able to contain the virus and that we can get through this quickly and get on with. But, coming up, a very, very powerful quarter. You know we had a beat, and we were intending to raise, but given the Coronavirus, we felt it was in the best interest to really better understand the implications of that. And as we do, we’re going to be transparent with our investors.

JIM CRAMER: I don’t mean to dwell on Coronavirus, but America’s dwelling on it. You closed half your stores in China. One, why not close all the stores? Because you care tremendously about not just the workers, the baristas, but the families. But two, you have got an incredible delivery system. Why not just say ‘You know what? Our stores are closed, but we are going to deliver it to you. Because we’re worried about Coronavirus’?

KEVIN JOHNSON: We’ll certainly Jim, we’ve closed over half of our stores in China, and it is a very dynamic situation. We look at that each and every day. I mean, you know, certainly, some of the stores we normally close over Chinese New Year. And then certainly in Hubei province, where Wuhan is, kind of the center of this Coronavirus, you know that entire province is basically closed down. But then we have been very responsible and thoughtful in working with local health officials and governments. If there is stores, you know, perhaps tourist gatherings, or near universities or hospitals, we have closed those stores.

And, of course, we do have our mobile order for pickup or delivery in China. And, you know, just last quarter, for example, 16% of our sales in China was through mobile ordering and 9% of that was for delivery. So, we do have delivery available. Look, we’re dealing with this on a daily basis. And so, when there is a concern, we will close stores. And we’re going to do it responsibly and thoughtfully.

CARL QUINTANILLA: Hey, Kevin. I’ve got to ask you about cold beverage, which basically led all of your day parts in all of your regions, in the middle of winter. I just wonder are there implications for kitchen engineering and margins and service time?

KEVIN JOHNSON: Well, you know, this, in many ways the cold beverage phenomenon is one that really builds on our core platforms. You know, think about this, a lot of this is Cold Brew and Nitro Cold Brew we put into our stores. And then the way we complimented that with that, you know, with things like Irish Cream Cold Brew. And you know, that is what is driving it. We deployed Nitro into all of our stores in the U.S., that’s unlocking cold growth. But it is around our core coffee and espresso beverage platforms, which is a good thing. And so, we’re very pleased with the reception to the entire beverage portfolio. And I think that is a key driver of why we’re seeing customer occasions increase and traffic grow into our stores.

JIM CRAMER: I do think, Kevin, when I look at what you’re doing, and you talked about innovation, Starbucks today in terms of the clock, in terms of when you’re using the physical plant, versus a few years ago when you first took over, there was really this kind of 2 to 5 period where it was dead weight loss. You changed that with innovation, haven’t you?

KEVIN JOHNSON: Well, you know, we have really transformed the way we drive innovation at Starbucks. And, you know, fundamentally, I tried to take all of the lesson I learned of 32 years in the tech industry, with how you innovate and constantly drive innovation that is relevant to your customers, innovation that inspires our partners and innovation that is meaningful to our business. So, we have transformed. We have gone from long-cycle innovation methodologies to a mantra of going from idea to action in 100 days and then learn and adapt. And we see that across beverage, across digital, across store design/ And it is paying off for us.

JIM CRAMER: Kevin, you know from my Twitter following, I have to ask this. It is more than anecdotal, it is empirical. The franchise that you have had to deal with, and I know you like -- I read the book -- HMS in airports, suboptimal, okay. It is no longer just a, you know what, Jim, they’re great, it is terrible. There are so many of them that are understaffed. So many of them cavalier, they are not up to your standards, Kevin what are you going to do about a partner who is -- I don’t want to hear they’re up to your standards, because I have too much evidence empirical that it’s just not true. How can you get that mess under control?

KEVIN JOHNSON: Well, first of all, Jim, I’ll comment the whole dynamic in airports is changed dramatically over the last five to seven years. And certainly, we’ve had a long-term partnership with HMSHost. And, you know, the volume of traffic that we saw to our Starbucks stores in airports over this holiday season was phenomenal. So, it is clear, we have got to reinvent and rethink how we do this. Now, HMSHost has been a long-term partner. They’ve had exclusivity in these airports. Going forward, HMSHost will continue to be a partner, but we are moving to a model where they don’t have exclusivity.

JIM CRAMER: Oh, amen.

KEVIN JOHNSON: And that is going to give us more opportunity to innovate and try different things. For example, we’re working on some ideas, even with pop-ups, pop-up stores in airports that could move depending on time of day and where gate arrivals and gate departures are taking place. So, HMSHost is going to continue to be a partner, but they will be in a model where they are not exclusive, which gives us a range of options to better serve our customers.

JIM CRAMER: That’s so good. It had to happen. I love it. Go to the airport, get a coffee.

CARL QUINTANILLA: Kevin, last week, you announced some plans to become more resource positive. Eliminating waste, storing more carbon than you emit. I was amazed at the statistic that adding whipped cream to Starbuck drinks emits 50 times the greenhouse gases of the company’s private jet. So, I guess the question is: how far are you going to take this effort into what consumers may want on their coffee?

KEVIN JOHNSON: Well, first off, we have been focused on sustainability for the last decade. But I think we realized that we have been doing it episodically on different parts of our business. So, about a year ago, we made a decision that we want to really take a wholistic look at our footprint as it relates to carbon, water and waste. And we engaged some of the world’s experts, Bill McDonough as an example, Paul Polman was an advisor to me. We sat down, and we did this benchmark of our entire footprint.

And we decided to set a very bold multidecade aspiration to become a resource positive company, a company that gives more than we take from the planet. Now, when you think about becoming climate positive and water positive and waste positive, that is over the next few decades going to really redefine Starbucks. And we have outlined a set of strategies and things to get us started.

We have set some goals and some targets for 2030. But we believe, through the research, look, our customers want this. 36% of the world’s population is Gen Z. And this is what they want. Our Starbucks partners want this. So, we are embarking on a journey.

We know this journey will be hard. We are going to have to solve a lot of problems that nobody has solved yet today. It won’t be linear. But we’re going to do this. We are going to do it in partnership with others. And we’re going to be thoughtful and we’re going to bring the market along with us. But this is something that as we approach the 50th anniversary of Starbucks, we’ll redefine the company.

DAVID FABER: Kevin. Yeah, listen. It sounds great. But you’re talking about changing customer behavior in such a significant way. The single use of your product is enormous, obviously. You look outside at any garbage can outside of Starbucks and it is filled up to the top if not overflowing unfortunately here in New York. You think you can change behaviors to the extent people will, for example, bring in their own thermos and that will become more the rule than the exception?

STARBUCKS CEO  KEVIN JOHNSON: Well, look. There’s a variety of things that will need to happen. I think certainly when it is for a cup that is for takeaway, part of what we have to understand is how to reinvent those cups so that they’re compostable and recyclable and that we work to ensure there is a waste management facility that actually does the recycling. But we also are going to really focus on re-useables. And you look at some markets in Korea, for example, they’re now at about 50% re-useable cups. And, you know, so, if a customer consumes their beverage in the store, maybe it is a ceramic cup, in other cases we’ll focus on re-useables.

But these are the kinds of problems that we have to solve. And part of it will be helping adapt consumer behavior. You just take, for example, in beverages, roughly 15% of our beverages and our stores in the U.S. now are alternative milks. Plant-based milks. And that number continues to grow. Those are examples of things that we’re going have to -- we’re going to have to influence and take customers and partners on this journey with us. But we believe that this is something that the world wants and needs.

We’re going to do it thoughtfully, we’re going to do responsibly, we’re going to do it consistent with our brand. And we think we can have a significant impact by bringing others on this journey with us.

JIM CRAMER: All right, I know you’re doing some great plant-based stuff too. But, Kevin. Let me ask you. Are you in touch with the PRC? The Chinese government. What are they telling you? And do you trust them?

STARBUCKS CEO KEVIN JOHNSON: Well, look, we have been in China for 20 years, over 20 year now, Jim. So, yes, we have a relationship with government officials, central government, provincial government, local government. And we’re connected, we’re communicating with them on a regular basis.

You know, certainly, as they are working to contain Coronavirus, we’re playing a responsible, constructive role in helping them do that, you know, simply by just being aware of where we need to close stores and how we can also help, you know in areas where we have stores open to ensure that, you know, this virus is being contained. And so, you know, this is a temporary issue. Don’t be confused. We’ve been in China over 20 years and I am still so optimistic about the long-term growth potential that China presents. We will navigate this. We are going to do it true to our mission and values.

And we’re going get through it and we are going to be stronger for it. And guess what? Next year, we are going to get to comp over this. So, this does not change our outlook for our long-term double digital growth at scale earnings model.

JIM CRAMER: All right. Kevin, thank you for never ducking us. I know this is a tough quarter to try to forecast. But holy cow I think you’re as transparent as possible. Kevin Johnson. He’s President and CEO of Starbucks.

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About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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