Starbucks (SBUX) Presents at UBS Global Consumer & Retail Conference (Transcript)

Starbucks Corporation (NASDAQ:SBUX) UBS Global Consumer & Retail Conference March 8, 2017 8:15 AM ET

Executives

Scott Maw - Executive Vice President and Chief Financial Officer

Tom Shaw - Vice President, Investor Relations

Durga Doraisamy - Director, Investor Relations

Analysts

Dennis Geiger - UBS

Dennis Geiger

Good afternoon. I'm Dennis Geiger, restaurants analyst at UBS. And I am pleased to welcome and excited to have on stage with me Starbucks’ CFO, Scott Maw. Also representing Starbucks is Tom Shaw, Vice President, Investor Relations; and Durga Doraisamy, Director, Investor Relations.

So first, Scott is going to give some prepared remarks and a presentation that’s being broadcast live and for replay. And then at the end, we will jump into some Q&A.

So, with that, Scott, thanks so much to you and the team for being here. Take it away.

Scott Maw

Thanks for having me. I am actually going to stand up at the podium just because I tend to gesture a lot and I don’t want to hit Dennis when I am getting excited here about what we’re talking about. So, I want to cover two main topics today over the next 20 minutes or so, and then get into Q&A. And the first thing I want to talk about and I’m trying to sprinkle this through the presentation is the longer term growth drivers for Starbucks, that I think occasionally with even our own focus on day-to-day comp drivers, our focus on getting the US business turned back to what we expect, sometimes we lose sight of those long-term growth drivers that make Starbucks a pretty unique long-term investment opportunity. So, I will spend some time on that. And then I want to go through with about half the time in talking about the US because I think it’s important to get into what we are doing to drive comp improvement there. So that’s the set up.

Forward-looking statement. Please study those. There will be a quiz at the end. Just some metrics over the last five years and I think this really keys up nicely the longer-term investment opportunity for Starbucks. So, store count you can see up about 50% over that timeframe. We opened 2,300 stores across the globe, that’s a big number. Those stores continue to do better and better on our top-line across the globe and on top and bottom-line in countries like China. 91 million customers, nearly 100 million customers per week coming to our stores. Revenue up sort of two-thirds over that last five years and market cap roughly doubling over five years.

So, a big long-term investment story for Starbucks. And I think in several aspects which I will talk about in a minute. The best is yet to come indeed and particularly around digital and in China. So, we will get into that.

And the first thing I want to talk about, and the first big growth opportunity and something that I think as unique about Starbucks is this combination of experiential retail and the digital consumer, increasingly digital consumer. So, Howard has talked about this for a while that Kevin has really been driving this as a key sort of operating tenant and strategy tenant for us since he has come in as COO and now as CEO. And what we’ve said now for the last couple of years is we think successful physical retailers will have some blend -- some more on one than the other, but some blend of experiential retail, in other words giving your customers a reason other than just your products to come into your stores and a blend of digital engagement with customers. So, a way to make it convenient or fun or fast to engage digitally. And physical retailers will be in different spots on that spectrum. But we think at Starbucks we play well in both places and there’s significant growth in both sides of that spectrum.

So, let’s talk about experiential retail first. So, this is something we’ve been doing for decades now. It's the third place in Starbucks. And while most of our products are taken outside of our stores to be enjoyed by our customers there is still a significant amount of activity and products brought and consumed within our Starbucks stores.

People come by the millions every week to meet in our stores, to work, to study, to connect, to engage. And I would argue we would argue that sense of community as digital continues to consume more and more of all of our days. That sense of communities actually becomes more important. It's not more frequent, and not as big a piece of the total timeframe, it becomes more important. That sense of connection, that sense of a place to engage with others and engage with our partners. And we've been really good at that for very long time. And the extension of that for us in a place we're investing quite deeply is what we called siren [ph] retail.

So, this is [Reserve Roastery in-pinching outside] retail to make it a little bit faster to say. At the peak of that is the two Roasteries that we have opened in Shanghai and Seattle. But also, the many, many stores that have reserve coffees with clover reserve stores that we're opening, we just opened one in Seattle, I will talk about that in a bit. And the ability to extent experiential retail to preimmunize our product and most importantly the 28,000 stores around the world to remind everyone that we still source, roast and serve the highest quality coffee that you can get anywhere. And so that is a very important part of what we're doing while we continue to invest and grow the digital relationships that we have.

And so, because of the frequency of our customers, because of the size of our ticket and the convenience of ordering and coming into Starbucks, we have a lot of transactions and a lot of opportunities for increased convenience for customers. That's where mobile and play comes in. Increasingly we're opening drive through locations, because that gets at an opportunity and occasion for our customers to have a faster experience and our investment in throughput at peak, which has had a big payoff for us over the last 9 months or so all goes to that kind of convenient side and the digital side of that spectrum.

And so, what we believe is if you look at in the retail world out there and certainly if you look in the restaurant retail world. There is not another brand out there with as many stores at scale that can win on both sides of the spectrum. I'll talk about where there is opportunity. We haven't fully executed on everything that we can. We haven't always grown as fast perhaps we like to on the digital side, but that doesn't take away from the size of the opportunity. And I think that's important not to get lost in the monthly and quarterly view of U.S. comp. So big opportunity around that spectrum.

So now let me get into what Kevin's talked about. I want to spend a little bit of time on Kevin's fixed operational priorities. And I'm going to again skewed towards the U.S. and China. Not to short [indiscernible] the other ones, but just I want to leave a little time for Q&A and it's a lot to talk about in 20 or 30 minutes.

So, as you know in the U.S. business on the next slide, there are three main priorities that Kevin has been talking about and having us focus on. The first is, using operational excellence to accelerate U.S. comps across holiday parts. So, the recent success in this area for us was in morning peak.

So almost exactly a year ago, over the holiday period we had a significant slowdown in traffic at peak it actually turned negative in our busiest stores that had a lot of them of peak transactions. And so, what we did is we focused on training on specific roles on really getting the partners that were in the stores pointed at where the biggest activity was and where the biggest bottlenecks were. We used lean principles to understand where those bottlenecks were, what the opportunity was to open up throughput there. And really within about three months, we started to see the comps turn. And they went from negative, to flat, to positive, over a relatively short period of time. And actually, for the last three quarters those busiest stores that had the biggest challenges a year ago, have actually grown comps faster than the average. And again, that’s that focus around operational excellence.

And even in the most recent quarter where our comps were below what we expected, we saw peak hold strong because of that focus. And what's exciting about this is, about three weeks ago, we launched nationally for the first time in about five years, an update to what we call labor deployment, which is an extremely unromantic title. We call it deployment 2.0. But it’s really how we position our partners at different dayparts within the store to drive throughput and service our customers.

And so, specifically, what we had before, what we launched about five years ago was really more based upon an average product mix, food, beverage, et cetera, and an average daypart mix. But our stores aren't average. So, you can have stores that have, 30%, 40% food. You can have stores that have 60%, 70% cold beverage and you can have anything along that spectrum.

And so, if you think five years ago, for instance, our food was 15%, 16% of total sales. Now it’s over 20%. In some stores that percentage changed by a factor of two. Went from 15% to 30% over that five-year period. Cold beverage as a percent of total beverage five years ago was in the mid-30s, it’s now over 50%. But again, in some stores that mix is doubled. And yet, we were running the same plays and the same deployment based upon average from five years ago.

And so, what we launched a few weeks ago is daypart-by-daypart, store-by-store, mix-by-mix, a labor deployment that has our partners in the right places at the right time. So we'll take a partner off a support role that they may be cleaning or restocking and we’ll put them at the warming oven at peak because we know that store has a high mix of breakfast sandwiches at peak or where we might have had one partner on the espresso machine, then turning around and making cold beverages, we now have two partners working back-to-back servicing a high cold mix store.

And it’s only three weeks in, so there’s nothing to read out yet on comps, but partner feedback on that is quite positive. We’ve seen a tremendous amount of enthusiasm because it just makes sense. It frees them up to do what they should be doing and it makes them a lot more efficient.

So again, we used lean principles, we used training, we used a lot of things we used learned at peak to sort of optimize that and it's off to a good start. So that's the first one.

If you go to innovation across food and beverage. So, I want to talk a little bit about beverage first and then I'll touch briefly on food. As you think about beverage and Starbucks we long had a history of real beverage innovation. And that innovation has always been a mix of, I'd call it platform innovation, things like cold brew, things like Teavana Iced Tea and shorter term our product innovation, things like different classes of Frappuccino flavors over special teas that have may be a three or four-week lifespan within our stores. We call those shorter product innovation sparks, right they are meant to go in a longer marketing plan. And for many years, that worked quite well.

But recently, particularly in the afternoon, those sparks just haven't worked well, they haven’t paid off, they haven’t paid back. Frappuccino Happy Hour is probably the biggest extreme of that, not really paying back. So, we're going to do very different things around Happy Hour this year, basically, the Frappuccino Happy Hour that you know is going away and something new is coming in.

But more importantly, we are now going to use more of our marketing dollars and our marketing time to have innovation around platforms. So, if you look at Nitro Cold Brew, it’s an extension of the cold brew platform that we launched a few years ago. Highly successful cold brew, Nitro is highly successful. We're now testing things in some of our Seattle stores like Nitro Tea Lattes and Nitro Milk Lattes and things that may or may not make it in the Starbucks stores but it's an extension of that core capability that we have and extension of what customers already sort of know and love. And importantly, in our stores that allows us to market behind those platforms for longer.

So, if you have been watching in the stores, the Blonde launch that we had in early January, that's been emphasized far longer than most of our product launches. Because Blonde is a core platform for us. We were happy with the way it starts, but what's more important is that emphasis on longer term more platform-based marketing. And I give a lot credit to Matt Ryan, but also Ros Brewer, who's our new COO, has come in. And she kind a look at the marketing calendar and she said wait a minute, Blonde is the first time we've ever had, a second espresso and we're going to market it for that so that we can get it out these other drinks, I don't think that makes any sense but stay in the stores longer. So, we took money from those, start marketing and put it in the platform of Blonde. So that's the opportunity. So, look for more things in Cold Brew, look for more things around Teavana ice teas. And we think that's a way for us to be able to extend core innovation at those platforms.

Food has been highly successful really over the last 5 years off the back of the La Boulange platform but beyond now. So, if I just take a few items over the last year, about a year ago, we kind of reinvented our bistro boxes and made them all I think at least 20 grams of protein. So, they are all protein bistro boxes a lot more health-forward, a lot more substantive for customers.

In the Better for You category, we launched Sous Vide Egg Bites, which are driving meaningful food comps, and then we will always have the spectrum in the more indulgent side, we recently launched a chicken sausage biscuit sandwich in morning and that's doing quite well. So, across the Better for You and more indulgent spectrum, we're pretty happy with what we see on food innovation and that will continue.

I'm going to go back, sorry. I missed the most important one. So, this is the most important on the page. And I want to spend a little bit of time on this. I can talk about the Starbucks Rewards Program if you like in Q&A, but what I really want to talk about is the opportunity that we see for those customers that aren't in the Starbucks Rewards program to have digital relationships with Starbucks.

So just a few stats. As you know, we have, now, about 15 million Starbucks Rewards members active, 90-day active Starbucks Rewards members out of 75 million customers that come into our stores every month. So that means 60 million customers do not have a digital relationship with Starbucks. But you also know is virtually all of our comp growth has been driven by digital relationships via Starbucks Rewards. And the reason is because of the frequency and the power of the rewards program, we're able to track all of those transactions and serve up relevant offers through one-to-one personalization and Big Data that drive a high level of incrementally. And that really hasn't slowed. So, this isn't about Starbucks Rewards growth slowing, it's about an opportunity that is at zero today from a revenue standpoint on customers outside of rewards getting digital relationships.

So, what do I mean by that? So that 60 million customer base, there are three things we're doing today, two that we've announced, and one that we are investigating. So, we'll see if it comes to fruition, but just give you an idea of the things that we're looking at to bring those relationships in.

And the first is, opening up mobile order and pay to all customers. So being able to, today, if you or a month ago, if you wanted to order ahead, you had to open a rewards account and preload a card. Now, anyone that downloads the app can order ahead. We're rolling that out by the end of the year, everyone will have access to it, but today a select customer base can order ahead. And when they do that, we obviously have the ability to capture their contact information and give either in-app or e-mail marketing and start to track their spend behavior so that we can then get them into the personalization engine and serve-up offers

And so that's just starting. That's mobile order and pay, the first one. The second thing that we're doing, is we're re-activating. So, I said that 15 million is 90-day active, but there are millions of customers that are 91-plus day active, and we're reactivating those customers. We have been marketing to them for a while now and having some success in converting them. But we're going to go far deeper. The offers will be richer because we know they pay off. And we’re going to try to get that previously active base reactivated.

And the third opportunity -- and this is something that we're just investigating, we'll see if we can make it work is what we call Wi-Fi sign-up. So, if you want to use Wi-Fi in Starbucks we’re going to make it easy for you, enter your e-mail once. Every time you walk into the store it automatically connects to Wi-Fi and you don't have to accept the terms and conditions again. That allows you to have the convenience of connection, it allows us to have the ability to have the e-mail addresses.

And so, across those ideas and others that we're considering, we said we'll have several million non-Starbucks Rewards digital relationships by the end of this year. And if you think about that 60 million, I would expect that number to continue to grow at a relatively rapid clip over the next handful of years. And even though you won't see a ton of revenue this year from those customers because we've got to get them in, get them established, validate, start tracking their spend behavior and then market to them, right? That's going to take a little while to build that out. I think as we get through next year and beyond that can become a meaningful growth driver for us, that is basically at zero today. So that's a big opportunity.

I just want to spend a little bit of time sort of unpacking that for you so that you can understand. If we can get those customers into the personalization engine, we will drive comps. It's just a matter of getting the information and then attracting and building the capability to market to them.

So global growth drivers. Just a quick comment on China, Asia-Pacific. So, it’s our fastest growing region. I am going to focus mostly on China, but all of Asia is growing quite nicely for Starbucks. You’ve got Korea, which is our fifth largest country, last year double-digit comps, wonderful profitability in a 50-50 JV we have there. Japan, while the comps have been challenged, overall profitability and revenue growth have been right in line with what we expected in that market, working to turn the comp story but still a really good growth market for us on top-line and bottom-line. And then of course there’s China. And there’s the rest of Asia that's growing as well, and then there's China.

And what's important to understand about China is just there's three big things working in our favor in China. The first is, the way we’ve built the brand over time. So, we've been in China for nearly 20 years. Over that 20-year period we've been really, I'll say, methodical about how we’ve opened stores and how we’ve invested in the market. I think you all know that our benefits package in the US is at the top of the peer set but it's the same way in China. People love working at Starbucks in China and that reflects well on the brand and it reflects well for our customers.

We just recently announced critical care insurance for parents of our partners to take care of some types of expenses that’s not covered by insurance. And we’ve invested significantly in the Yunnan Province in improving coffee quality. And sure, we benefit from that but the vast majority of the coffee that is produced under those improved practices goes to others, and that's the right thing to do.

So, over a very long period of time we’ve built a really strong brand in China. I think if you were to talk to customers and the surveys that we see, Starbucks consistently ranks at the top of western brands in China. But I think it’s how we've done that and how our partners feel about us and how our customers feel about us. So that's the first thing that we have.

The second thing we have in China is we’ve got a great team. So, the leadership team there is almost exclusively Chinese nationals. They have done a fantastic job building out the store level teams and the regional managers. Belinda Wong and her team are first class. They are very, very conscious of where they open stores, how they open stores, how they stack those stores, building a supply chain that is safe and on time and accurate. And making sure as we do this acquisition that we get it integrated right, which is why I've been a little bit conservative in making sure we're doing the right investment in the first year to get that acquisition off to the right start. But China, we double down with the acquisition. The growth prospects there are just huge. And that leadership team is the one that's driving. It's not being driven certainly from Seattle.

And then the third thing is, obviously is the massive tailwind that is the economy of China. So highest growth GDP of any major country. You've got, in a couple years, you'll have 600 million middle class customers in China, almost double. Obviously, the total population of the U.S. And what's interesting about that middle class is not only is it growing at double digits in numbers, but the spend per, the income per capita within that is growing significantly as well. So, unlike a lot of developed countries where, if the middle class is growing, it's only grown a little bit. There's almost no income growth, China has both. The number of people are growing and disposable income is growing. And so that tailwind is wonderful for us. We wouldn't be able to capture any of it if we didn't have the first two things to sort of provide a way to capture it. So that's China.

Siren Retail. So just a couple comments on this. We just opened in Seattle our first reserve store. So, it has fresh baked Princi, on-site, it's got mixology, so it's got three daypart, breakfast, lunch and dinner. It had a great first week, one weekend but what I was actually most excited about, was the weekend. Because obviously, during the week, it's in our building.

During the week, it was just -- I went down there to get a slice of pizza and I saw that like half of the finance team was down there. So, there is a lot of partners shopping there, which is great. But the weekend was strong as well. So that shows that there is a drop from the community. That's obviously what we seen in the Roastery in Seattle, 20% comps in that Seattle Roastery last year before launching Princi. And that's the third year of operations so still really strong, acceptance in Seattle and then our largest store in the world, which is the Roastery in Shanghai, which, food, merchandise is a significant piece of that equation in China and obviously, core coffee.

So, all of the things in Siren Retail allow us to make sure we're investing in and extending premium experience, investing in and extending experiential retail. And we're just getting started there. We just announced, I think Howard was in Costa Rica over the last couple days and opened a Visitor Center so people can interact with the farm that we owned, Hacienda Salsa in Costa Rica. Experienced how we grow, how we use café practices to extend coffee farming and agronomy in origin countries, so that's all gone very well.

And then CPG. So just quickly, on CPG. Our most profitable segment by margin. CPG is going under a little bit of a transformation as far as the category is concerned. Because growth has been slowing from strong growth, really the flat to slightly negative growth in that core down the aisle coffee business, packaged coffee, cake-cups, et cetera.

Growth for us has still been there because of the power of the brand. So, we continue to take share in a market that's slowing. We continue to see the partnerships that we've established with North America coffee partnership we have with Pepsi, the Teavana tea partnership that we have with Anheuser Busch and then our Chinese Bottle Coffee partnership with Tingyi, those are doing quite well and provide additional ways for us to grow in a market that's slowing a bit here in the U.S. So, lots of growth opportunities in the CPG in the partnerships, internationally, and continuing to take share here in the U.S.

Okay. So, I want to talk a little bit. I'm going to try as best I can to address a question I get a lot. And I'll try to show you, basically, everything I can show you that we're able to see around this concept of sales transfer. And sales transfers are what happens when we open up a company-owned store, Starbucks stores, and sales and transactions move from one store to the other. So, there's three things on the slide I want to point out.

First of all, average unit volume in a company-owned store is $1.5 million. And the lighter brown area, that represents the amount of business that’s coming from existing Starbucks stores. And we can track that quite accurately by looking at trends, little bit MSR data, we know that number. And I'm not going to give you the exact percentage but I will say you can eyeball it. It's drawn to scale. It's small.

Everything else in the darker shade, that's all incremental revenue from existing customers that are giving us additional occasions and/or new customers. So that’s important. I'll come back to that in a minute.

The second thing that’s important is, we're opening 750 stores. That's a big number. I think a lot of folks say that -- look at the number and say, well their comps are slowing, they must be moving sales from one store to another. But the reality is, our licensed stores -- this is so important, our licensed stores and our company stores are different. They are not the same. It’s not like we go into a downtown area and we open five licensed stores and five company-owned stores and they kind of all look the same. They're totally different. Our licensed stores are in grocery stores. They're in airports. They're in Target. They're in hotels. Generally, they don't have outward-facing doors, right? They're capturing an occasion that isn't coming from an existing store.

Now there's some sales transfer from licensed store, I don’t pretend that isn’t the case but it is just so much different and so much lower. I worry that sometimes we're not getting that message across. So those licensed stores do not look like our company-owned stores.

So, we have got 350 company-own stored that we're opening, company-owned base is about 8,000, and most of those company-owned stores are drive-throughs. So, we're going into areas that aren’t the areas that you guys are used to seeing around here. We are going into areas where there’s less density from Starbucks stores and opening new stores.

So, what happens when we do that? So, this is a store in Fort Collins. And I am going to wrap up Dennis. So, here’s a story in Fort Collins, a store and a shopping center, no drive-through, 700 transactions, 1.5 million AUV, great store. I'll take them all day long. We make a ton of money in this store, highly profitable, okay? That’s what it looks like.

We opened a store about two or three miles away, beautiful, drive-through, larger store, and here's what happened, that existing store before we opened it had 700 transactions. A year afterwards it had 600 transactions. The new store captured about 1,000 transactions, again that's the convenience of drive-through and about $2.5 million of revenue. So, this is just one year after. You can see the total transactions in the trade area went from 700 to 1,600 and revenue more than doubled. That's a highly profitable trade for us and it's all dependent on our ability to target real estate, have a minimal amount of sales transfer. And then I forgot something that’s really important.

What happens with this new store is it’s going to comp at 2 to 3 times the rate of the rest of the Starbucks stores. So, you are going to have three or four years built up of stores that drive outsized comps. If I was to take the weighted average impact of those comps, it's meaningful compared to an average store.

On the flip side, you obviously have negative comps in that existing stores, right? And if I take the weighted amount of that, it's a meaningful number. When I add those two numbers together, the lift from the new store and the comp impact from the existing, it nets to basically zero. So what I'm left with -- I just want to go back, what I'm left with is virtually no impact on comps because I’ve outside comp on my new store offsetting the negative comp in existing stores and I am left with all of the cash flow from that dark portion there, it’s all incremental, it’s all new on relatively low ROI store, high profit beverage store, high AUV. It just works.

We're not falling asleep on this. We are not closing our eyes and saying everything is good. We still look at it store-by-store. We've learned from every store we opened and we make adjustments.

So, I'll wrap just by saying, balancing the long-term opportunities in China with digital and experiential retail with the need to focus that I talked about in the U.S. As Howard always says our best years are still ahead of us. Thanks, Dennis.

Question-and-Answer Session

Q - Dennis Geiger

Great, thanks guys great detail for what is one of the if not the highest quality growth company in large cap consumers. So, let's dive into a little bit of what you went through and then some other questions. Maybe for a second, we focus on the more near term. So obviously in recent quarters, Starbucks putting up still very solid absolute numbers that I think most restaurants would be envious of. But obviously on Starbucks like you talked about some of the challenges. Can we go through some of the others, I think beyond the number of total Starbucks doors that are out there, folks wonder about competition, they wonder about brand perceptions? Can you just address those two quick?

And then just building on that, just the confidence you have obviously as we think about comp guidance for the year. Assumes a little bit of an acceleration from where we are beyond what you just said, the key drivers to get to the [indiscernible] side.

Scott Maw

Yeah good question. So, what I'll say about competition first of all, is we live in a competitive world. What we believe is the competition that comes for Starbucks really is the collection of those independent coffee shops that also try to extend the third place and have a premium coffee experience. That may have certainly grown. But what I think is important is as best we can read it. And there is no perfect read of this. But we think over the last couple of years, away from home coffee occasions have probably grown I will be generous 1% to 2%. Meanwhile we've been growing our own stores at 4% to 5%, we've been driving about a point of traffic comp. So, we've been growing our coffee occasions by let's just say 5%. So, despite the proliferation of doors and some excellent execution by some of these competitors, we're still taking share. I think the thing that's important to understand is as they have grown, when we have issues let's say throughput at peak. People used to have to if they wanted to find an excellent cup of coffee they had to walk a few blocks maybe in Boston to find that. Today often they could just look out of our lobby window. And when we don't have the right kind of execution and the right kind of meeting customer expectations I think we lose those sales. And so, I think that happened with throughput at peak.

The other thing that gives me some confidence that we're still competing well is our peak has held up. It's 50% of our business and I think it's our core coffee business was really at risk, we would see much more continued softness there, and it's just not what we're seeing. What we're seeing is softness in the afternoon. And we believe a little bit of that same customer experience risk is at play there, where we're not really focused on throughput, we're not really focused on customer connection. We have so many other things going on for our partners in the afternoon. And again, customers will vote with their feet if they don't get that they want such first thing.

There has been no degradation in any of our brand metrics. Customer service metrics are actually up year-over-year, employee engagement, satisfaction and turnover metrics are better year-over-year. So, there is no indication that the brand is softening. But I do think we've got to execute every transaction customer-by-customer. What was the second part?

Dennis Geiger

Just as far as the drivers.

Scott Maw

Yes, the drivers.

Dennis Geiger

Lots going on obviously. What you're most excited about over the next --

Scott Maw

Yeah. So, if we break it down really into those three things that I talked about. We were talking before about Kevin's ability to lead a strategy and get us focused on executing at things within that strategy. So those three things. What we talked about is we ended the quarter and we started in January. We've kind of indicated a one comp, that's kind of the math that you can do. And so, I'm not talking about where we are now. But if you think about that what we need to do is we need to get back to with three. And if you consider the impact of what we saw from gift cards right, that was pressure in the quarter. Some of the things that we have in Lobby, those will abide. And what will come through is the things that I talked about around execution, operational execution within our stores. So, the ability to do deployment 2.0 across all dayparts.

Then if you look at the digital side of things, so we’ve signed up over 1 million new members in the most recent quarter. it's our biggest quarter is the holiday quarter. But if you look at January, those have really not gotten into the personalization engine. So, we will start to go after those. We will start to have just a little bit of impact as we get through the year from those non-Starbucks Rewards digital members.

And then the third thing is around innovation. And again, we’re really happy with what we are seeing with Blonde. We are really happy with what we are seeing with food. And I think if I’m just trying to go from 1 to a 6, right, I would be a lot more nervous than heading into the holiday with a 3, several quarters in a row at 3, having a couple of months where we were softer and then needing to build back across those drivers, 2 or 3 I think that’s something that’s entirely achievable for the course of the year.

Dennis Geiger

And again, as we think about most recent quarter where we saw some softness in non-loyalty members, afternoon daypart. I think when you talk about labor deployment, when you talk about throughput. When you talk about some of the innovation around platforms and then what you are doing on the digital side with a non-MSR member, it feels like this is the strategy to kind of address a lot of this.

Scott Maw

Yes.

Dennis Geiger

And this is a big focus over the next three, four, five quarters.

Scott Maw

That’s absolutely right and the good news about all of that is we were focused on much of that heading into it. So, if I look at deployment 2.0, we didn’t want staff to address the afternoon daypart and ideate on that two months ago. We have been working on that for 18 months. The first thing we did was at peak but a broader labor deployment was always planned. So, this is very consistent with where we have been focused. We will execute across those and we should see comps grow.

Dennis Geiger

Great. I want to jump to digital and mobile, obviously where you sort of got a best-in-class platform at this point. What has you most excited as we look ahead, where can utilization go, what capabilities, what initials are coming in the direct marketing et cetera. If you could just touch on that bit more because that obviously can be a big driver here as we look ahead?

Scott Maw

Yes, when you look at the next few quarters, you really have to look to that MSR, the start-ups rewards, group of customers. And we continue to drive the majority of our comps with those customers. We are not seeing softness in that customer group. And so, I look at continued ability to serve up offers at the right time with in-app suggested selling, the ability to continue to get smarter and smarter with the next likely product for customers to purchase, the ability to get even more personalized with some of the gamification and things that we do going deeper into those marketing channels.

So, I look at that as a comp driver and that feels like that’s going to continue for us. We haven’t really seen any slowing there. I feel pretty confident if anything we could see a little bit more from that customer group. And then where you really get excited, again, not so much for this year but as you get into ‘19 is, the customers that we’re not really engaged with digitally, and that’s where the real opportunity is there.

Dennis Geiger

Good. I want to focus on that My Starbucks Reward loyalty program, over one-third of all transactions coming from MSR members. I think growth member spend has been mid to high single-digits over the several quarters. Last quarter, you accelerated member growth, so that 11%, which is a great number. How do you think about growing that membership base, is it 10%, can it be better than 10% year-over-year? I think you talked about 70 million, the opportunity as to number of customers. Any sense on how many are potential MSR members, or [indiscernible] et cetera and maybe they don’t have to be given what you just mentioned on the -- given the focus on the non-MSR but?

Scott Maw

Yes, it’s a great question. So, if I think about the first part, I should have said this before. There is sort of two ways we’re growing the revenue of that group. We are growing the number of customers and we are growing spend per member. And so, if you look at that spend per member number over the last year, it’s been in the mid to upper single-digits every quarter, which is a tremendous growth rate from those highly engaged customers already. And that’s personalization.

So, people ask me, hey is your personalization engine working? Just look at that, relatively small slivers of our customers are highly engaged with the way we've been able to grow not only the number of members in that but spend per members pretty impressive. And we can continue to do that. so, I like sort of mid-single digit or better spend per member growth and I like double digit member growth at least 10%.

The member base is getting big and what we need to do is we need to expand the offering. So, could we for example have a lower level reward tranche if you will where customers don't get quite as much rewards, but they get something for engaging with us and we're able to understand to market them. And then importantly outside of the rewards program, because a lot of the people they just won't sign up for rewards program, they even have friends that, I know how much to expand to Starbucks. And it's an 8% discount. The airlines and hotels you get 1% to 2% like best case, this is 8% why don't you signup and its just people have an aversion to some rewards program, they have averse to preloading the card. So outside of that through mobile order and pay, how do we get customers into that personalization engine, that's a real opportunity.

So that's what I would say. That member base should be able to grow at 10%, we should be able to see spend per member grow somewhere in the mid-single digits. If we do that, they'll still drive very strong comps while that other member base is growing.

Dennis Geiger

And I think your initiatives like the Chase debit and credit cards opening up the mobile order payment architecture essentially. You could see some conversion from -- certainly there is the potential for an acceleration from those initiatives that's really signing folks up.

Scott Maw

Certainly, and it's an important thing, another thing I forgot to say, the exciting thing is let's just say over 5 years we're able to have as many members that are non-Starbucks Rewards Digital or Starbucks Rewards Digital. I'm just throwing, why couldn't it be millions of millions to stream a bit. The real opportunity is marketing to those folks, but a sub opportunity as moving those people along into the rewards programs maybe at a lower level driving additional engagement but ultimately some of those customers will come through to gold. The part of your earlier question I didn't address, there is a significant number of that 60 million customer base, they are like my friends who're coming to Starbucks every day, they're just not in the rewards program. How do we get them aware of the rewards program a little bit engaged and then can we move them on through to gold? If we can't that's fine, we can still market with them and engage them and get them think that are interesting to them. But if we can get them all the way to gold that's the power. So, I think that becomes a feeder an extension of that 10% as the pipeline grows.

Dennis Geiger

And then I just want to touch on this non-MSR customer relationship again. Because it could be powerful, you're going from essentially nothing let's say to thinking about the MSR member who is a mid to high-single digit spend grower year-over-year. You've got them into system now essentially you can direct market to them. Maybe they're not getting the stars, they don't want to make the full conversion. But this can really be a powerful driver, I guess as you ramp over the next 6 to 9 months or whatever it might be.

Scott Maw

Probably a little longer than that, but yes. I'm super excited about it as we move through 2019. Some of the technology stacks that we have to build we can't completely piggyback off Starbucks rewards with the personalization there. We've got to do some building out. We have to build history for these customers. The beauty of Starbucks rewards members is we have all this history on what you enjoy. So, we know what to offer. That will take some time in order to really actualize that, but the size is huge. And we're talking 60 million customers. And even if I think some skeptical people say well those customers on average or less frequent they are. There are some of them that are actually as frequent as gold customers, but on average they're less frequent. But all I need to do is increase a bit. So, if I have a customer that comes in once a week, and I can get them to come in six times a month. And I do that across millions of relationships that could be a nice comp driver within that 3% to 5% long term guidance.

The only thing that I think if Matt was here, he and I would be trying, it's going to take a bit of time to build this. You're not going to see much this year. it will start to build next year, but as we get through the next couple of years it gets pretty powerful.

Dennis Geiger

Great. And I want to just touch on food quick. Lots of momentum, contributing about 2 points of comp recently, sales mix up over 20%. You’ve just had impactful food can be, as I think about some of the quality enhancements you’ve seen in breakfast under some of the partnerships you’ve been doing with Mercato and other things. As we look down the road, partnerships, acquisitions organically, can Starbucks be a destination place for food and can this really continue to be significant growth engine five years, many years in the future?

Scott Maw

Yes, I mean even today we do have single food transaction things that are happening, at breakfast and lunch. So, people do come to Starbucks for a food. And I think the best way to think about it is, I would expect over the next five years we could get to 25%. And if beverage starts growing the way we hope that will, food has got to work really hard to take that share. And so that’s a lot more things happening in a breakfast with food attached. That’s the ability to attach things, to iced teas and more better for you, more healthy beverages that are open to that or more open to that food attached is the ability to do things in the afternoon to give people reason to come in. It’s the move to fresh. It’s may be some things in select stores around Princi and Mercato. So, all of that gives us confidence over the next five years to continue to build that. And then as you know it’s super economical for us because most of it is attached. So, people are already coming in, so you leverage labor, you leverage rent. And so, while it can be gross margin -- put a little impact on gross margin, it tends to be profitable at the operating income level.

Dennis Geiger

Good. And we’re just out of the time. So maybe the last one. As we think about the long-term guidance, recently updated to 12% plus on the earnings growth side of things. Can you just talk about that decision briefly? And then the comp guidance is 3% to 5% long-term. If we are at the lower end or below that, are there opportunities in the cost structure to sort of hit that earnings target?

Scott Maw

Yes, I mean there’s a number of things we are doing this year for the first time. So, we have had our work that we’ve done on cost of goods sold that continues. We are doing some things in the middle of the P&L off to a great start in the first few months on labor and waste and really digging into those stores that are either too low on labor and waste and adding capability or too high and making sure we are managing that, and Ross has been a great partner in that. And so, there are opportunities to go deeper there. The only thing that I talk to people about is for this year. That 3%, it has a fair amount of those savings in there. So, I don’t think I would -- it wouldn’t be right to look to the operators and say they look things are slowing though even deeper because we loaded them up pretty fully this year. I think as you go further in to time, we start to unlock more and more. This is what we’ve learned as we’ve gotten into the supply chain savings. That’s gone on for three or four years now. We just see more and more as we dig in and we start to develop a pipeline. But I wouldn’t count on it this year.

Dennis Geiger

Well thank you very much, Scott, and the team. Really appreciate you braving the weather and coming here. And looking forward to having meetings throughout the day. Thanks so much, guys.

Scott Maw

Thank you.