Starbucks' (SBUX) Management Presents at JPMorgan Gaming, Lodging, Restaurant and Leisure Management Access Forum (Transcript)

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Starbucks Corporation (NASDAQ:SBUX) JPMorgan Gaming, Lodging, Restaurant and Leisure Management Access Forum March 9, 2018 12:00 PM ET

Executives

Scott Maw - Chief Financial Officer, Executive Vice President

Analysts

John Ivankoe - JPMorgan

John Ivankoe

Good morning everyone. It's John Ivankoe from JPMorgan, restaurant analyst here. It's certainly a pleasure to be headlining this event and starting off Friday morning for us, the Starbucks Corporation. With the company today is their EVP and CFO, Scott Maw. Also joining them are their VP of Investor Relations, Tom Shaw and Director of Investor Relations, Durga Doraisamy. So welcome all. Thank you so much for coming.

And we would really like to talk about the number of different very top goal initiatives for the company. And I think what's very interesting is continued growth of My Starbucks Rewards members and continued conversion of non-MSR members into active MSR members and just the overall opportunity that you have and why you are excited about converting some of the $75 million customers that you have to the 15 million active My Starbucks Rewards customers that you have.

Scott Maw

Yes. Great question. First of all, good morning everyone and thanks for having us, John. What I would say is, what we have driven over the past several years is significant growth and over the last couple of years, almost all of our same store sales growth from those customers that we have digital relationships with and those that are in our Starbucks Rewards program and last quarter those grew 11%, a little over a million that we added. They are growing their spending rate somewhere between mid to high single digits. So you are getting both revenue per customer growth and the number of customer growth.

And I think that continues to be a big part of our growth as we look over the next year or two and beyond, just because if you think about where we are in personalization, most of that growth is coming from personalization, but we have really only been capturing spend data and learning about spend data for a couple of years now. So we are pretty early on in the optimization of that process. And so we set a target out there sort of in that mid single digit hopefully every quarter on spend growth and at least double digit on number of member growth. And we have got a number of things that we are doing to bring customers in and we feel really good about that. It's really a long-term growth driver.

What's a little bit new and we have been talking about recently and people have been asking about recently is, we have got 75 million people coming up through our doors each month, 15 million in the Rewards program. What about the other 60 million? We know you will convert million or two every year into Starbucks Rewards, but what can you do beyond that? So we have talked about and the big reason people don't join the Rewards program is twofold. Number one, they don't know about the benefits of the program. We have done a lot of customer work on this.

So they don't understand that when they engage with Starbucks and they bring their spend through the program, they basically get 7% to 8% discount, right. It's one of the best loyalty programs out there. I am obviously a numbers guy. So I know what credit cards do and what airlines do, hotels and 7% to 8% rate, it's really a big incentive. We can offer that because of the nature of preloading a card, because of the nature of our product and the margin that we have, because of the frequency of customers, because of the incrementality we have been driving with one-to-one personalization. And so we have got to find a way quite to continue to get people to know about the program more. We are doing more things in store.

We are doing more things as we can with digital marketing. But the real opportunity and then the second reason is, they don't want to preload a card. So one of the reasons that program is, as you know, so beneficial for customers is they preloaded a card which has all sorts of benefits. Psychological benefits that they know they have money loaded and banks and companies have been talking for years about when you put your money with someone and people know they prepaid it, you use that more often and we see that. There is the benefit we get from flow, loader interchange and all that stuff. So that's the core program. But we know those two facts are hurdles for customers. And so what we are starting to do is for the first time capture digital relationships so that we can use digital marketing assets, including personalization at the end of the day to get non-Starbucks Rewards members or we like to say, customers outside of the Rewards program, just so that it's a positive.

So what are those things? I mentioned three things recently. Two of them are either running or planned and one of them we are debating and could come. The first one is opening up Mobile Order & Pay to everyone. So it's long been a bit of frustration for customers that don't want to join a Rewards program or are unaware that they can't order ahead. Starting, we think, by the end of March now, we will be fully rolled out where everyone that downloads the app will be able to use Mobile Order & Pay. So we opened up that channel and it is a channel like drive-through or POS to all customers. There is no friction of having to be in the Rewards program. So as we do that, obviously, we have the ability to capture their email address, to capture mobile phone information and begin to market to them directly.

The second thing that we have done is, we are doubling down on, you mentioned this, the converting lapsed members. So we have 15 million 90-day active members, a pretty narrow active window. I think it's the right thing. But we have millions of what we call lapsed active or inactive members that are 91-plus days and we have been marketing to those folks and they have been a source of growth in the Starbucks Rewards program, sort of reigniting them that Matt Ryan and the team have a number of things and we are going to reach a little bit more on the offers that we give to them because we have got the math to show that it pays off to get them to come from inactive and back into active. So those are the first two things.

And then the one that we are talking about, I call it researching although it's a little more than researching, is what we call Wi-Fi sign-up in our stores. So you come into our stores. You give us your email. And then every time you come in, you are automatically connected to Wi-Fi. You don't have to accept and connect. It's convenient for customers. And it allows us to have a chance again to email market.

You add all those things up and we said on the most recent call, we think we can have several million of these non-SR digital relationships. It's not going to be a revenue driver this year. As we get into and through next year, we will be able to start understanding what their spend patterns are and then start marketing to them directly. And this should, as we get through 2019 and beyond, start to contribute to comps. And as you know, to-date that group really is not, it's zero, right, in the revenue stream from personalization that we have today.

John Ivankoe

So do you view the Chase opportunity separately from this?

Scott Maw

Yes. When I think about Chase, it's really in that core program. It's a way to capture more Starbucks Rewards program and drive increased activity. And what we have done with Chase, there are sort of three pieces to the agreement. There is obviously an interchange agreement, which is beneficial as with every credit card that's done with any retailer. By the way, the debit card is unique just because debit cards rewards are so unusual. So that piece by itself will drive increased profitability.

Chase buys stars from us. We think we have a chance to market to those customers. We think the fact that people earn stars when they spend, that will drive more customers into our store. So there is some comp impact. The interchange piece in the first few years is actually bigger than the comp piece, just given the size of our interchange.

And then the third piece is really around building out the infrastructure to the partnership. So you will remember Spotify, Lyft and New York Times. Those were wonderful partnership, sort of small, but even doing those it was highly manual tracking those partnerships. So this is now fully automated. It took us a little longer than we thought. When I say a little longer, we are almost a year-and-a-half past our original date, to be honest.

But the big reason of that is, we build that out. We now have the ability for customers to earn stars outside of our stores at different rates, burn at different rates, all the way from how we market, integrated marketing capabilities all the way back to something as basic as the accounting system. As we look at other partnerships and there will be more, we now have the engine to run those on.

John Ivankoe

I guess, so obviously driving comps is actually increasing the ability of your stores to serve more customers. So two different things. One, do you have continued ability drive the morning business through Mobile Order & Pay improvement? I mean I know that was an initiative over the past year. I mean is there a part two to that perhaps that you can talk about? And then secondly maybe little bit separately from throughput if you want to look at this holistically or not, is the afternoon business and as you get data on a weekly basis, if you are understanding the afternoon weakness better in terms of what the causes are and by definition, what some of the solutions may be?

Scott Maw

Yes. I will talk to those in order. So if you look broadly at throughput and we will start with that peak but I want to talk a little bit about what we have done throughout all dayparts recently. So you will remember a year ago we struggled with throughput at peak, particularly in very high volume MOP stores. And so what we did is, we created specific roles and trained those roles that at peak, all they did support was MOP.

So before may be there were seven or eight partners working at peak, three or four of them might be doing some portion of MOP, fulfilling the orders, consolidating orders, doing handoffs. What we did in 1,500 stores as we trained either one or two roles, in some stores we trained one role just to do the consolidation and then partners would share the calling and handoff. But in the really high volume stores, we trained someone just to consolidate orders from the cold case and the oven and the espresso machine together and get the ticket ready for it to go and one partner to call.

And because we could make that, it's not four hours a day, right, it's couple hours a day in some stores, though some stores it's one hour a day, whenever that peak is it allowed us to connect to customers. It was the same person in the store every morning a lot of time, so you get to know your customer and it's significantly improved the customer benefit. Fewer lost items because the orders were consolidated by the same person and in order. And so that, within about three months, in those 1,500 busiest stores, we saw comps turn. And over the last three quarters, they have actually been improving comps faster than the average. And so that's what we have done.

To your question, is there more that we can do? So about three weeks ago, we rolled out a national update to how our partners, what we call, deployment 2.0, which is a terribly boring name, but that's what we call it. And really, it's based upon what's happening in the store. How many people are deployed doing what? It's been about five years since we have done that. And the way we were doing it before, it was absolutely weighted for how many transaction you have.

Of course, the more transaction you have, the more complex the transaction, the more labor you earn. But what it wasn't really weighted for specifically was the product mix of those transactions, deeply product mix store by store. And even with those transaction, it was sort of a lot more on average by store type as opposed to store specific.

So what we have now is, each and every store for each and every daypart has not only how many people they should have staffed, which is what we did before, but where they should be. And so I will just rattle off a couple of stats here. If you go back five years ago, cold beverages as a percent of total beverage revenue in our Starbucks stores was in the mid-30s, 36%, 37%. You roll forward five years, cold beverages are now over 50% of beverage sales. And in many stores they have doubled, right. You have gone from 30% to 60% or something like that. Warmed breakfast sandwiches have doubled in many stores, yet the play is based upon an average number of transactions and the deployment is based upon average from five years ago.

So now, in stores that have a high mix of cold will have partners standing back to back, one at the espresso machine and one at the cold beverage station working on those concurrently. Previously, you might have someone at the espresso machine turning around and trying to keep the cold beverages and throughput suffer from that. So that impacts and influences everything. It's three weeks in. The partner response has been really strong. I am copied on a lot of that. And so we think we are on to something. We think we are off to a good start. And even if the partners are just happy and nothing else happens, it's going to be a good thing. But I think that is also part of what will help in the afternoon. So if I could pivot to that.

So in the afternoon and just to give you guys a little bit of math, we are comping positively in the morning daypart last quarter. Lunch was flattish and the afternoon --

John Ivankoe

This is traffic?

Scott Maw

This is traffic.

John Ivankoe

Okay.

Scott Maw

Yes. And total comp, just because given where the comp that we reported was too, lunch was flattish and the afternoon was quite negative. When you think about that afternoon and evening daypart, it's a pretty small daypart. And so you can think about the size of negative comps that we are seeing there. And what we are seeing in the afternoon, some of that was holiday, but what we are seeing in the afternoon is an opportunity to make sure our partners are focused on the customer first. It's not that they have taken their eye completely off the customer, but there is so many things going on in that afternoon daypart, again, driven by us around cleaning and training and restocking, We just want to make sure that while we are doing that, we are keeping an eye on the customer. And I think with this new deployment, that helps free that up.

And then in the afternoon, there is a big opportunity, we think, around product. So as we move particularly through and into the warmer months, Nitro will be a big part of that cold brew broadly, but Nitro we have got lots of things planned around iced teas that have done well for us. So we think that afternoon daypart, we have the right products. The challenge, as you know, has been Frappuccino has been declining faster than those new products have been growing. It's not that those new products haven't been working. It's just the net of that, given the Frappuccino decline has been slightly negative.

And then digital becomes a big opportunity for us, both lighting up that new million members that we have coming in but also if you watch your offers carefully, a lot of the sprints that we are doing and the star dashes and the gamification are pointed at the afternoon. So come in, in the afternoon and bring a friend and do this or come in, in the afternoon over the next two days and get 100 stars. So all of those things are pointed at the afternoon. We think we can start to turn that pretty negative daypart, probably not positive this year, but even if we can get it to be slightly negative, that will help comps a ton.

John Ivankoe

So let's discuss Frappuccino. Have you talk about what percentage of sales it is, for example, in the summer months? Excuse me if I don't remember.

Scott Maw

Yes. I think we have talked about for the full-year, it's somewhere in the mid-teens of our sales mix. And so you know, it's a meaningful category for us.

John Ivankoe

And presumably more than that in summer. So stopping Frappuccino Happy Hour, is it your belief that you no longer have to discount to someone that was going to buy the Frappuccino anyway? That the discount wasn't actually driving increased traffic? It was just allowing people to spend less that would buy it. So why isn't this a risk for the business? And I guess like, how much anxiety is there in kind of pulling a promotion that you obviously used to put a decent amount of faith in?

Scott Maw

Right. So what's happened with Frappuccino Happy, you have got it exactly right. What's happened with Frappuccino over the last two year's, Happy Hour is that halo that we get after the promotion has gone away. So what used to happen is, we do Frappuccino Happy Hour, we would sell a ton of Frappuccino. We comped well in that time period. But what would happen is, people would continue to come in and buy Frappuccinos and other beverages in the afternoon at a higher rate throughout our third quarter.

And so that was really where we paid it back. We didn't actually pay it back during the promo. It was wonderful, but it was all of the impact we have because we are top of mind with people after. That softness is what we have seen in the last two years. And so financially bottom line standpoint, it really hasn't been worth it over the last two years and wouldn't be worth it this year.

But your question is on topline, right. So what we are trying to do this year is sort of reinvent Happy Hour. And there will be more details to come. But basically the gist of it is using our digital assets to light up Frappuccino Happy Hour for those people that we think it's truly incremental.

John Ivankoe

Okay.

Scott Maw

Basically, count on the fact that the halo is probably not going to come and try to get real incrementality while we are running Happy Hour. And we have got a number of other products and promotions during that timeframe. We think we can close some of the gap. And then the other thing I would just remind, well, Frappuccino Happy Hour early in the quarter was positive, the back half of the third quarter last year was pretty tough. And so when you think about the comparisons for the full quarter, we feel comfortable that we can do at least a 3%, as we get through the back half of the year.

So it's all those things. The fact that we have a little bit bigger comparison. It's not a big P&L driver. But we have got a number of things around cold beverages, probably some specific Frappuccino Happy Hour offers to offset that during Happy Hour. And then we think good momentum as we move to the rest of the quarter to comp strongly. And the thought is, get to a 3% for the year.

John Ivankoe

So let me take that then. If you do at least a 3% comp in the back half of the year, December was 1%. I think you have commented that January was 1%. A couple of different things here. Let's isolate January between what you think the impact of the Starbucks card gift was, let's isolate the lobby and like the experience of when might that be lapped. If it is possible to isolate maybe some throughput initiatives? I mean the deployment 2.0 that hadn't been put in yet. So in other words, why is January an anomaly? And then secondly, we will come back and just understand holiday. Is holiday something that is always going to be the low quarter and that's just something that we need to accept and expect? Or this holiday 2018 and I am sorry to be pressing this in now, to fiscal 2019, is there a reason to believe that we can then take a December quarter back to trend?

Scott Maw

Yes. Let's break that down a little. I think it's a fair question that's on people's minds. So if you think about our first quarter, the holiday quarter, first six weeks or so, half the quarter we had strong momentum and really a continuation of the 3% comps or so we have done for a while. So that was in place when we went into holiday. Pretty much right when we went into holiday, we saw the impact that you are talking about. And for the back half of the quarter, you can just do the math, it was about a 1% comp. What we said is January is similar, just completely backing myself into a corner but obviously you are in the ballpark.

So January was soft as well and looked quite a bit like that back half of the holiday period. And it was actually some of the same drivers. So what we saw in January, two things in particular, was a continuation of the softness in lobby and again I think that was ongoing from holiday as we typically get a little bit of carry forward into January as we move through some of our final merch. And then the second thing is, we didn't get the gift card tailwind. And so gift cards weren't negative year-over-year, but they were flat and we typically get a nice tailwind in comps as we get into January and that tailwind actually was a little bit of a headwind, small amount but it was meaningful.

So as we get through January, those two things almost by definition should abate. There are still some gift cards coming in, so it's not zero, but it's not a huge number. And the things that we talked about which is this change in deployment, some of the product things we are doing like Blonde espresso, which is off to a great start and all the things are doing in digital, we think that's enough to move us back up to get it up towards a 3% run rate as we move to the rest of the year. And that's what gives us confidence to hit the 3% for the year.

I think if January, Sorry John, if the drivers in January were so different than what we saw on the holiday are not related to holiday, I think it would be harder to sort of understand what's going to happen. So it's a little bit of what's not there as we move forward but it's also the things that we have momentum around.

John Ivankoe

So can we talk about holiday

Scott Maw

2018, sorry, yes. First of all, our lobby will be entirely different. And so even if we won't have the same negative comp impact, I am not if it will be positive or not just because you still have a year-over-year decrease in the number of SKUs but I promise you it will be more profitable. Fewer markouts, fewer bogos, fewer write-offs, all the things that have hurt us in the lobby before. So from a top line standpoint, my guess is, there is opportunity maybe to get a little bit better there in lobby, but from a bottomline standpoint, it will absolutely be better.

As we get into holiday beverages, what I think we have learned over the last year or two is, we are going to really have to go deeper around digital at holiday. So not only in our own channels, email and in-app, but also in our social media channels and really try to make sure we are doing everything we can to reach our customers digitally. And that is what's driving our comps. So I feel like that can offset some of these headwinds that we have seen.

John Ivankoe

Okay. So annoying question, Unicorn Frappuccino, how big of a driver in the last year? Have you begun to talk about that and prepare, is there an encore for it?

Scott Maw

Yes. So I mean it was a pretty driver in the month of April and we have got a number of things keyed up which I can't quite announce yet. I think you watch what Kevin talks about in the Annual Shareholders Meeting and then obviously in earnings we will give you an update. Look, we think we can offset that comp over the course of not only the month of April but over the course of the quarter. We will see how we do. It's a relatively big number. But I don't think we are terribly nervous about it, particularly if you take a little bit longer term view. It was a wonderful product and we have got some other things planned that I think will be pretty cool as well.

John Ivankoe

I never even laid eyes on one.

Scott Maw

I hadn't either. I was in a meeting with John Culver and I hadn't had laid eyes on one. I said that. And all of a sudden, he mobile ordered and paid one and someone brought it in from our store. I am like, it's actually pretty good.

John Ivankoe

It was already gone by the time I came in. I go every day. So I would like to what happened. So okay.

Scott Maw

We have got a number of things planned, I think, that will offset some of that.

John Ivankoe

So deployment 2.0, we have been focusing on the throughput side. What about the cost side? So let's take your cost and then just push into that part of the equation. Obviously, U.S. margins were not what you wanted them to be in fiscal 2017. They weren't what you wanted them to be in the first quarter of 2018. So when can we begin to at least stabilize that? What does it take to grow Americas margins again?

Scott Maw

So if you go to time before the tax investments came in, so go back to guidance basically and where we guided. What we said is, the first half is going to be challenged, in the back-half we should start to see improved margin and margin expansion. And so if you adjust for the tax impact, we are still in that ballpark for the U.S. I think as we get through the third quarter into the fourth quarter, we can see a little bit of margin expansion. It's not going to be anything like us on 2014 and 2015, but a little bit of margin expansion which given the investments, I think, is just fine.

And so, what's driving that, I think, is your question. Our normal work around, it's not easy but it has been something we have had for a while around cost of goods sold and that's looking good. And I think a couple hundred million is our target this year. And we are on track to get the vast majority of that. This year, we launched two new initiatives and Roz has really leading and driving these things and her background has been wonderful to partner with.

So labor savings and waste savings. And both of those are sort of three months in. In the first quarter, running on track and there is significant savings there. And you know about this, but the big opportunity there is taking a look at our stores and deaveraging them and looking at those stores that on the surface of it and we can analyze this from Seattle. On the surface of it, it looks like they have too little waste and or too little later and what we want to do is we want to add in product and want to add in labor to drive sales.

On the flip, we call that the green tail. On the red tail, distribution is too much, right. So we want to manage that cost. And so we are off to a really good start there. There's lean principles that we are deploying. There is lots of analytics that we are getting into store by store working with district managers, working with store managers. But the opportunity is significant and that builds. Obviously, it's backend loaded, right, as we get that pipeline built. And we feel like if we can execute on all that, we can get back to margin growth excluding those tax investments.

And if you are thinking, well what about including the tax investments, we will lap the majority of that as we get into the third quarter of next year. So most of the wage increases that we announced will go in place in April.

John Ivankoe

Okay. So a lot of companies have been here yesterday, I suppose, that have talked about putting technology and to reduce labor hours, efficiency, effectiveness and really being driven, not as a nice to have as a need to have, especially in high wage markets such as your home state and a number of other markets that you do business. And so to what extent can technology, can you enter the tipping point where technology and how consumers use the brand or potentially new things to come or what have you, you will start to reduce the number of efficiency and effectiveness in terms of store level labor expenses?

Scott Maw

Yes. I think one of the things that we have done around, for example, supply chain and this impacts a store because our managers are obviously ordering and stocking inventory. So we are continuing to look for automation opportunities, both in our manufacturing and distribution centers, robotics in some of our distribution centers to improve the efficiency and accuracy of orders so that we can get managers less and less involved in their own store orders. So automated ordering is something that we are looking at. So literally you still have a chance to look at your order but you are not filling out an order every day. It just comes and it's highly accurate because of the automation of the supply chain. So we are well into that.

Within stores, we are looking all the time, although with lean techniques for getting far smarter about what is time and motion around espresso machines and how doe we get our espresso machines positioned right in the stores, how many do we need. We are starting to work upstream. Matter of fact, we got a new espresso machine in test right now in a couple of our stores. We are working upstream with our manufacturer to make those more, not only quicker in the way that they deliver espresso, but also Bluetooth and Wi-Fi enabled so that we constantly are looking at the efficiency of those machines, what the grind looks like and taking all that work off our partners. So they are not adjusting the grind three or four times a day. It's happening automatically. So all of that is helping within the stores.

And then when I talk about this deployment work, again it's really using the analytics to figure out where to use people without having more folks. And so, as you know people have more transactions, they earn labor. But most of the deployment 2.0, probably 95% plus of the stores, it's simply redeployment with better analytics. So all of that should help the store experience.

And the goal, the way I think about it, John, the goal is all of those non-value added activities that don't touch the customer or touch the product, we want to simplify those greatly. We won't be automating how we make espresso beverages. I know you are not saying that. We won't be automating how we make breakfast sandwiches. We looked at automating things like, could we automate some of the brewing that we do, but anything that really is about that Starbucks experience, it will always be handcrafted.

John Ivankoe

Which may free you up to do more things on the premium side. If you have things like drip for example, that's automated, it would be fine, especially if there is more of a handcrafted element in terms of Reserve bars within Starbucks. So it's not something that a couple of years ago, I thought there was going to be a relatively big conversion opportunity within traditional Starbucks U.S. store base in terms of putting in Reserve bars and what have you, but it doesn't sound like that that's a big opportunity at least in the short term. So do you have an ability to put customer facing attributes within the Starbucks store of, hey, this drives additional traffic or drives additional ticket, from a capital perspective?

Scott Maw

Yes. The answer is yes. And I think your intuition on the number of new Starbucks Reserve bars, let's call them, versus converted, if we get to 20% of the stores that have Starbucks Reserve bars, they will be a meaningful number of those that are conversion. If I was betting, I would say it would be the majority, just as we go through renovations and look for those opportunities and even some of the ones that we are testing in the U.S. for conversion. So I think your intuition is right.

And when we talk about store returns and I talked about this a fair bit yesterday, most of our new stores are drive-throughs, but not all of them. And so we have got 80% drive-throughs rate, it's 20% more in urban markets. Those 20% stores, they skew the way you are talking about. Not all those new stores are Reserve bars, but many of them are Reserve Forward. They are more about third place, experiential retail, things that we been doing for decades. And those stores still have really good returns, but they are not high as a drive-through, but for us that's absolutely critical. We can't back away from the premium experience and write the expression of the brand.

So we will continue to invest in those stores, get a great return, maybe a little bit lower than what you see in drive-throughs, while we drive convenience and transactions through the drive-through stores. And the last thing I will say is, if you really want to see this a little bit more at scale, because we only have a couple dozen Reserve bars in the U.S., you can go to China where they have a lot more, whether they are Reserve bars or what tag we put on them, Reserve Forward stores, pour-over, slo-bars, Clover, all the things, ways to enjoy coffee at the premium end.

John Ivankoe

Thank you. Is Mercato the food solution. As it currently stands, the packaging, austere might sound like a negative word but it's minimal, it's fairly high-priced. Obviously, it's much harder to manage inventory coming in and coming out the store every single day. I mean is this the permanent solution that you see that's right for the country? Or is that just going to still be done on a market specific basis?

Scott Maw

Yes. We are still sorting that out. So we are in two markets. We will roll six more markets before the end of the year. And what I said about Mercato is, when we roll it out, there is probably 30 or 40 SKUs, I should know the exact number. Let's just say there are 30 SKUs. There's a couple dozen SKUs, right, that come out under the Mercato banner and some of those SKUs do really, really well and some of those SKUs do good.

And what we what we are trying to learn is, do all of those SKUs go into every store across the U.S.? It probably not, right, just from a supply chain efficiency standpoint. Do some of those SKUs go to every store in the U.S.? Perhaps a few champion SKUs. Do all the SKUs go into all the stores along the coast? Maybe. That's what we have to figure out.

We figured out cost of goods sold. We figured out the delivery cost. But we are still working on what's the demand equation, what's the value equation and what's the waste solution. I believe that there will be some number of fresher SKUs in our stores that come through Mercato. The question is just scale. And I think that's the nature of your question.

But I just want to go beyond food. Food growth over the next few years is not predicated on Mercato. It would be a little. I have gotten that question a little bit from folks. I think that's upside for us in the afternoon. It's upside for us around fresh. But if you look at today, sous vide egg bites, our new innovation, they are driving a ton of growth. We have got the uplevel we did on bistro boxes with everything being protein forward. We have got the uplevel and we have done on some breakfast sandwiches and those are driving two points of comp. So food comp and innovation is healthy. But a point of beverage comp, we would be having different discussion.

John Ivankoe

So cannibalization obviously in the U.S., especially given your rate of store growth and depending on the quarter, relatively flattish same store traffic. How are you measuring it? And have you seen, I don't think that you are seeing it on a national basis. I don't know if you are seeing it on a local basis. Have you seen cannibalization on a local basis where you materially taken capital out of one market and you said, listen, this is a higher return to where you were? Your cannibalization real-time data, for example, is robust.

Scott Maw

Yes. I will use the word sales transfer. If you look at sales transfer, we track it. There is sensitivity around the other word. We track it store by store. And you are absolutely right, John. So we see sales transfer when we open a store. We plan for it actually. So I did a couple of slides yesterday and I used the store in Fort Collins, Colorado where we had a really profitable store in a shopping center in Fort Collins. It was doing, I think, $1.5 million, if I remember correctly, about 700 AUVs. We opened a drive-through, a big, beautiful, drive-through, couple of miles away and it did $2.5 million or something like that of sales and it's doing 1,000 transactions.

So what happened in that existing store within the first year and again we planned for it, it lost 100 AUVs, right. And then what happens is, is it comes back into the comp base and comps. So the math around the new stores is there's going to be cannibalization. What we do is, we add all of that cannibalization that we can track in impacted stores, that negative number, on a weighted basis and we take all the positive lift we get from comps in years two through five after we open a store in the comp base.

We take the positive and the negative on a weighted basis, we put them together and it's basically zero. Sometimes a little bit positive, sometimes a little bit negative, but it is basically a 0% impact on comps. And what you are left with is and the other picture I showed is, you are left with the incremental cash flow that's come into that new store. And it's a hugely, like some huge percent, because I didn't give the actual percentage, but a vast majority is a criminal comps. And so when you do the IRR and given our AUVs and given our relatively lower cost investment and given the margin on our product, it's big incremental benefit from a cash flow standpoint.

And the last thing, I would just remind everyone that licensed stores that we opened are about half of the 750 stores we opened in the U.S. They have very different characteristics than the company-owned stores. They tend to be captive locations. It's not that there is zero cannibalization. By the way, we track those two and we model cannibalization on licensed stores well. But it's just a different type of impact, I said the word I say we never use. We model sales transfers in licensed stores as well. It's just a different type of model.

John Ivankoe

Last question. But 80% of your stores are drive-throughs. We don't talk about significant drive-through throughput. This is the ultimate single queue, the faster you can be, the more people you are going to serve.

Scott Maw

So you want to talk about, that is the place where lean is helping us the most today. So we are doing time and motion studies. We are doing things where we go in and look at the highest throughput drive-through stores. Because in the drive-through, we have so much telemetry about what's ordering and how everything closes out, right. Because unlike at the POS where we don't yet have the DOM rolled out everywhere, we are not closing out every order. In the drive-through, we close out every order. So we know exactly how long each and every product takes to make. So we find the best drive-through and using distribution, we find best drive-throughs. We do time and motion studies. And we are starting to train that into all of our drive-throughs.

John Ivankoe

And Mobile Order & Pay is better integrated in the drive-throughs? In terms of when the customer comes into the queue, that the product is being made at the right time. That's always a challenge.

Scott Maw

We are getting better at that. And one of the things that we have been talking about as, we have gone to channel production in some of our busiest Mobile Order & Pay stores and what channel production is, it's important that we dedicate an espresso machine and a POS to Mobile Order & Pay and we dedicate an espresso machine and a POS to in-store traffic and that allows us to move the in-store experience faster, so people perceive that things are going faster rather than in some stores today, it's just in the order it comes in.

John Ivankoe

Exactly.

Scott Maw

And we didn't get a chance to talk about China. Please can I just say one thing about China?

John Ivankoe

Absolutely.

Scott Maw

It's probably the single, John asked me this before, probably the single most underestimated opportunity within the Starbucks. Please come to China in May. It's going to blow your mind. It's an amazing business.

John Ivankoe

The last conference call that you did, well I think that was January 31, was certainly very helpful on China.

Scott Maw

It's very top of mind but 30 minutes goes by very quickly, I get it. Thank you John. Yes. Thank you.

Question-and-Answer Session

End of Q&A

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