Mobile ordering might be slowing Starbucks sales

Starbucks’ success with its digital efforts — particularly its mobile ordering system — could ironically be contributing to a slowdown in the growth of sales at its stores.

In its first-quarter earnings Thursday, the company reported disappointing sales growth. Starbucks stores worldwide open at least a year grew 3 percent, a sharp falloff from 8 percent growth a year ago and lower than the 3.8 percent growth some analysts had expected.

Growth in the U.S., too, was slow at 3 percent, compared with 9 percent a year ago.

President and Chief Operating Officer Kevin Johnson, who will be taking over from Howard Schultz as CEO in April, attributed the slowdown in part to the success of the mobile order-and-pay feature on the company’s mobile app. With that feature, customers can place and pay for an order directly from their smartphone, and then pick up their orders in the store, bypassing the ordering line.

But at certain stores in the U.S., during peak times, so many people place mobile orders and then go to the stores to pick up their drinks that customers who wander into the store to place an order “might see the congestion and decide not to complete their transaction,” Johnson said in an interview.

Given that the challenge stems from increased customer demand and usage of mobile order and pay, “it’s a good problem to have,” Johnson said.

The company is working on alleviating the congestion, including adding labor to those stores.

Mobile order and pay represented 7 percent of U.S. transactions, up from 3 percent a year ago. And in about 1,200 stores across the country, mobile order and pay represented more than 20?percent of transactions at peak times, Johnson said.

Mobile payments now accounts for 27 percent of all transactions.

Johnson also cited larger challenges for the retail sector as a whole, and the restaurant industry in particular, as a factor for the slowdown.

Sales have been weak in the restaurant industry “despite a sustained wave of positive economic news in the U.S.,” according to a recent research note from Barclays.

The 3 percent same-store sales growth at Starbucks is the lowest since 2009, Neil Saunders, CEO of retail research and consulting firm Conlumino, said in a note.

But “for a mature, fairly saturated company operating in a competitive segment of the market, we believe the numbers show resilience,” he said.

Still, Saunders said, “there is no doubt that Starbucks is now firmly in middle age: it is finding growth more difficult to come by and, in financial terms, the business is not moving upwards at the pace it once did. … Given that this dynamic is only likely to intensify over the next few years, it is incumbent on Starbucks to find new avenues for growth. In our view, the company is managing this well.”

Starbucks’ sales for the quarter ended Jan. 1 reached $5.73 billion — a record for the first quarter, though short of the $5.83 billion analysts had expected, according to a Zacks consensus estimate.

The adjusted earnings per share of 52 cents met Wall Street expectations. Without adjusting for certain items, earnings per share came to 51 cents.

“We are pleased with the record Q1 financial and operating results we announced today, particularly given that the results were delivered in the face of a challenging environment for restaurant retailers overall,” Scott Maw, the company’s chief financial officer, said in a statement.

Starbucks also lowered its guidance for sales growth for the year from double digit growth to an increase of 8 to 10 percent.

The company’s shares were down 3.8 percent in after-hours trading following the release of the earnings report.

Howard Schultz, chairman and CEO, said in a conference call with investors that even the 3 percent comparable sales growth “reflects the continued relevance and appeal of Starbucks,” pointing out that it outperformed other retailers and restaurants.

He touted the growth of the company’s digital and mobile efforts, saying it saw $2.1 billion in gift-card sales and reloads, up 15 percent year over year.

Schultz also highlighted the growth in Starbucks Rewards members, 16 percent year over year to nearly 13 million. The company closely ties its rewards program to its mobile app.

Schultz said in July that he would be stepping back from day-to-day operations to concentrate more on global strategy and the company’s new high-end stores.

In December, he announced that he would be handing the CEO post entirely to Johnson in April. Schultz will be staying on as executive chairman focusing on the company’s high-end offerings.