Laxman Narasimhan
Chief Executive Officer at Starbucks
Thank you, Tiffany, and thank you all for joining us this afternoon.
Let me be clear from the beginning. Our performance this quarter was disappointing and did not meet our expectations. Our Q2 total company revenue was $8.6 billion, down 1% year-over-year. Our global comparable store sales declined 4% year-over-year, driven by a negative 3% comp growth in North America, led by declining traffic and a negative 11% comp growth in China. Our global operating margins contracted by 140 basis points to 12.8%, and our overall earnings per share declined by 7% to $0.68. While these results do not reflect our strengths, our capabilities or the opportunities ahead, we confront these challenges from a position of enduring strength.
We have led the industry for more than 50 years because we have built a different kind of company, one that exceeds our partner expectations, one that delivers a distinctive and unique experience for our customers and one anchored in the love and craft of coffee. As a result, our worldwide brand equity remains resilient and strong. Our leadership in coffee remains unmatched. Our global base of customers remains loyal. Our experiences are differentiated and elevated, our partners are talented and engaged. Our forward-looking product pipeline is highly appealing. Our distinctive store development capability continues to perform incredibly well. Our network of stores is healthy and robust. Our stores are executing better than ever with a stronger operating foundation.
Overall, partner engagement is very strong. Our triple shop with two pumps reinvention strategy continues to deliver, and our possibilities as a company remain limitless, Still we face a challenging operating environment. Headwinds discussed last quarter have continued in a number of key markets, we continue to feel the impact of a more cautious consumer, particularly with our more occasional customer and a deteriorating economic outlook has weighed on customer traffic and impact felt broadly across the industry. In the US, severe weather impacted both our US and total company comp by nearly 3% during the quarter. The remainder of our challenges were attributable to fewer visits from our more occasional customers.
Turning elsewhere. We still see economic volatility in the Middle East, but we remain confident in the region's long-term growth opportunities. In China, we still see the effects of a slower-than-expected recovery, and we see fierce competition among value players in the market, but we are strengthening our premium position and our team in China continues to execute with terrific rigor and heart as the market shakeout continues and as demand recovers and matures. None of these realities are excuses, some like weather are transitory. Others like a more cautious consumer may persist longer, but much is within our control.
There are three execution opportunities in our US business I want to expand on: First, meet the demand we have across dayparts to drive future growth; second, launch even more exciting and relevant new products while maintaining our focus on core coffee forward offerings; and third, reach and demonstrate more value for our occasional and non-Starbucks Rewards customers. We understand how to do this and we have what we need to deliver against our plans. So as we look to the second half of the fiscal year and beyond, we're accelerating our work on the underlying execution engines that power our business to realize these opportunities.
Let me talk you through each: First, meet the demand we have in the US across dayparts. The morning daypart is likely what you think off when you think of Starbucks. It is our peak, and it represents about half our business. It's coffee forward, heavily routine-based and driven by strong loyalty. At our best, we bring in customers with distinctive coffee and a great experience. We convert them to Starbucks Rewards members. We build interest with new coffee innovations, and we encourage more frequent visits and food attached. But we currently have a challenge meeting our peak morning demand in the US. For example, more than 60% of our morning business in the US comes from Starbucks Rewards members who overwhelmingly order with a Starbucks app. What's interesting though, despite strong Mobile Order & Pay sales, we saw a mid-teens percent order in completion rate within the order channel this past quarter.
In other words, customers using MOP put items into their cart and sometimes chose not to complete their order, citing long wait times of product and availability, here lies opportunity. We're intensely focused on actively working on improving operational throughput by providing our partners with the right processes and tools and on giving our customers a better sense of when the order will be ready. Rollout of our equipment-driven siren system is on track, but we're also fine-tuning the store processes that underpin this new equipment. We have been working for the past six months with the Toyota Production System Support Center to unlock additional capacity at our peak. And what we saw through store tests was a real near-term opportunity to fundamentally improve how we operate our stores.
The siren craft system, as we're calling it, requires no capital. The technology solutions are relatively straightforward. And we are working to roll it out in North American stores over the coming months. In stores where we've used the siren craft system to optimize operations, we have already seen an increase in peak throughput, which we estimate to be worth nearly one comp point annually. The siren craft system also bolsters the highly incremental returns we expect from our equipment-driven siren systems as it is deployed in stores. Taken together, these new processes and new equipment systems act as complements and amplify efforts to unlock capacity at peak.
Additionally, we are revamping and investing in our Deep Blue technology to improve wait time estimates and provide more transparency for customers. Their efforts we began last quarter and build on the many improvements we've made to the Starbucks app over the last 12 weeks with introductions now on a 4-week upgrade cycle. Another reason customers choose not to complete their order is product availability. For example, our potato cheddar and chive bakes were a big hit with customers. But demand was so strong that we are currently only able to offer them in 2,000 of our US stores. We are ramping up supply chain investments to further improve availability with an initial focus on our customers' favorite items. In summary, we are working to increase throughput and improve product availability to enhance the customer experience, improve convenience and better capture existing demand. Over time, we believe these improvements will attract a larger subset of customers.
I also want to talk about unmet overnight demand. We see it as a tremendous and untapped incremental opportunity. Last quarter, we mentioned we were conducting a pilot program to serve customers overnight between 05:00 PM and 05:00 AM when our stores are traditionally closed. During this pilot test, we doubled our business. Building off that success, we are aggressively pursuing options to build a $2 billion business over the next five years. Overnight opportunities are incremental and create a complement to our existing delivery business, which grew by double digits in the US this quarter with both ticket increase and transaction growth. In addition to the overnight, we have unmet weekend demand potential. Starbucks attracts routine customers all week through the morning and the afternoon. While the weekend continues to attract our routine customers, we also see more families and kids.
We are working to realize this demand potential to new product offerings, collaborations, marketing and enhancements to the store experience. As you can see, there is significant demand in the morning and even more potential during afternoon, overnight and the weekend, we have yet to realize. And we are accelerating our execution engines to meet it. Second, launch more relevant and exciting new products for our US customers while maintaining our focus on core coffee forward offerings. We are the leader in coffee, we are overwhelmingly focused on our coffee forward products. Coffee continues to perform strongly. And for example, 63% of our beverage sales in the quarter were cold, up 1% from a year ago driven by innovation. And beyond our core, there is more.
We know we are challenged to bring new innovations with frequency and strong appeal across other dayparts. This winter, we brought back Pistachio Latte, rolled out Oleato nationally and launched a new core iced-shaken espresso. Our beverage is prepared with new breakfast products like our Potato Cheddar and Chive Bakes, some of our new products did well and drove positive customer buzz, but not all met our expectations. That reality, coupled with what our customers have told us, points to opportunity across both coffee and non-coffee, and by that, I mean, refreshers, Matcha and Chive and across food to drive greater attach. Later in the quarter, we saw improvement. Our Lavender platform was extremely successful, including our Lavender Matcha, and it compares to some of the most successful launches we've ever had.
But to cut through, we're working to drive even more buzz-worthy products and on strengthening the supply of products that become popular. These efforts take time, but our team is working with great energy and speed to make both happen. We also invested in our brand over the past quarter to address recent misinformation. The work was effective in driving brand metrics and our overall brand equity and affinity remains strong. As we look ahead, we have an opportunity to better amplify our new products and to drive more awareness and excitement for those products, particularly among our more occasional customers. As we will detail, we are accelerating the execution engines to help us drive more frequent and exciting product innovations, both in the core and beyond. Third, reach and demonstrate more value for our occasional and non-Starbucks Rewards customers.
We have loyal customers in the US, and they stay truly loyal in terms of frequency, transactions and the level of customization they sought with their purchases. We are a brand known for the premium value we provide. Our one-of-a-kind experiential Starbucks Reserve Roasteries, which elevate our brand and create lasting value had strong transactions, fueled by innovation across our coffee platforms, other beverages and food. Throughout the quarter, brand perception of value for what I get, on average, remained strong, and our pricing decisions have been measured. But in this environment, many customers are being more exacting about where and how they choose to spend their money, particularly with stimulus savings mostly spent. We saw this materialize over the quarter as customers made the trade-offs, but being food away from home and food at home.
Against that tide, we need to be able to reach and communicate with our customers in a way that demonstrates our value, particularly through Starbucks Rewards and the Starbucks app. We are accelerating back-end work on the Starbucks app to ensure we better connect with our more occasional customers. Starting in May, we will add new and exclusive in-app offers that create additional value for our customers. We'll also launch upgrades to the app that includes significant improvements to our wait time algorithms. Then in July, we will begin opening the Starbucks app for all while making MOP available in more places outside our app. Following the milestone, more of our customers will be able to see our offers, including those that use guest checkout and more customers will discover the strong value we provide, value that they will not see otherwise, more on that later. These opportunities show that much is within our control.
We are confident in our accelerated plans to strengthen the execution engines that power how we serve our customers, how we create and amplify a pipeline of new products and how we reach our customers through the Starbucks app. But let me be clear, it will take time to fully realize these opportunities. Our triple shop with two-pump strategy is the way we will drive these plans forward over the long term. So let's talk about our progress made against each strategic pillar. Our first strategic pillar is to elevate the brand. We do this by driving compelling product innovation, building great stores and operating great stores. Over all, we maintain our leadership and innovation in coffee.
In fact, just last week, we announced several steps to reinforce our leadership position to the lens of our partners, our customers and our farmers. These include new investments in coffee farms to further scale open agronomy practices, new and exquisite whole bean coffees coming to our core and reserve stores and new pop of experiences in cities around the world to engage Gen Z and millennial customers in the craft of coffee, which they love. Further, we are scaling the rollout of our Clover Vertica brewer to deliver the world's finest top-quality brewed coffee. The Clover Vertica provides customers choice between six separate coffee roasts and blends, including teacups, brewed fresh on-demand any time of the day and its rollout is paired to the global launch of our new Starbucks Milano Duetto light and dark roast blends in stores later this year.
As mentioned, we are also driving more frequent and exciting product innovation, both coffee and non-coffee. Our team has been working with remarkable speed and agility to create a product innovation pipeline that includes new flavors, textures and functional benefits. Investments in product development are already showing benefit. Our new Lavender platform performed nearly as well this past quarter as the PSL. More recently, too, our new Spicy Refreshers and Reserve Hot Honey beverages show that relevant product innovation can exceed expectations. And our new Roastery and Reserve stores, we are now introducing new products with more agility and speed. Notably, we're also making strides to cut our average product development cycle in half from our current time table of 12 to 18 months.
Looking to our innovation pipeline for the second half of the year, I'm excited by the number and types of products we're bringing to market. For summer, we are launching our first texture innovation Pearls. This is the first of more texture-based innovations that our customers can expect in the coming years. And we're launching a new functional product, a zero to low-calorie handcrafted energy beverage, both build on our coffee heritage and open entirely new vectors for additional future innovation. And later this year, we will add up to five sugar-free customization options to our menu in response to both partner and customer requests. This will provide a lower calorie option for approximately 80% of our beverages. Our product innovation pipeline will also include more plant-based options as well, like our new plant-based ready-to-drink Frappuccino beverage that recently launched in US grocery stores.
Beyond our beverage development pipeline, we're also focused on enhancements to food. As an example of the investment we're making in food quality, we recently launched a reimagined premium blueberry muffin. And for summer, we're launching a new egg pesto and Mozzarella sandwich. It combines protein with outstanding taste. We're also expanding grab-and-go choices available in our store lobbies to include more vegan, vegetarian and gluten-free options as well as kid-friendly options. Taken together, our partner experience, unique customer experience and our core products are what differentiates us. Our pipeline is significantly stronger than last year and product builds are being developed with partners and simplicity in mind.
We're also investing in our supply chain to lower cost, and ensure products are available and in-store for our customers. Lastly, we continue to grow our global store footprint. Our store development capability is a core strength. This year, we will design and build more than 3,000 new stores globally, and we continue to do so in a financially accretive manner. Our new store openings continue to realize strong unit economics. AUVs and ROIs across our portfolio continue to drive strong returns and high incrementality. We're also leveraging learnings from international markets to meaningfully lower breakeven points for store formats scalable in emerging markets.
Moving on. Our second strategic pillar is further strengthening and differentiating our leadership position in digital. As mentioned, Starbucks Rewards and the Starbucks app pay a central role in driving value for our customers. Our MOP set another record in the US, representing 31% of all transactions in the quarter. Our Starbucks Rewards members in the US also grew by 6% over the prior year to nearly 33 million members. The stickiness and evolution of our digital position provides a structural advantage. Building on this strength, we are mapping additional ways to engage customers as we work to double SR members over the next five years.
As mentioned, we will begin opening the Starbucks app for all in July. This addresses the current gap in our ability to reach non-Starbucks Rewards members allows us to deliver more value for the occasional customers and improves our ability to convert them to SR members. It drives a better experience for our customers and is core to our growth. We know that SR customers visit more often and spend more. Upgrades in our queue include a guest checkout feature and sequential improvements that make our app an even more appealing gateway for all customers. We also plan to invest $600 million over the next three years to further digitize our stores and better target customers in more personalized ways. This includes the installation of digital menu boards across the footprint of all our company stores in the US and China.
And we're making additional investments in our Deep Brew AI and machine learning platforms to further digitize and fine-tune how we operate our stores while delivering an improved digital customer experience and more personalized customer offers. Offers that are timely and relevant and flexible to location, inventory availability and weather. These investments, including a new revenue management system are foundational to successful execution. In the near term, we continue to provide increasingly compelling offers like marketed pairings, including both beverage and food that make occasions like lunch even more appealing. We continue to encourage and reward routinized behaviors across the day with exclusive offers for SR members.
To better communicate the value we provide, we are working to drive offer awareness with omnichannel marketing. This campaign will remind customers that the best offers are in the app and will target more occasional and non-SR customers. Our third strategic pillar is becoming truly global. Our international business remains an important part of our long-term growth strategy. Across the Middle East, we continue to work with the Alshaya Group to support the well-being of our partners and customers. Last month, the Starbucks Foundation and Alshaya Starbucks donated $3 million to the World Central Kitchen and their humanitarian efforts to provide food aid in Gaza. Last week, we also announced that every bag of whole bean Starbucks Odyssey Blend Coffee sold at participating North American stores through June will benefit World Central Kitchens efforts to address hunger around the world.
Turning our attention to China. Macro pressures resulted in traffic contraction this quarter. Performance was impacted by a decline in occasional customers, changing holiday patterns, a highly promotional environment and a normalization of customer behaviors following last year's market reopening. Like the US, our decline in occasional customers was most noticeable in the afternoons and evenings. Still, there are many bright spots. Starbucks remains the Chinese consumers' first choice and away from home coffee across city tier and age group. Our morning daypart in China registered growth fueled by coffee routines we've cultivated. Mornings are now larger than before the pandemic. Delivery also achieved positive comp. Starbucks Rewards membership expanded with active members now reaching a record $21 million.
We're investing further to grow our SR members and their loyalty to drive greater engagement and lifetime value. Beverage innovation is also strong and validates the opportunity we see to further drive the strength of our product pipeline in China. Through the quarter, we unveiled 27 new products fueling brand excitement and meaningful customer engagement and monthly customer connection scores are at their highest ever as its partner engagement. Our robust operating muscle led to sequential margin expansion amidst revenue headwinds, and we sustained very healthy and profitable unit economics and a double-digit store operating margin for a total store portfolio, including new stores. While recovery will remain choppy, our business has shown great resilience, and our fundamentals are very strong. We will win and lead in the premium market.
We have built a strong and expanding customer base, a strong brand, a strong portfolio of highly profitable stores and strong capability to drive margin expansion. We continue to execute on the three key elements of our China strategy, offering more coffee forward, locally relevant product innovations, making significant investments in technology to increase omnichannel capability and digitize our stores and increase the percentage of new store openings in lower-tier markets and new county cities where we see stronger new store economics. We will weather through this dynamic and transitory period as the industry shakeout continues. Our confidence in the market opportunity and our ability to deliver remains unwavering as we play the long game in China. Elsewhere, we saw growth in many parts of our international segment, highlighting the resilience and diversity of our business portfolio. Excluding China, our International segment grew revenue and comp in the quarter bolstered by strength in Latin America, Asia Pacific and Japan.
The Latin American region continued its strong momentum with double-digit system sales growth. Our Asia Pacific region drove revenue growth despite headwinds in the Indonesian and Malaysian markets and revenue from our Japan business grew by double digits. Across our International segment, we opened 230 net new stores this quarter. In total, our store count outside of North America is now more than 20,800 reflecting a year-over-year growth of 9%. We opened our 400th store in India, our 600th store in Indonesia and a 1,900th store in Korea. We are on track to operate 1,000 stores in India by 2028, translating one new store opening every three days. As we expand to Honduras and Ecuador, our global footprint will grow to more than 39,000 stores across 88 markets, putting us well on the path to 55,000 stores by 2030. Our fourth strategic pillar one of our two pumps is unlocking efficiencies.
In the quarter, our triple shot strategy continued to unlock meaningful efficiencies across the North American business, driving 150 basis points of store operational efficiencies. Additionally, we saw meaningful reductions in product and distribution costs, driven by supply chain improvements in procurement, transportation and sourcing. Specifically in our US stores, we're focused on creating a more stable environment for partners through investments in equipment innovation, process improvements, staffing, scheduling and waste reduction, all things our partners value and prioritize, creating a more satisfying work environment in our stores while derisking our business.
Today, our stores are running better than ever before, underpinned by the strong fundamentals our team has built. For example, we see meaningful improvement in drive-thru window times without adding more work for our partners with even more to come as we layer in our siren craft system. We are rebuilding and refining our supply chain and to unlock efficiencies in our factory in the back we are leveraging technology in new ways. We have significant above the store opportunity to realize efficiencies in our supply chain. They are significantly higher than we initially thought and we are ahead of plan and savings. Through work to date, we have the confidence we need to extend our goal from $3 billion in added efficiencies over three years to $4 billion over the next four. As a result of our investments and focused efficiency efforts, partner turnover reached a new low in the quarter.
Store manager turnover has also improved, and both beat industry benchmarks by a wide margin. Average hours of partner continues to improve by double digits year-over-year, increasing engagement and their take-or-pay. That brings me to our fifth strategic pillar, reinvigorating our partner culture. From the beginning, Starbucks set itself apart as a different kind of company. Our unique culture is anchored in our mission promises and values of craft, results, courage, belonging and joy. And at the heart of our business are our partners. They are central to the Starbucks experience and are delivering on our promise to uplift the everyday for customers around the world. I see this every day and through my regular work in stores.
We continue to work to restitch the fabric of the Green Apron for our partners. Just last week, we gathered together to celebrate our first ever Starbucks Promises Day. And next month, we will celebrate the 10th anniversary of our Starbucks College Achievement Plan with Arizona State University. Following commencement, more than 13,000 partners will have earned the bachelor's degree through the program bringing to life our partner promise of a bridge to a better future. What's more, over 25,000 partners across more than 90% of our US stores are currently enrolled in the program and are pursuing a bachelor's degree.
To close, we had a tough quarter. We need to do better, and we will. As I look forward, I'm confident we have the right strategy. We have terrific partners and a strong executive team that is deeply engaged and continues to lead. I thank each of our 460,000 Green Apron partners around the world for their remarkable work. We have real opportunity, and we are taking swift action to accelerate investment to the execution engines that will address the near term and drive our long-term success. These actions are funded by a highly profitable operations and productivity initiatives and is captured within our guidance. As these actions take hold, we expect our business to return to algorithmic growth and to achieve its long-term opportunity.
And with that, I will turn it over to Rachel to discuss our results in greater detail. Rachel?
