Howard Schultz
Interim Chief Executive Officer at Starbucks
Thank you, Tiffany. Love and responsibility brought me back to Starbucks, my love of the company and my deep responsibility to our partners and shareholders. In the month I've been back, I've traveled the country and met with thousands of Starbucks retail store partners and visited all 5 of our roasting plants, and I've learned first-hand about the unique challenges confronting the company today. I've also experienced the passionate relationship our partners have with the company and the enduring emotional connection our customers have to the Starbucks brand. COVID presented unprecedented operating challenges to consumer brands. COVID also drove dramatic changes in customer behavior that Starbucks stores and systems were not designed or built for. The challenges have been amplified by record demand for Starbucks coffee in our U.S. stores that has accelerated with the lifting of COVID restrictions.
Our Q2 results tell the story. In Q2, our sales comp in North America grew 12% over last year, 23% compared to Q2 2020. Both drive-thru and Mobile Order & Pay activity have surged, together now generating over 70% of our U.S. store volume. Delivery, a nearly $500 million business, is up 30% in the first half of fiscal year. And in our stores, customers are increasingly further customizing already complex handcrafted cold beverages.
The combination of shifts and customer patterns, accelerating demand and algorithms built for different customer behaviors has placed tremendous strain on our U.S. store partners. Ordinarily, we would have anticipated and invested ahead of the shifts we're seeing, but COVID disruptions interfered with our ability to make the required investments in store design, operations, infrastructure and technology to do so. As a result, we've been unable to meet the relentless demand we're seeing in our U.S. stores as seamlessly as our customers and partners expect and candidly deserve. Simply said, we do not, today, have the adequate capacity to meet the growing demand for Starbucks coffees.
Going forward, we will be making investments in our partners and business to literally catch up on investments we have not made and make further investments to position the company ahead of the coming growth curve. We will also be accelerating our new store growth with 90% of new stores being high-returning drive-thru. Our newest class of drive-thrus will integrate new store designs, technology, including more handheld devices and equipment improvements that will increase efficiency, speed of service, and we believe deliver even greater profitability in the future. We will then incorporate the new technologies and equipment into our existing stores and provide our people with the tools and resources they need to elevate the Starbucks experience we deliver to our customers and create even more demand in the future.
And we'll be making significant investments to extend our digital capabilities and deepen our digital connection to customers and the emotional attachment our customers have to the Starbucks brand. Returns on our digital investments are consistently among the highest returns we generate, which brings us to the decision we will revisit in fiscal '23 to suspend stock buybacks. Buying back stock yields us, on average, about a 10% return. With Starbucks' treasure trove of global assets, a 10% return is not satisfactory to me. Throughout our history, the investments we have made in our people and business have always delivered outsized returns to our shareholders.
We're so eager to show off our pipeline of disruptive innovation that we're moving our Investor Day up to September in Seattle from December in New York. The significant innovation around technology and personalization we will reveal our industry game-changers that will further increase store productivity and efficiency. What you will see is the coming transformation and reimagination of the Starbucks customer and partner experiences.
The transformation will accelerate already record demand in our stores, but the investments will enable us to handle the increased demand and deliver increased profitability, while also delivering an elevated experience to our customers, and most importantly, reducing strain on our partners. We must reintroduce joy in the customer and emotional connection back into the partner experience.
We've identified over $200 million of investment that's incremental to the significant investments we've already committed to in our U.S. company-operated stores this year. These include further investments in training, wage and equipment and new investments in internal communication with our people, where we will launch a new partner app to communicate directly with all store partners.
We will also be reaffirming our commitment to coffee excellence and partner education by reintroducing our black apron, Coffee Master and origin trip programs. And in 2023, we will introduce enhanced digital tipping for our partners. We believe these investments will improve retention and recruiting and elevate the experience we deliver to our partners and our customers.
Over the last month, we've realigned Starbucks U.S. organization to focus entirely on transforming and reimagining our core U.S. business. Belinda Wong will share plans for accelerated growth in China as soon as COVID-related mobility restrictions there are lifted. And make no mistake, our aspirations around China have never been greater and I remain convinced Starbucks' business in China will be eventually larger than our business in the U.S.
We have a big breakthrough idea around the launch of Starbucks Web 3.0 and a unique platform for NFTs that Brady Brewer and Adam Brotman, architect of Mobile Order & Pay and the Starbucks digital app, who is serving as a special adviser to us, will shortly tell you about. I believe Web 3.0 will create an authentic digital third place experience and drive substantial new revenue streams for Starbucks and be accretive to the brand.
Our Web 3.0 strategy is a proxy for the greater ambition we have for the company going forward. Despite the fact that post COVID, our customers are not using our stores the same way, and we've been operationally challenged as a result, our national retail footprint and best-in-class real estate portfolio is still enabling us to meet customers wherever they are and irrespective of their need state. This relentless demand we're seeing in our stores today underscores this reality.
Looking ahead, trying to imagine thousands of vastly more productive and efficient Starbucks stores reconfigured to align with today's customer behavior and built around technology that will deliver increased speed of service, improved labor management and reduced unit cost, an elevated partner and customer experience. Now imagine the accretive impact to our financials when we reengineer our stores to deliver what we're capable of in delivering and arm our people with the tools and resources they need to once again exceed our customers' expectations.
From my perspective, I understand what's needed, and I'm back to lead this transformation and committed to seeing it through. Starbucks sits alone with something few, if any, of our peers literally have, and that is unmet demand. Companies spend hundreds of millions of dollars on marketing, promotions and social media trying to create demand. We have demand everywhere we look, despite having not lived up to the expectations we set for ourselves, let alone exceeding the expectations of our customers and our people since the pandemic.
The big opportunity ahead for us is to meet strong and growing demand in our stores more efficiently and effectively and to leverage technology to enhance productivity and reduce burden on our store partners.
Let me highlight just a few sources of the accelerating demand we're seeing in our U.S. stores and business. Mobile Order & Pay, an over $4 billion business, is up 400% in 5 years, is up 20% over last year. Our $500 million delivery business is up 30% over last year. The Starbucks Card puts our brand in the hands of nearly 120 million people and is alone larger than the entire gift card category. Starbucks customers are increasingly prepaying for their purchases in huge volumes, roughly $11 billion last year, and we are on track to exceed that figure this year. At this moment, well over $1 billion is loaded on Starbucks Cards waiting to be spent in our stores. And active Starbucks Rewards membership in the U.S. grew 17% over last year to Q2 to 27 million members. Strong underlying demand means the productivity and efficiency investments I've described represent literally low-hanging fruit available to us right now.
And ever since, Starbucks remains a growth company today and will remain a growth company into the future. Two related dynamics underscore the power of the equity of the Starbucks brand and support our growth aspirations: consistent pricing power and strong demand for Starbucks products in CPG channels. Over the last year, we raised prices several times to address increasing inflationary pressures. Yet, we experienced negligible customer attrition, once again demonstrating the elasticity of demand for Starbucks coffee.
Even so, inflationary pressures have outpaced our price increases, resulting in several points of margin compression in the short term and costing us over 200 basis points in the first half of the fiscal year. In Q2, we were able to absorb the incremental cost while still delivering on our EPS expectations.
In our channels business, Starbucks today has the number one share in the U.S. at at-home coffee and the number one share in global ready-to-drink coffee. Customer loyalty inside and outside our stores has never been greater. You have to ask yourself how many retail companies have a consumer brand that is best of class and literally the number one position in grocery and in multiple channels of distribution? You'd be hard-pressed to find any.
I could not be more optimistic or confident in the successful transformation and reimagination of our store partner and customer experiences.
Let me turn to China. I cannot think of any other Western consumer brand, let alone a food and beverage retailer, that has performed as well as us in China over the last 20 years. I say that with great pride having been to China so often, building confidence, trust and respect for relationships with government officials and working closely with our Chinese team.
However, the situation in China is unprecedented. Shanghai, a city 4x the size of New York City, is completely locked down. Other major cities, including Beijing, are experiencing new COVID outbreaks and implementing new mobility restrictions pursuant to China's strict zero-COVID policy.
Conditions in China are such that we have virtually no ability to predict our performance in China in the back half of the year. Given the materiality and the high level of ongoing uncertainty around China, accelerating inflation and the significant investments we are planning, the only responsible course of action for us to take is to suspend guidance for Q3 and Q4.
As we move through Q3 and approach September's Investor Day, we will have much greater visibility on Q4, holiday and fiscal '23, and be in a position to share details around our comprehensive post-COVID China plan with you.
I'm very pleased with the growth we're seeing from our international business. Excluding China, our International segment grew comps in the double digits in the quarter, stronger than anticipated, demonstrating the strength of our diversified portfolio and the opportunity ahead. Even including the impact of China, our International segment still grew 4% in the quarter over last year to a record $1.7 billion.
Our international store base grew 9% over last year to over 17,700 stores. 15% of that growth was in licensed markets. We expect 75% of the net new stores we will open in fiscal '22 to be outside the U.S., further underscoring the enormous global and the opportunity ahead.
Now let me turn to a subject in the news. Across America, there is a movement in the media and across multiple industries, including the service sector, whereby fellow citizens have begun turning to labor unions as a means of gaining voice, representation and improved working conditions. This movement is not related to any specific company.
We are highly emphatic to the root causes of the frustration and anxieties that Gen Z Americans are facing, having come of age during turbulent moments in our history: the 2008 Global Financial Crisis, The Great Recession and now The Global Coronavirus Pandemic. These young people have completely valid concerns given today's uncertainty and economic instability. They look around and they see the burgeoning labor movement as a possible remedy to what they are feeling.
I understand the climate, and I'm deeply sensitive to the needs of all of our green apron partners. Yet, we have a very different and vastly more positive vision for our company based on listening, connecting and collaborating directly with our people.
Throughout our history at Starbucks, we have led our industry, and in many cases, corporate America, in introducing breakthrough benefits for our people. Aon Hewitt, the gold standard in benefits, rate Starbucks in the 100th percentile in the retail sector, the 100th percentile, including from part-time workers who want stability and flexibility to achieve their future aspirations. That means no retail company in America ranks above Starbucks for the benefits we provide our people.
We are proud of our history and leadership in wages and benefits, and we are committed to doing even more to meet the evolving needs of our Starbucks partners in the future.
Sharing success through wins and benefits with our partners is among our core values, and has been for 50 years, and our values are not and never have been the result of demands or interference from any outside entity. It's who we are, it's who we have been and who we always will be. Compare any union contract in our sector to the constantly expanding list of wages and benefits we have provided our people for decades and the union contract will not even come close to what Starbucks offers. We remain committed to doing the right thing for each and every Starbucks partner and that includes respect for differing opinions, inclusion and embracing diversity and individuality.
Today, we take further steps to modernize our pay and benefits vision for our partners with further investments in wage, barista skills training, coffee excellence and financial wellness and literacy. And in September, we will share additional initiatives we are planning for Starbucks partners in areas that include help with student loan refinancing, additional skills recognition programs, enhanced in-app tipping and new profit sharing initiatives. Partners at Starbucks U.S. company-operated stores, where we have the right to unilaterally make these changes, will receive these wages and benefit enhancements. This covers more than 240,000 Starbucks partners and roughly 8,800 Starbucks stores across the country.
We do not have the same freedom to make these improvements at locations that have a union or where union organizing is underway. Partners in those stores will receive the wages increases that were announced in October 21, but Federal law prohibits us from promising new wages and benefits at stores involved in union organizing. And by law, we cannot implement unilateral changes at stores that have a union. Where Starbucks is required to engage in collective bargaining, we will negotiate in good faith. Starbucks will not favor or discriminate against any partner based on union issues. And we will respect the right of Starbucks partners to make their own decisions when exercising these rights.
A question I get asked frequently is how long are you going to stay? So let me try and preempt it here. I've just framed the enthusiasm and the optimism I have for our transformation plan going forward. We have line of sight on what the transformation looks like and how meaningfully our plan will benefit the company and our people as together we co-create and reimagine the future chapters of Starbucks' story history. The plan I share is being designed mindfully and strategically and will be executed successfully. This I can assure you.
The Board and I have agreed I will stay to help transition our next leader. We are driving towards naming the new leader in the fall. After joining the company, he or she will undergo full immersion and have the opportunity to collaborate with me for a defined but not indefinite period. The plan is for me to completely hand over the CEO reign sometime in the first calendar quarter of '23 and to thereafter remain on the Starbucks Board.
Over the last 50 years, we have built Starbucks into one of the most recognized and respected brands in the world. And we have delivered best-in-class returns to our shareholders since being a public company in 1992. The investments in our people and our company we discuss today will absolutely assure that despite our success in the past, our best days are ahead.
We're looking forward to demonstrating what's ahead and the enthusiasm we have to sharing that with you on our Investor Day in September.
And with that, I'll turn the call over to Belinda. Belinda?
