Your Smartphone May Be Destroying Starbucks and Chipotle

Published January 30, 2017
Fool.com

Image source: Starbucks.

Consumers are not heading to their neighborhood Starbucks (NASDAQ: SBUX) orChipotle Mexican Grill(NYSE: CMG)the way they used to, and the reason for the shift could be in their pocket. Starbucks became the latest retail giant to point to the pitfalls of the mobile revolution in disrupting the customer experience.

Starbucks saw its same-store sales rise 3% in the U.S. during the holiday quarter, the chain's weakest store-level growth spurt in years. Making matters worse, the number of transactions per store declined by 2%. The comps figure was positive only because the average check was 5% higher than it was a year earlier.

Starbucks blames the same-store slowdown, in part, on the growing popularity of its smartphone app. The baron of baristas has seen the number of customers using mobile ordering and payment grow from 3% to 7% over the past year. A whopping 1,200 locations -- up from just 13 stores a year earlier -- now get at least 20% of their business through the Mobile Order & Pay option on Android and iOS devices during peak morning periods.

Wall Street would've cheered this news a couple of years ago, but it's creating a problem that Starbucks now needs to tackle. Mobile ordering and payment is resulting in a traffic jam at the counter where drinks are being handed over, and that's apparently scaring away potential java junkies.

"When those orders come in at that volume, it's creating congestion at handoff," incoming CEO Kevin Johnson said during last week's earnings call.

Starbucks feels that it will solve the problem. It used to have long lines at the point-of-sale, an issue that often had potential customers leaving. Now the same thing is happening with the pick-up counter. Folks see a lot of people waiting around for their beverages and baked goods and decide that even a short line at the order counter isn't worth the wait at the other end of the transaction.

It's not just Starbucks

The math may not seem to add up at first. How can the pick-up counter be any busier than it was a year earlier when it was pushing out 3% more transactions? Well, with the shorter lines at the order counter it does create a glut of customers.

There's also the psychological factor of seeing folks skip the initial register line and head right to the handoff counter. Walk-in customers -- still accounting for the lion's share of the chain's business -- have no idea of knowing when their order will be ready since they didn't see when the folks walking in later placed and paid for their orders through the mobile app.

It's a problem, and it's not just happening at Starbucks.

Speaking at the Barclays Eat, Sleep, Play -- It's Not All Discretionary Conference last month, Chipotle CEO Steve Ells admitted that his chain was dropping the ball when it comes to customer service. The burrito roller used to take pride in its speedy assembly lines, but it's clear to anyone visiting the chain these days that Chipotle queues are moving slower.

Ells concedes that throughput is a problem. We can lay some of the blame on menu additions, new safety-minded food prep procedures, staffing adjustments since comps started to slide in late 2015, and the register-slowing process of BOGO deals and other promotions that Chipotle has resorted to in an attempt to jump-start sales. However, a big problem slowing down the line at Chipotle is the growing popularity of mobile orders.

Chipotle had 2.6 million active users of its mobile ordering app as of its latest earnings call. It's been beefing up the convenience of its mobile platform -- gnawing away at the lag time between when an order is placed and when it can be picked up -- and that will only make it more popular in time. The chain points out that it has a second prep line at its stores that it uses for catering orders that it can also use for mobile missives, but then it's a matter of staffing that secondary assembly line.

Mobile ordering may be great for the tech-savvy smartphone owners that embrace the platform, but slowing down the process for everybody else is going to keep weighing on walk-up traffic at Starbucks and Chipotle until they figure things out. Smartphones were once played up as the key to incremental sales, but now the challenge is to avoid mobile ordering from being detrimental to overall sales.

Find out why Starbucks is one of the 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. (In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the market!*)

Tom and David just revealed their ten top stock picks for investors to buy right now. Starbucks is on the list -- but there are nine others you may be overlooking.

Click here to get access to the full list!

*Stock Advisor returns as of January 4, 2017

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool has a disclosure policy.