Business/Finance: Starbucks CEO Kevin Johnson Speaks with CNBC's "Squawk on the Street"

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"Squawk on the Street" host Jim Cramer, host of CNBC’s Mad Money, interviewed Starbucks CEO Kevin Johnson who explained recent gains in Starbucks shares, beta testing Starbucks Delivers, java growth in China, Alibaba partnerships and the long game.

JIM CRAMER: Alright, we have a treat here. Shares of Starbucks are out this morning. As they should, the coffee giant reporting better than expected first quarter earnings. There were strong U.S. comps, and there’s continued growth in China, although, I would say we need to ask more about it. So joining us now, FIRST ON CNBC, Starbucks President and CEO Kevin Johnson. Kevin, how have you been?

KEVIN JOHNSON: I’m well. Happy New Year, guys. I haven’t seen you in a while.

JIM CRAMER: Too long. It’s been too long. Last time at the Rose Stream. We’ll do Rose Stream maybe in Milan. I love that one. Okay, let’s get right to it. This was the first quarter upside on strongest comps since June of 2017. The comeback is here. How have you done it?

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KEVIN JOHNSON: Well, you know, clearly, Jim, the streamline activities that we embarked on six quarters ago are paying off. It’s allowing us to have more focus and discipline against our three strategic priorities. You know, we’re focused on accelerating our growth in the U.S. and China, and that’s working.We’re now leveraging the Global Coffee Alliance with Nestle to expand the reach of Starbucks globally. And we’re continuing to focus on shareholder value, creation and we have returned a significant amount of cash to shareholders over the past two years. But this last quarter was just another demonstration that our strategy is working.


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JIM CRAMER: Well, Kevin, one of the things that you didn’t get to talk enough about on the call, which I was surprised someone didn’t ask, is the Uber Delivery. Apparently the Miami test is doing great. You’re brewing out in a lot of places. And it’s a big win for you. Is it moving comp stores sales – or do you see it moving comp stores sales in Miami? And will it move comp store sales when you roll it out across the nation?

KEVIN JOHNSON: Well certainly what we’re doing, Jim, is we’re enabling a new channel for customers to engage with Starbucks with StarbucksDelivers. And as you know, in China, we partnered with Alibaba and their delivery company Ele.me to enable it in China. It is going very well in China. And in the U.S., we’ve partnered with Uber Eats.

And we started in Miami. We saw good customer demand and incrementally. We now have rolled it out in San Francisco. And we have a plan now to bring it to a significant number of stores across the U.S. here over the next 90 days. And so we’re optimistic that delivery is going to be another one of those things that will boost our traffic and continue to give customers an opportunity to engage with Starbucks in a new way.

Transactional Decline Verses Total Transactional Growth

JIM CRAMER: Alright Kevin, we’ve got to ask you this. We talked about it -- I know you watch the show -- so you’re already prepped for it. 2% decline in comp transactional in China. 1% growth versus what we used to do eight. You seemed almost content with that, Kevin. And I was surprised at that, given the fact that’s a deceleration and given the fact I would have thought this quarter, it would have done better. So please tell us why you’re okay with that de-sell and tell us what you’re going to do to fix it?

KEVIN JOHNSON: First of all, Jim, the number one metric we look at in China is total transaction growth. And those total transactions come from a combination of new stores that we build, as well as same store comp. And if you look at the fact that we opened -- we increased the number of new stores by -- increased the number of stores in China by 18% this quarter, and so if you put all of that together, we had transaction growth -- double digit transaction growth in China.

And china is a market that is all about first mover advantage. It’s about building new stores and expanding our presence. In fact, we’re now approaching 3700 stores in China. We entered ten new cities last quarter. We’re in 158 cities in China. The addressable market and the growth opportunity in China is significant. So the priority we have is really expanding our footprint, while we continue to enhance the experience in our stores, drive beverage innovation and enable new channels for customers to engage with Starbucks like Starbucks Delivers. So we are playing the long game in China.

Starbucks and The Long Game

DAVID FABER: Yeah, Kevin, thanks. It’s David. And you know, those numbers, I think people just should stop for a moment: 3700 stores, 158 cities. But that said, given its importance overall to your long game, and to the growth of the company, when you talk about the market being highly promotional and disruptive, give us a sense as to what that means and whether that is just going to be the landscape for the long game you’re talking about.

KEVIN JOHNSON: Yeah, David. So context: whenever you have a large addressable market, around coffee in China, you’re going to have a lot of competitors come in. Now some of those competitors are going to try to differentiate in different ways. And so they’re going to have to use price and be highly promotional in what they do.

For Starbucks, we differentiate on the in-store experience, we differentiate on the quality of our coffee, and we differentiate on the digital reach that we have through our partnership with Alibaba. Now the one thing that the competition is certainly doing in China is it is expanding the addressable market for coffee. It’s introducing the Chinese consumer, who is primarily a tea drinking culture, to coffee. And so that’s helpful for the growth and the addressable market.


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For Starbucks, we’re confident. We’re going to play our game. We know how to create the kind of experience and leverage the brand strength that we have in China to create -- to create that unique differentiated opportunity for us to engage in customers. And so I think if you look at the overall landscape of who is growing the most share of transactions and engagement with the customer, I think Starbucks comes out on top.

Coffee Delivery Services Challenges

CARL QUINTANILLA: Kevin, the guys-- we discussed the Uber Eats partnership earlier in the week. And I got to thinking, you know, delivery of coffee is so much about speed and having a cup of coffee that is hot. Are there structural challenges in delivering coffee in an Uber?

KEVIN JOHNSON: Well, you know, this is why we partnered with Uber Eats. Dara and the Uber team put a lot of emphasis on Uber Eats and Delivery to the point where we work together to integrate our software, so that our mobile app can integrate directly into their software to dispatch and their app interfaces directly into our store operations. So we made it seamless for partners in our stores to get those orders and then embraced some of the best practices candidly that were created in Starbucks China when we launched delivery.

So when we prepare a beverage for delivery, we prepare it as a hotter temperature than we would normally in the store so that when that beverage is delivered and handed to the customer, ideally it is at the same temperature that it would have been when they picked it up in our stores.

So we’ve prioritized the customer experience around delivery and fully integrated the operational processes from Uber Eats into our Starbucks stores. And that’s part of the key to making this a great, great customer experience.

JIM CRAMER: Well, Kevin, I love you, but I would have to wait 19 minutes for my coffee in China. Kevin, I don’t care if you put that thing -- you bake it in hell. I just do not think after 19 minutes that thing is going to come out piping hot.

KEVIN JOHNSON: Well, Jim, we’re happy to host you in our stores. We’ve got 3700 in china and we’re approaching 30,000 around the world. You’re welcome anytime.

AI Teaches The Trade

JIM CRAMER: Fair enough. Now listen, Kevin, you’re from tech. You’re from Juniper. You were a great tech guy. I detected artificial intelligence about you trying to figure out what people want. It is the first time I’ve heard it. It is almost as if you finally figured out, you cracked the code about what people want, whether it be Nitro, the more expensive drinks. Are you using machine learning and artificial intelligence to figure out what the customers want for first time at Starbucks?


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KEVIN JOHNSON: Jim, we have dramatically stepped up the focus on customer insight and we are using technology to help inform us of what customers want, what they need, and what they think of Starbucks. That informed our entire holiday plan this year and we had a fantastic holiday. And so we are driving much more use of analytics, artificial intelligence, personalization, and technology to help us be more informed and more connected to our customers and that is making us a better company.

The, um, Cannabis Question

JIM CRAMER: Alright, Kevin, you know, I like to bring something to the party when I get together with you. I have been working some of these companies like Canopy Growth. Alright. Now you know that is a cannabis company. In this country we will be drinking cannabis coffee and cannabis tea. I would rather be able to have a triple venti cannabis venti -- whatever at your place than I would the other guy. You know that other guys, your competitors, are going to be having cannabis tea and coffee. Are you going to be, in the states that it is legal: Washington, California, Oregon -- can I get a cannabis triple venti?

KEVIN JOHNSON: You know, Jim, you can’t get it today. We’re well aware of what is happening around CBD, THC and all the trends in the industry. But you know, we’re staying focused on the beverage innovation that we’re driving and right now it is all about Nitro. You know, we talked yesterday about how we’re deploying Nitro and Nitro Cold Brew across our entire portfolio of company-operated stores. But, you know, we will always stay on top of consumer trends and new ideas. And so I always appreciate your suggestions.

JIM CRAMER: Well let me press that again, because you know I love the Nitro, it really makes you feel good – I think it’s a fantastic drink -- but the cannabis, if you did a little, let’s say, Indica, it would be a nice way to get down from the one I finished with the Nitro. In other words, if – why not sample it in California, Kevin? Why not just take it by storm?

KEVIN JOHNSON: Well, Jim, I think there is a lot of issues that we have to think through on that. And right now that’s not on the road map. But you know, we are mindful of the trends, we’re mindful of how -- I’ll say CBD oils and CBD is viewed as a health and wellness. And so, you know, we’re going to keep watching this. But right now, not on the road map.

CARL QUINTANILLA: You need to go work for Starbucks R&D, Jim.


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JIM CRAMER: Believe me, I’m ready to don a green apron in a flash. Because you can get benefits like no other company. Congratulations. And by the way, these guys hire veterans like there is no tomorrow and they deserve it if everybody else did this, then every veteran would have a job. That’s what they do. What do you say, David?

DAVID FABER: We still have Kevin with us or are we wrapping him up?

JIM CRAMER: No, he’s right there.

DAVID FABER: I’m not hearing what -- whether we got time. Kevin, I’m curious about this line of questioning that Jim opened up about AI and what you’re learning or how you’re doing it. Can you give us more sense as to how that works or what that meant on the ground during the Christmas season for, for example, in terms of your ability to fulfill customers and a more effective way?

AI Verses Old Fashioned Customer Insight

KEVIN JOHNSON: Well, I’ll frame it sort of, David, around customer insights. And coming out of last year’s holiday, we used a number of tools and research to give us customer insights on what customers really appreciated and loved about Starbucks at the holiday.

And that informed everything from the design of our cups to the, you know, utilizing the re-useable red cup promotion that we launched. You know, we saw gift card sales grow 4% year on year on the quarter. That was a function of customer insight and research that we did.

So this holiday, in many ways, was informed by that insight. And that’s an example of what we are doing. We’re using all kinds of data, customer focus groups and things to help us be more informed, more front footed on the trends and the things that customers really want to see from Starbucks.

Alibaba

JIM CRAMER: Okay. Well, Kevin what the customers may want to see in China is a cup that is not an American cup, because people are worried about tension in the same way that Xiaomi has been able to take share from Apple – what are you drinking? You’ve got a Starbucks? You don’t even have a cup – a label on there. Can you hold that cup up? Does it say Starbucks on it? Alright, so --

KEVIN JOHNSON: Yeah, this is a – Jim, we’re in the Roastery. We have a Starbucks Reserve right here.

JIM CRAMER: Kevin, this Luckin, they’ve put up 600 stores in seven months, they’re coming in 20 to 30% under you. Why wouldn’t I want to go to Luckin over Starbucks?

KEVIN JOHNSON: Well, Jim, first of all, you know, when you look at a competitor like Luckin, they talk about the number of units that they’re growing. And I think sometimes a unit would look perhaps like a Starbucks store, but most of the times they look like a point of presence.

And so, you know, you need to visit these for yourself. That said, you know, having a lot of points of presence, we’re at 370 stores, we have our Global Coffee Alliance with Nestle coming in, with food services and CPG.

The reason you want to come to Starbucks is because we create that unique customer experience, we serve the world’s finest Arabica coffee. Our partners will hand craft beverage to your perfection, and we create an experience like no other in the industry. And we’re going to continue to stay true to the experience we create in our stores and how we extend that experience with the digital mobile relationship.

The China digital partnership with Alibaba is making great progress. We now have the virtual Starbucks store integrated into the Alibaba properties. That’s now reaching 600 million Chinese who use Alibaba on a daily basis. And so, you know, we think the strategy that we’re on is the right one, it is allowing us now to continue to grow transactions in the double digits. And we’re going to continue to play the long game with the strategy that made Starbucks what it is today in China.

JIM CRAMER: Well, thank you so much, Kevin, for coming on, for playing. Because we have tough questions and good questions. This is the best quarter for a couple of years. Great job. That’s Kevin Johnson, he’s the President and CEO of Starbucks.

The above transcript is supplied by CNBC and used with permission.

The above is the unofficial transcript of a FIRST ON CNBC interview with Starbucks CEO Kevin Johnson and CNBC’s “Squawk on the Street” (M-F 9AM – 11AM) today, Friday, January 25th.

The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2019/01/25/watch-cnbcs-full-interview-with-starbucks-ceo-on-q4-earnings-report.html.

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