How Starbucks’ Loyalty Program Change Sent Customers Away

Starbucks’ impressive winning streak—25 straight quarters of comparable-store sales growth of 5% or greater in the U.S.—ended on Thursday as a change to the coffee giant’s rewards program hurt a popular Frappuccino promotion.

Wall Street observers had hoped Starbucks (SBUX) would report a 6.1% increase in comparable-store sales, in what would have been the 26th increase of growth at or above 5%. That streak, lasting just over six years, is an incredible period of strength at a time when many restaurant chains of Starbucks’ size can’t hope to replicate. Same-store sales judge growth as existing stores (excluding new locations) and say a lot about the health of a restaurant concept or retailer.

But Starbucks reported a disappointing 4% increase, news that sent shares slightly lower in after-hours trading on Thursday.

The coffee company knew it dropped the ball. In comments to Wall Street analysts, CEO Howard Schultz admitted with “candor and humility, we acknowledge we didn’t execute as well as we could have in the U.S.”

But Schultz promised observers that the disappointing growth in the U.S. was an “anomaly.” He blamed the timing of a major change to the company’s popular rewards program, which had previously given perks for frequent visits but now gives loyal customers free drinks depending on how much they spend. Starbucks made the change because it said some customers had been splitting their orders (for example, asking a cashier to ring up a coffee and bagel separately) to game the system and get rewards faster. That led to slower turnaround at the cash register.

But the change angered some, and led to some noise about how the loyalty program wasn’t as generous. Starbucks argues that isn’t the case but acknowledges that because of the change, there was a small dip in traffic.

The loyalty program change occurred in April and less than three weeks later, the popular Frappuccino Happy Hour promotion launched. That event is so popular that in 2015, it led to a 30% increase in revenue from the prior-year period.

This year, however, “noise” from the loyalty program change hurt the resonance of the Frappuccino event.

“What we underestimated was the interdependence of rewards and happy hour,” Schultz explained. “In hindsight, we should have built awareness for the Frapp promotion and gave it the breathing room it needed.”

Schultz added that while Starbucks outperformed the industry, the company didn’t overcome headwinds—including macroeconomic challenges—”to the extent that we and you are accustomed.”

Notably, despite the change to the loyalty program, membership increased 18% over-over-year to 12.3 million active users in the U.S. Executives also touted opportunities to better leverage the rewards program, like say sending targeted promotions to users to get them to increase their visits to the store. Starbucks wasn’t able to do that before under the frequency-based model.

Schultz also aimed to strike a bullish tone about the future. He contends new stores opening in the U.S. and abroad are performing strongly on their own, without cannibalizing the performance at older stores in the same region. Schultz lauded the power of the brand and said Starbucks is accelerating store openings in the U.S. and abroad in the upcoming fiscal year, as well as in future years. That all implies sales and profit growth will continue.

Schultz said that in the past, Starbucks has confronted lulls and that’s very true. The recession in the U.S. led it to shutter hundreds of stores in 2009. But he added that the company always rebounds quickly and posts strong accelerated growth.

“I see that in fiscal 2017 and beyond,” he promised.

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