Starbucks Corporation ($SBUX)

All right. Time. Yes. Great. Hey, everybody. I'm David Palmer, Evercore ISI. Really excited about this one. Thanks so much for joining the Evercore Consumer and Retail Conference. I'm pleased to welcome Brian Niccol, Chairman and CEO of Starbucks to this conference. And congratulations to you and the team so far on many areas of progress from service times to innovation to marketing and loyalty to productivity savings. There's a ton of initiatives, a ton of things for us to talk about, comps have turned with fiscal second quarter U.S. transactions growing across all income cohorts, morning back to 22 levels, and operating income and EPS inflecting for the first time in 2 years. So it does make sense when you talk about saying that there's been a turn in the turnaround. At this point, I know investors want to understand if that 7% U.S. comp. We saw last quarter is the start of a durable sales recovery. And of course, I think they'll be wanting to see that be a profitable one as well going forward. So many initiatives to talk about, you've talked about 5 big ones lately, the Green Apron Service, menu and marketing innovation brand digital rewards, that whole area, you are imagined afternoon and the coffee house uplift. So I think I have that right. And so when you think about those initiatives, what's been important so far and what do you think will be become increasingly important in your growth in the quarters ahead?

Yes. Well, thanks, David. I don't know what else we need to talk about. You've covered it. Yes, that's fine. So look, I think for any turnaround, you have to get the operational foundation healthy and that's really where we spend our time. The labor investment was all about reestablishing a great customer experience and reorienting the company back to being a customer-focused company. And I think that's what you're seeing in our stores. And then we've scorecarded the program as well with what we call the growth scorecard. And you hear us talk about you get 0-shot score or a 5-shot score and where are you going to be on that spectrum. And the reason why that's important is twofold. It shows us what stores are performing and it also shows us what stores still have work to do. And it also provides feedback for our store leaders on what's working and what's not working. And so very proud of the progress that we've made there. Mike and our operators have done a phenomenal job. We now have close to 70% of our stores performing at 4 shots or better. And the reason why that's important is we know when we're above 3 shots, we see really nice transaction and comp performance. And so still work to do because there's 30% of stores that aren't where they need to be. But the good news is now we have clarity of what they need to work on in order to get them to that 3, 4 shot performance. On the menu marketing side of things, the good news is once you have a strong foundation, it makes a lot of your menu and marketing work a lot more effective because you're working from a position of strength as opposed to a position of weakness. And I think that's what you saw with our protein launch, our Matcha menu reset, our bad case reset. And what you'll see us going forward is as we tackle the afternoon, One of the key pieces of that puzzle is we've got to fix the supply chain to support the afternoon, but we also just have to have the right offerings, both in drink and food. And I think that's what you're going to see us continue to do. And on the refresher side of things, next week, we launch the Blue coconut refresher. We've already added our refresher platform Energy. What's great about the energy is both in the morning, people are able to have more energy in their foot forward drink. And in the afternoon, they're able to take out all the energy. So they can have 0 caffeine in the afternoon, if they would like, and you're starting to see that play out. And then when you think about food, our food business looks pretty good in the morning. I think we've got the right assortment. We still have opportunities to be better. But in the afternoon, we do not have the right assortment, and we have work to do on the food offering to attach with the right beverage offering. But I view that as all opportunity. And then on your point about uplifts or getting the stores back to being a great coffee house, we've done this in about 700 stores so far. Our plan is to get it across 8,000, 9,000. And we have seen when we fix the store environment and we give you a great seat and a great coffee house experience, people spend time there. And we see an uptake in afternoon business. And we also see people just have more engagement with the brand, period. And also, our partners prefer working in places that are great coffee houses versus not. And so it's just got an add-on effect for building the brand. satisfying customers and making our partners feel great about the place that they work in. So -- and in the process, we're putting seats back in, which it's kind of store 101. It's good to have seeds for customers.

Yes. That would make sense if you want them to hang out for sure.

You said it with enthusiasm.

Well, it might makes you wonder what was happening before. Yes, what were they doing? The operations turnaround, let's double-click on that a little bit. It feels like you've come a long way. I know sub 4 minutes was a big goal for you in terms of in Cafe and the drive-through, And you've said that the original Green Apron Service rollout stores, those 650 of them are still out-comping the system by 2 points. And it makes you wonder, like, where is the end? What is it -- what do you think this operations throughput stuff, but also customer satisfaction levels from operations might be doing the comps right now and where is the end?

Yes. Look, I mean, the reality is from a transaction standpoint, we're still not all the way back to 2023 levels or 2019 levels. And 2023 and 2019 were roughly kind of the same level. So there's still a lot of headroom just in transactions. And I would say, I don't know if you're ever done. I think the reality is customers are going to demand experiences to justify spending their dollars. And I think if you're just a transaction, I think you lose in the long run. I think if you're an experience with great craft, I think you win in the long run. And I think fortunately for us, that's kind of the Starbucks model, which is craft expressed through customization and a barista that personalizes it for you. And the connection, meaning the third place and also this idea of a community environment. So -- and when you look at this gross scorecard, it's very simple. It's like, are we in stock? Are we food safe? How are we satisfying customers? Are we doing great throughput? Our speed requirements, right? And so when you just look at these things, this is like the basics of how you run retail. And the good news is our partners, as a result, understand the feedback and then they can understand the action that they need to take. And the other one in there, too, is already staffed. So you do those 5 things correctly. Guess what, you end up with a great store.

Yes. I remember asking you, this is a little off script, but I remember when we were chatting a year into when you were running Chipotle, I was asking you about what sort of score would you give the major buckets of the business. Right now, I can think of menu and innovation, operations, supply chain would be on the list there. Marketing would be on that. Where do you think it tends where you really think you can be and let's just say one was where you were. Where are you on those major areas, do you think?

Yes. I mean the way I kind of think about it is, for the most part, we've got the fixing done on operations and marketing menu, but there's still lots of opportunity to be better. And so in all these cases, I feel like the good news is now I'm on my front foot for operations for menu marketing but still early innings of what I think we're capable of versus supply chain, I would say we're still in the process of fixing. Technology, we're still in the process of fixing. The store experience through uplift, still in the process of fixing the store pipeline, we're still in the process of fixing. So I think some things are working and we're on our front foot. Other things we're still fixing better than we were, but still need to be fixed, and then you can turn it into a position of strength. And that's ultimately what I'm after is, operationally, I want to be in a position of strength, marketing, position of strength, supply chain, position of strength. And once you have those strengths, then the trick is how do you build on it. Plus I'll never give myself a 10 out of 10. There's -- you're dealing in a customer business that customers attitudes, beliefs are always changing. We have to be a learning organization that doesn't get complacent.

What do you -- if you had to go back to just the Grow report and what you saw with Mike originally with the operations. Just give us a sense of just the operational, the org structure, the accountability, what you're trying to achieve and where you are in that journey? And how important has this been for comps?

Yes. Look, I think it's been critical, like if you can't operate consistently, it's going to be very hard, I think, to consistently perform. It's just that simple. And the good news is, Mike, I think, is one of the best operators you can find in the industry. He's got 31 years of experience. I think he is best in class. And as a result, our operations will be best-in-class because that's the leadership that he expects. And I think the standard will continue to elevate. And I think it will continue to be a source of growth for us, not -- you never want your operations to be something you have to make excuses for. And you see a lot of places make excuses for it through discounts or promotions or whatever it may be. I think at the end of the day, the company has got to be able to stand on great execution and it's got to be able to stand on great operations, especially when we're operating as many stores as we are within any people that we are. And I just think at the end of the day, if it's not additive to the business, something is off and there then we have to fix it.

One of the other big areas is menu innovation. It feels like the speed is being improved from idea to shelf. Can you talk about this? And just it kind of is amazing to me. Some companies I've seen out there in the quick service space. They don't want to over test things. They don't want to get bogged down by that. They'd rather do a fast fail type approach tell us about what you think your approach is versus what we might see elsewhere and what's working in .

Yes. I mean, look, it depends on what the innovation is, right? Like if the innovation requires a huge capital outlay and like we're going to go have to touch all the stores and knock out walls, you're going to test that thoroughly. If it is a syrup there's low risk to getting the syrup wrong. And so I think you just have to balance the innovation to be like, well, what's low risk, what's high risk? What's something that we need to be opportunistic and go fast on versus something that we can be more programmed on. And you mentioned this, like when I first got to Starbucks, it has taken us 18 months to do a syrup. I guess ridiculous, right? Now on an existing syrup, we can turn it around in 4 months. And so I always like to have a pipeline that has a plan, but also has the flexibility to be opportunistic. And that's really the process and the organization that we're building, which is if a door opens, we're going to run through that door. And at the same token, we have conviction in what we believe are long-term trends so that we set the brand up to be culturally in front of kind of where society is or where society is moving. So you got to have both. And that's what we're building into the supply chain. And then that's also what we're building into the organizational structure so that people understand what you're accountable for and the performance matters. So like if you put a syrup out there and it doesn't work, we got to have the intellectual integrity to say it didn't work and learn from it. That's how we then get even better and faster.

I remember when it was the Analyst Day, we talked about -- I said, what might be the story of '27 by the time we get there, and he said by then, we will have some operational improvements that it will give us some momentum. But we'll also be identifying what platforms are kind of working for us and we can kind of double-click on those and go deeper on those. Maybe you can talk about just the -- what has been the evidence of what is working so far? And where do you think might be the story of '27 in terms of your menu and innovation?

Yes. So there's a couple of platforms that are working for us. Matcha, protein or call it, health and wellness is also working for us. Cold Foam is working for us in a big way that modifier. And then I think you're also going to see that Refreshers is also a big platform, more specifically energy right now. But ultimately, Refresher is going to be a platform. It's over $2 billion business today, frankly, that we've under leveraged. And it's a huge tool for us to grow from as you look at the afternoon as well as continuing to expand our drink portfolio. Next week, we'll launch the Blue Coconut Refresher, which will be great because now we'll finally go from 2, which is strawberry acai and dragon fruit to now 3 with the blueberry -- I'm sorry, blue coconut -- blueberries coming, getting ahead of myself. But these platforms are powerful. The big case that we reset is proving to be another really powerful platform for us because attach is a big deal in the morning. I think you'll see us in the afternoon, have platforms around bites, grill cheeses. And then obviously, we'll continue to drive the Cake Pop platform. That's a big winner for us as well. So the good news is we've got these platforms in our menu. The other big unlock for us, frankly, is getting the third place back. Putting the seats back in with a great environment where people want to spend time and do well will drive the afternoon daypart and it will also drive the morning daypart. And we're going to get better and better at how we build those stores and how we keep those stores current.

I was just thinking about how you have 2 things that might be unlocked for your afternoon a little bit, obviously, the uplift and how the hangout factor, but also supply chain and food. Just enabling some of the stuff you want to get done. I mean maybe you could talk about that when would be -- when are you going to get the supply chain ready for you to get bigger into food in the afternoon?

Yes. So supply chain, we're going to be at a place where we can have daily delivery in all of our stores by the end of this year. And we're also going to have a replenishment system where now we can replenish things in less than 24 hours versus today, we're in like 60% of our stores with daily deliveries, and it's a 72-hour replenishment system. It's very hard to run an afternoon business and a food business if you don't have 24-hour replenishment. And the reason is because, I'll give you for an example, right? If you have a turkey sandwich, a steak sandwich and a vegetarian sandwich, if you're only shipping in cases of those sandwiches, you're not recognizing what's actually being consumed. So therefore, you end up with a lot of ways is really what happens or you just end up about the stock. And the principle we've mandated is if it's on the menu, it's going to be in stock. And then we've got to have the supply chain to support that menu execution. So getting to the idea of 24-hour replenishment with daily deliveries is going to unlock our food business in a big way because we'll be more in stock with the right items at the right time. And also one other thing, we can shrink the back of house. So it also helps our build capability because now we can shrink the back of the house because now you're bringing in eaches as opposed to cases.

One of the things I wonder about on the innovation front, I was hearing [indiscernible] talk about beverages are growing versus food that's declining in America today, which is an interesting thing itself. Three of the wellness things that were driving beverage, obviously, hydration, but also energy and protein conveniently come through that. And I was just thinking about you guys. And I wondered to what degree are you using those sort of basic insights to go after the wellness occasion because a lot of times, we just think of you as coffee shop and maybe a little bit of...

Coffee is the original or I guess, the OG of wellness when it comes to drinks. And so I do believe -- I mean, exactly what you just said, drinks are a traffic driver. And like I think if you just stop and think about that for a second, drinks our traffic driver, both in the morning and in the afternoon, you would have a different frame of what a craft drink company is capable to grow into. And then what we have to do is figure out what are the right attaches to go with those traffic drivers. And so that's really what we're focused on. And you hit the nail on the head. It is wellness. It is hydration and it is energy. And we actually do all those really well. And I think we're building on the wellness platform with protein. You'll see us do other things, right, collagen, creatine, like the things you would expect. On the hydration, the ability to get into these other fruit forward drinks and then customize your caffeine allows the hydration game to be played at a different level. And then obviously, on the energy side of things, the caffeine is a really clean way to get to that energy.

Yes. One of the things that we're also wondering about is how you're doing this doing so well with Gen Z and millennials. And we hear all the time about the struggle with those generations, you had a 40% increase in Cold Foam, mix increases going on across the menu is incredible that you're doing that with those generations. So I would just wonder how you think that you are doing that and how maybe is it something category? What is the insight there about connecting with those younger generations that you're clearly winning with?

Yes. Look, I think this is where the actual store experience matters. So the coffeehouse experience really matters. And when you can create a space that 15-year-olds want to hang out in as well as 80-year-olds, news flash, it's called a coffeehouse, okay? So if we can own that third place, we have relevance now with every age cohort you can think of. And you can also think about just about every occasion to, whether it's the PTA or the retired guys having coffee, like whatever occasion you can think of where people want to have a community experience, the coffee house is at the center of those things. So that's why I'm so passionate about getting this coffeehouse back. And that's not to say the drive-through occasions, not important, the mobile order pickup occasion, it's not important, the delivery occasion is not important. I just think the centering point is the coffee house, and that's what makes it magnetic to all these different age groups because they can all realize a connection with that idea of having a community place for whatever age of life they're in. Then you factor in what can we do with food, what can we do with drink to make it even more relevant. And this is where it gets really interesting because like protein, a protein latte, initially, I was like, "Oh, this will be for folks after a workout". Yes. But actually, the 30- to 50-year-old female turns out really like protein lattes. And we're seeing that continue to grow. And now what we're also developing is a protein cold foam business in a big way. And you're seeing the protein coal foam have resonance on cold drinks, which is really interesting because now our cold drinks have just become that much more valuable to people. And so -- and also, I think the way we're showing up in social media, advertising, all the ways that we're communicating. I think we're communicating in a much better way, in a much more culturally relevant way from. We did store in Nashville with Taylor Swift where we launched her new album, and we wrapped the place to be starbies, okay? So it was one store starbies, but it turned into a social media platform that lasted for 2 or 3 weeks. One store. Coachella, we did the Unicorn Frappuccino at Coachella, that created all sorts of buzz. In a couple of weeks, we're going to do Unicorn Frappuccino. But again, we are culturally in these relevant places. And then our social media, if you just look at what's happening on social media, I think the team has done a phenomenal job of moving away from puns and cringe stuff to things that are connected, relevant and being viral. And then even last night, like if you're watching the Next Game, hopefully you saw our Starbucks ad was on with like 4 minutes to go, and it was a coffee. And it was a great coffee at. Like unfortunately, the Knicks loss. So I think more people were buying coffee this morning than if they had one, people may not have shown up in the morning. There may not be as many people here right now at the next one last night. But my point in this is we have the ability to connect with wherever you are in your age of life, wherever you are in your income journey and also wherever you are in your social circles. And the coffee house is the third place where it doesn't matter what your age is, what your income is or where you're coming from, it's a place where people connect and create community. And I think we're uniquely set up to do it better than anybody else.

Yes. I remember when you were first focusing on this stuff, I think people were thinking, "Oh, that's like a Gen X guy thinking that, that still matters" that it wasn't the relevant because people are blowing and going and they're ordering digital. They just -- and so that was leaning against it at one point. If you're saying...

I think we'll prove that the third place is highly relevant. And like I said, I think people sometimes misinterpret that statement of saying that I don't still value the drive-through occasions, I absolutely do. And you've got to win in all those occasions. That's why we created these operating standards where if you're in cafe, you're going to get your drink in under 4 minutes. If it's mobile order, pickup, it's got to be on time and accurate. We've got a little more grace because you're usually off-premise, so it's 10 to 12 minutes. And the drive-through, it's got to be less than 4 minutes. Delivery, it's got to be around 25 minutes. So it's like if you set up the operating model to deliver on those occasions, why can't I also have a great cafe? For that occasion when you walk in the store to grab your drink, look, last I checked, even if you're grabbing something to go, would you like to get that from a place that's great or a place that looks like a hell? Like, I know what I would like. I'd like it to come from a place that's great. It makes you feel better about your purchase decision. You have less buyer's remorse if you go into a place that was great, made you feel good, even if you're only there for a split second.

Yes. When it comes to marketing, what's the big picture about -- there was a strategy in the past, it was a lot more in-app discounting. You've increased the weighting in traditional and other. Are you where you want to be now? And can you just talk about the marketing strategy from a big bucket perspective?

Yes. Look, I think the team is doing a great job with our marketing spend. We've reallocated -- we stopped a lot of the discounting and reallocated those dollars to, I would call it, marketing at the top of the funnel. We still have a lot of work going on with marketing, frankly, at all levels of the funnel, right? If you think about our digital marketing, our rewards program. But I just think, in general, you're better off building a brand through engagement than trying to build a brand through discounting. I think those are borrowed transactions versus earned transactions. And we have a really simple approach brand over time, sales overnight, and you can do both. And that's what trusting the team are tasked with. And then Mike and the team have to make sure when people show up, they're getting experience that says they want to do it again. And I think our partners are doing that. If you haven't been to , I guess there's a coffee shop just across the street from here, somebody told me, her nickname's Java Julie, and she runs a great Starbucks. And I wish every Starbucks had that type of leader so that everybody has that type of connection. And this is kind of along those lines of when you do the marketing right and you get people to really commit and then our partners deliver on the experience, the loyal following is unbelievable. Like I've never seen it in a business the purchase frequency and how habitual people are with Starbucks is pretty remarkable.

Yes. One of the things that seems to also be a thing, so to speak, right now in restaurants is that young people want more rapid news to keep their attention. I don't know if you just agree with that general statement, but it seems like you are with your strategy, you are talking about doing more new news. Could you talk about what the cadence is?

Yes, yes. Look, I think the reality is culture is moving faster than it ever has. And if you want your brand to stay relevant, you got to be in culture and in front of culture. And that requires, I think, in my -- in our case, news happening all the time. But we've got to be purposeful enough where we know we've got news happening at least every 2 to 3 weeks. Now that doesn't mean it's a new product, right? Like you'll see us this week, we're doing some stuff around the fact that all the soccer is going on, right? And we've got a clever way in on the soccer tournament, right? Next week, we've got the blue coconut refresher. Two weeks after that, I think, is more Frappuccino. And then there's a bunch of other fun things happening from a merchandise standpoint. And I think that's the other thing that we got really complacent on was our merch. And you guys probably saw this when we did the Barista, we finally got back to some great merchandising during the holiday, and that was a huge driver of performance. And frankly, people showing up at our stores at 5:00 a.m. on the nose when we opened. So I think you got to have news across your business. You got to have news, whether it's digital, commercial, packaging, cultural, products or taking advantage of what's happening in culture at the moment, too. You got to figure out how your brand can show up authentically, right? We don't want to show up in a way where it makes people cringe though, right? There are those examples were like that didn't feel good. You got to show up in a way where people are like, oh, they should be there, and I hope they're there again next time.

Yes, you say you're going to be doing something with World Cup in a way that's unique to Starbucks, I wonder what that will be or how that will be.

We have a cup.

Yes. Okay. There you go.

We have a World Cup. And I'm not even in the marketing department.

No, you really nailed -- yes. Got it. And I got it. Let's talk about rewards for a minute. You've made some changes there. I know you've been happy with some of the results? What needs tweaking? What have you learned so far?

Yes. Look, the rewards launch has gone really well. And we did this back in March, I fully expected our kind of user population would go down because whenever you change anything, usually people quit. But instead, we actually saw an uptick in users. So we went to like 35.6 million. And usually, at that time of the year, we also see a natural decline as well. So we kind of broke the seasonality of it, and then we also kind of broke the idea of making a change, being able to keep people engaged. And kind of the key things we heard from this were when we addressed the complaints people had about our rewards program. First was, can I have my birthday reward on more than just my birthday. You wouldn't think that's a big deal, but apparently for a lot of people, they want to get their free drink more than just on the day of their birthday. So we addressed that in your -- the rewards program now you have 30 days to redeem your free drink for your birthday, big unlock for people. The other one was they wanted the ability to earn and burn faster. So one of the things we put in here is for 60 stars. Now you can get $2 off a drink. That's proving to be highly, highly effective. And then the other thing that we did in here is we recognize people for their loyalty. So now you have a reserve status, a gold status and a green status. And there was an element of like, geez, why am I treated the same way as the person comes once a year versus I come 200 times a year. And I think they had a point. And so what we've seen is those that qualified for reserve or gold, high levels of engagement. They're more engaged with our Starbucks shop, they're also oddly enough, already. It's pretty amazing. If you looked in your app and you slide over in your reserve or in your status, you can see where you are on the journey of maintaining your status or achieving the next status. And we made so many people have already achieved their status again. So it's like it's pretty powerful in that gold and reserve area. And then the other thing that we did too is on the reloadable card. You now get differentiation in stars for how you reload your card. So $50 gets more stars of reloadable $30 and then $25. And so we've seen, as a result, more stored value because people want the rewards to go with it. And then we talked about this earlier, we talked about Cold Foam. We've also introduced this program where once a month, we do Mod Monday, where you can get cold foam or a modification for free. And then what we've seen is that becomes really sticky for people and then that becomes part of their new routines. So we're pretty happy with the rewards program, the way it started. Still early days, but off to a really good start.

Normally, if we were doing this and we're another company, we've talked about the low-income consumer, how you keep them in the game and the fact that you say you're growing across all the income demographic buckets is sort of makes that sort of question moot. But why do you think they're staying in the game, the low-income consumers? And then maybe to the degree that you would recognize that it's not going to maybe get any easier for that side. How do you make sure that stays that way?

Yes. Look, I mean it's clear, like if you -- all the surveys we do, and I think all the surveys you probably do, the low-income consumer is under more stress than they ever have been. And they're going to be more choiceful with the dollars that they choose to spend than they probably ever have been. And so I think this is where our experience and the customization that we provide really is a point of difference that makes them feel good about spending their $10 with Starbucks. And that's -- we're going to have to continue to push to make sure that when they decide to spend $10 with us, they feel like it was a good choice just spending the $10 with us. And I think you run into a -- you're in a difficult situation if it's very transactional because it's very easy to trade out of that transaction. Lot harder to trade out of an experience that you feel was well worth it. And I don't think it gets any easier. That's why I wish we could get these uplifts done even faster. And we're going to have to continue to make sure that our partners are getting the experience where people walk out of that experience saying like, "hey, that was worth it". Regardless of what income level you are, you want people walking away feeling like, yes, that was worth handing over my $10.

I want to talk about competition a little bit and how you view your own strategy when you see that competition. People here in New York, they might see a luck in doing just digital orders in a very small box at cheap prices and they could see a higher priced artisanal brand down the way and then they see in the suburbs, the Dutch Bros of the world. And so they are scared of the increased competition, even though you seem to be coexisting extremely well right now with them. What would you say about what the competition represents to you in terms of opportunities for you and threats?

Look, I think the competition is an endorsement of the category, like I think the only reason why you have more players coming in and more players that are growing is because the category is growing and more people want to experience drinks, and I think in our case, when we do Starbucks correctly, there is no better brand. When we don't do Starbucks correctly, we opened the door to competition. But when we compete correctly, I like our chances of coming out on top. And when you put a drive-through with a cafe just about anywhere, it works. And when we do an in-line cafe with the right seating with the right partner experience, again, that works. So I think we have opportunities, right? It's like the other thing I love about competition is it highlights where maybe you got a little complacent. I think we got complacent in our refresher business. Like the fact that we only have 2 really drinks in our refresher business. Meanwhile, there are whole businesses that basically exist because of the refresher platform, I think it's a wake-up call. And I think it's a wake-up call that says opportunity. Because at the end of the day, I've got the scale and I've got the market share and I've got the brand. So I view it as like stay on your front foot and you need to compete. And we weren't competing. Now we didn't have a small drive-through execution. We didn't have a 0.5 acre execution with the cafe, now we do, and we'll start building it. I think we're a little bit behind on energy and sparkling and blended drinks. We're going to get there on that.

Yes. To some degree, I think when you say the food and the sparkling I hear afternoon, just like with the uplift could help the afternoon. I just wonder from an afternoon daypart opportunity, can you just give us a sense of what that daypart is today? Maybe the TAM, what's the opportunity?

Well, I mean, so I'll put it to you this way. 50% of our business happens before 10:00 a.m. like 65% of our business happens before noon. I want to emphasize like winning the morning is not any less important. Like we have to continue to win the morning and be the premier solution. I actually like what Mike says on this. It's like we're going to be the first coffee shop open in the morning, and we're going to be the first choice for coffee in the morning. And we are going to be the first destination in the morning, like by no means saying that we can create an after new daypart does it mean we take our foot off the gas of winning the morning. With that said, I think there's a real opportunity to create a second peak around the afternoon between like 2 and 5. And I think it can be driven by drinks. And then I think you have -- we've got another tremendous opportunity to put food with those strengths. So ideally, I'd love the afternoon peak to be as powerful as the morning peak. We're always away from that, but I don't see why that can't be the case. And we've got a really strong platform with Matcha. We've got a really strong platform with refreshers. And I think we're going to have a really strong platform with the cafe because it's going to be the third place for where you want to be in the afternoon.

Yes. The one thing I wanted to touch on was that sort of incremental margin date, we would love to see the strong comps and profitability, please, both the combo. So I guess, last quarter, phenomenal comp growth, there were still some North America margin compression. A lot of this is planned. I mean you're obviously still in the labor investment year. But as we kind of cycle past some of those that $0.5 billion that you spent on Green Apron Service. Are we going to see that 60% to 65% incremental margin from that business?

Yes. Look, there's no structural reason that would prevent us from doing that. Now if we don't have growth, it's very hard to do it, right? You got to have consistent comp performance. But assuming we have the consistent comp performance, we're going to have cost discipline. We're going to have a stronger supply chain. And from here, you earn all the additional labor hours. And I wouldn't say I spent $0.5 billion, I would say I invested $0.5 billion into our stores with labor. And I think we're going to see that play out and continue to pay dividends. So by all means, I think I said this from the beginning, it's like, look, we've got to fix basis, get the top line growing, and then we will get the bottom line. I share everybody's desire to get to the margins that we experienced in the past sooner rather than later, but it is a process. And I think the good news is we're ahead of schedule on that process. And I think you can start to see we stay disciplined on the things that matter. We'll get the top line, and we will get the bottom line.

One of the things that I know you've been working hard on is the supply chain side of things, and it kind of goes all in for this the $2 billion savings, which is 1/3 COGS, a 1/3 OpEx and 1/3 G&A. So almost $700 million per area. I guess, on the OpEx side, you just got done spending the incremental labor or investing. Yes. Are there any savings that are going to come -- what are the nature of the savings that come out of the OpEx? Is that some of that coming out of the store side? Or are you really talking more about the supply chain when you're talking about that OpEx savings?

I mean you're going to laugh -- it's a little bit of both. But what I would say is our goal is to flow as much of it as we can to the bottom line. Okay. We talked about it in gross terms, only because we know we can control the gross. I don't know what's going to happen between now and the end of the year that would potentially impact some of the $2 billion of savings. What I will tell you is there's no structural big capital program that we're trying to offset $2 billion of savings with. So -- but I don't know what I don't know. Right now, I'm dealing with some higher fuel prices. A year ago, it was high coffee prices and tariffs. And so I think it's just more prudent to tell you, I know I can control getting the $2 billion. And we have a commitment to get as much of that to the bottom line as possible. We'll see how that plays out over the course of time. And it's going to come in phases. It doesn't all happen at once. But the good news is we've got really great line of sight on it. We've captured, I think, clarity on hundreds of millions of that $2 billion. And we see our path to how you get to the $2 billion over the next, call it, 12 to 18 months.

Labor productivity, you guys did a lot of that at Chipotle. The first step was to invest in labor. But now we have a world of AI, which can be an enabler plus you're going to be refining things with -- as the team kind of gets into a rhythm of how you deploy that labor. So how can we think about that sort of labor productivity upside from here?

Yes. Look, I think you touched on it. One, we're learning better how to deploy and where when you earn the labor, where do we actually put the labor in the stores to capture the most throughput and ultimately the most sales and transactions. But the other thing I will tell you is the good news is as you earn from here, it's not a one-for-one kind of thing, right? It's one of those things where you don't need to add a person because one additional drink went out the door. And by the way, to add a person, that requires a fair amount of transaction growth before that happens. On the other side of this, too, with AI and technology Ideally, what we want is our technology to be invisible to the customer and invisible to the partner. Because at the end of the day, it's going to be a human experience. You're going to have Barista to customer experience. And what you should see with our technology, it's all happening kind of back of house, supply chain, forecasting, management of like the smart queue system of how you sequence tickets, establishing the queue, inventory management. A lot of the tasks that frankly take our partners away from servicing customers is what we want to use AI and tech and robotics to solve for. And there's even opportunities, I think, in the corporate office as well to embrace the technology to be even more efficient and effective. So I think the combination of just being smarter about the business and how we deploy the labor combined with smarter tech to help us do it. And then focusing on the task that, frankly, at the end of the day, take our partners away from servicing the customer is a big, big opportunity.

I know we're coming up towards the end. I just want to make sure I ask something about how you spend capital going forward and unit growth opportunities. And I know some people would find it hard to believe that there is an opportunity to double units, why could that be? And then just double-clicking back on the uplift, what is the uplift, the sales uplift from these uplifts?

So to answer the first part, look, we've got clear line of sight on at least another 5,000 units. And it's not hard to get there when you start looking at the places where we're frankly underpenetrated. And we're really underpenetrated in the middle of the country and call it, Texas up to Virginia, okay? And for whatever reason, I wasn't around for this, we just have had a West Coast East Coast bias and didn't develop enough in the middle of the country. Perfect examples even like Nashville. If you look at Nashville proper, I don't think we have a Starbucks corporate store in Nashville proper. We have a handful of licensed stores inside hotels. But we probably should have at least a dozen Starbucks in that area. And then even when you go out to like a Franklin or some of these other suburbs, and we have like 1 and we should have like 8, okay? Then I think if we're successful in creating the afternoon daypart and changing kind of the 4-wall economics, that just opens the door with the smaller footprint that we can now build right on a half acre or an in-line store for sub-1,000 square feet, there's probably another 5,000 sites that we can add on top of the 5,000 that we've already identified. And that's how you get to 10,000 additional stores in the U.S. And then around the world, I know we don't talk about it a lot, but look, we've got 22,000 stores outside the United States. There's no reason why that can't double. And if you just look at our partnership in China, I think in short order, we're going to go from 8,000 stores to 20,000 stores just in China with our partner there. So there's a lot of sirens to be developed around the world and in the United States. And then to your question about the uplift, part of the reason why we're so excited about going on the uplift is one, all of them are coming in budget or below budget. So we're spending $150,000 or less, and we're seeing a transaction uptick. And that is really exciting because what we were doing before with this remodel program and the Siren program, we're spending a lot of capital for not a whole lot of return. And now I think we're doing the right type of remodel uplift and getting a really exciting return. And so the trick is how can we do it faster? We'll have over 1,000 by the end of this year and then hopefully 2,000 or 3,000 next year. And ideally, by 28, you'll get to 8,000. So by the time you get to '29, you're like, wow, you're through this program.

Yes. Well, thank you very much. Great conversation. Appreciate it. Thanks, everybody.

Yes. Thank you.