Brian Niccol's AI Bet at Starbucks Just Failed. Is the Turnaround Still on Track?

Starbucks' (NASDAQ: SBUX) new CEO, Brian Niccol, has put together a comprehensive strategy to turn around the business. That includes increasing personalization in stores by writing notes on cups and serving drinks in mugs to customers who are staying in stores.

Niccol is aiming to reclaim the concept of a "third place" for Starbucks, and he's invested in labor to alleviate chokepoints in service like mobile order and pay, and reduce barista stress. One of his tactics for driving change in the business was investing in AI, specifically an inventory management technology that could track inventory, freeing up baristas to focus on customer service instead of counting boxes.

However, that initiative seems to have missed the mark. According to a report in Reuters, Starbucks is retiring Automated Counting, as the technology was known. The technology frequently miscounted and mislabeled items, for example, confusing similar milk types. Overall, the technology seemed like a good idea, but the execution did not live up to expectations.

Image source: Starbucks.

Is the turnaround in trouble?

While the move from automated inventory counting may be a setback for Starbucks, it seems to be more of an indictment of the maker of the technology, NomadGo, rather than Starbucks itself.

After all, every turnaround requires experimentation, and not every initiative Niccol rolls out is expected to pay off. Given the fact that it didn't seem to be working, pulling the plug was likely the right move. Store-based employees apparently cheered the changes, a sign that getting rid of it was the right move.

As far as the overall turnaround, Niccol's efforts appear to be paying off. Comparable sales jumped 6.2% in its most recent quarter with growth in all of its regions, including China. It also returned to margin growth, a clear sign that the Back to Starbucks program, as Niccol has dubbed the turnaround program, is paying off. Niccol said that the quarter marked the turn in the company's turnaround, though the company still has work to do to get back to its previous peak earnings level.

Restaurants are a human-driven business

Starbucks' experience with Automated Counting is a reminder that, despite the influx of technology in the restaurant industry, it remains a human-first business.

Sweetgreen recently sold off Spyce, the unit that owned the Infinite Kitchen, another automation tool that seemed to be billed as a savior, but wasn't. Sweetgreen still retains the rights to use the technology, but it wasn't the transformative innovation that investors hoped it would be.

Similarly, Starbucks' improvements in Niccol's turnaround have come from investing in the human touch and taking better care of customers.

Starbucks continues to employ technology where it makes sense, such as the mobile order & pay platform, and smart queue, an algorithm that sequences drink orders to minimize wait times, though customer service remains central to its success.

Rather than pursue full automation, Starbucks is moving to using technology to support its brand mission, and that seems to be paying off.

Jeremy Bowman has positions in Starbucks and Sweetgreen. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Sweetgreen. The Motley Fool has a disclosure policy.