Brewing resilience - how early digital vision is paying off for Starbucks

Profile picture for user slauchlan By Stuart Lauchlan July 29, 2020
Summary:
Starbucks made savvy early digital investments that paid off when the pandemic ground up long term planning.

coffee beans

Customers are seeking safe, familiar and convenient experiences in many aspects of their lives. In that regard, our digital assets have proven to be a competitive advantage.

If any company was going to benefit from prior digital investment to build resilience during the COVID-19 crisis, it was likely to be Starbucks. As diginomica has tracked over many years, the coffee giant’s hardwired digital DNA has delivered leadership when rivals have been left to play catch-up. In that light, CEO Kevin Johnson is perhaps entitled to more than a hint of ‘we told you so’ when he talks about:

our multi-year strategy, which has been further validated by the unfortunate dynamics created by COVID-19… in response to clear shifts in consumer behavior and preferences, we are now accelerating strategic initiatives for the future and positioning Starbucks for continued, long-term growth. We have moved aggressively…to accommodate trends that we have long seen emerging in our business that were only exacerbated by COVID-19.

Of course, like everyone else, Starbucks has had to respond to global events beyond its control - and certainly beyond anything that was actually in the 2020 section of that multi-year plan. In April the firm shuttered its stores, with the exception of drive-thru operations, but this, according to Johnson, validated the company’s belief in its own customer engagement levels: 

During that period, we had significant demand through the drive-thru. It was quite amazing. The lines and the amount of time the customer wait in line in drive-thru to get their Starbucks. And so that was the first indication that there is a very powerful customer affinity to Starbucks, even in a global pandemic. 

Stores in the US began to re-open in May, offering mobile ordering - an early Starbucks gambit that has proved a winner despite early hiccups - and contactless collection, such as  entryway and curbside pick-up. Safety is the primary requirement from customers, says Johnson, and has fuelled a substantial uptick in app downloads: 

That is the safest way to order. You order on your phone and then you can pick it up contactless or you can get it for delivery.  We quickly figured out, if we launch curbside, we’re going to get more customers. If we put handheld point-of-sale at the drive-thru lines, we get drive-thru. When we open our stores for to-go orders or even limited seating, we see customers come back….Through a combination of new store operating protocols and service channels, we were able to amplify a number of contactless experiences for our customers.

Consumer change

The digital stats behind all this are impressive. Some 3 million new users downloaded the Starbucks App and signed up for the Rewards loyalty program since April, up 17% on the first three months of the year before the COVID crisis hit home in the US. Over the same period, 90% of sales were executed via a combination of drive-thru and mobile order-and-pay, with mobile order usage alone now accounting for 22% of total transactions.

But consumer behavior has been impacted by lockdowns, most notably in the weekday mornings where the early morning coffee run has slipped back by several hours, while out of town and suburban drive thrus have displaced outlets in city centers. Balancing that out though is an increase in the size of orders as people do a Starbucks run to collect for a wider group. 

The challenge now is for Starbucks to adapt to the new reality of consumer demand and that means new or accelerated digitally-enabled solutions. Johnson points to a number of these: 

We are introducing a simple handheld device to further increase throughput and improve the customer experience. And we are introducing a new curbside pickup experience that will be available in 700 to 1,000 locations by the end of this quarter, which enables incremental customer business.

In urban core markets where drive-throughs and curbside aren’t feasible, we will begin to reposition our store formats to create a blend of traditional Starbucks stores with new Starbucks Pickup stores. These stores are built in a smaller footprint and create a familiar and convenient walk-through experience that is very relevant to customers in urban markets. Each of these Starbucks Pickup stores will ideally be located within a three-minute to five-minute walk from a traditional Starbucks store, giving customers the flexibility to enjoy their beverage in our store or on-the-go. We plan to accelerate the development of over 50 of these stores over the next 12 months to 18 months with a view to have several hundred in the US over the next three years to five years. 

And as part of the ongoing digital engagement strategy, there will be a new pay-as-you-go option for Starbucks Rewards members in North America. Chief Operating Officer Roz Brewer explains: 

That will allow us to expand payment options and ways to earn stars. This we believe will provide meaningful impact on our business results overall [and help] us understand the activity of the customer as we reward the loyalty and delivering personalized offers to the expanded customer base. So starting this Fall in US and Canada, you’ll be able to download the Starbucks App and sign-up for Starbucks Rewards. You’ll be able to pay with a credit or debit card, cash or select a mobile wallet to earn the stars without having to pre-load a Starbucks card within the app. And so customers can link those card payments to the PayPal account.  

We believe these are the kinds of initiatives that will make a difference as we try to regain the most important parts of our business and watch what happens as the transition from work from home returns back to work from office, and we’ll be watching the customer patterns very carefully and adjusting.

And adjusting is going to be a key word for the foreseeable future. While there has been a reopening of various states, COVID-19 spread is accelerating in large tranches of the US and the prospect of fresh lockdowns cannot be ruled out. Johnson says that Starbucks has learned a lot here from experience in China in terms of how to respond with agility to changing circumstances in the event of localized resurgences: 

When it happens like that, we’re able to sort of turn the dial back slightly on the range of customers’ experiences we serve…As a company, we’ve now taken this playbook that was developed in China and adapted for the US and we basically have embedded it into our store protocols and our operating procedures. So if there happens to be a flare-up in a certain city or a certain portion of a market, the stores in that market have the agility to basically turn the dial down if they need to or turn it back up if things are recovering.

My take 

Starbucks can scarcely be said to have emerged from the past few months unscathed - revenues are down 38% for the most recent quarter! - but in relative terms, it’s ‘had a good war’ so far. Johnson boasts: 

When I look at the data, our customer connection scores are at an all-time high. Part of that is, I believe, the way that we’ve navigated this has built trust. It’s built trust in our Starbucks partners that we’re always going to do the right thing. We put people ahead of profit, whether it was providing economic certainty for our partners or ensuring that our customers had safe ways to interact with us. I think that deposit in the reservoir of trust is building and strengthening customer affinity.

Obviously, the deployment of mobile reach is building more customers that become sticky. They build that relationship with Starbucks, we can communicate with them, we can serve their needs, we can personalize that experience for them. And then the investments we're making to make it easier for customers to have those experience is just is continuing to unfold.

It’s certainly been an impressive response and one that’s once again affirmed the clear benefit in corporate resilience terms of having done the digital spadework early on. It’s to be hoped however that Johnson is proven correct when he states: 

This is not a crisis any longer in my opinion. We are navigating a global pandemic, but we know exactly how to do it. That’s woven into the fabric of how we operate.