Digital? You ain't seen nothing yet, says Starbucks Chief Strategy Officer

No traditional brick-and-mortar retailer is better positioned to navigate and flourish in the global retail industry of today or better positioned to lead in the digital retail world of tomorrow.

It’s a familar enough boast from Starbucks, but one that is going to be repeated with even greater emphasis as the food and beverage retailer steps up its investment and focus on its Digital Flywheel at a time when CEO Kevin Johnson is talking about the need for the firm to be:

opening the aperture of the reach that we can get with the digital mobile relationship… we're going to start by experimenting with things on this guest checkout and some other initiatives that we have on the digital side.

While Starbucks got into digital earlier than many other retail firms, the competitive landscape is shifting and adding fresh pressures to the need for digital agility, says Johnson:

Retailers who are agile and reimagine the art of the possible will be big industry winners. Those who do not will struggle mightily. The evidence is clear that the pace of retail transformation is accelerating with a common theme [of] extending the in-store experiences to include relevant digital scenarios.

It is the driving force behind combinations including Walmart's acquisition of Jet.com, the combination of PetSmart and Chewy.com, and last month's announcement of Amazon's intent to acquire Whole Foods. Each of these combinations demonstrate that pursuit of enhancing the physical retail experience with a relevant and complementary digital experience.

The big thing at Starbucks disposal is its Digital Flywheel, pitched as a great “proprietary asset” based around four key drivers of customer acquisition, spend-based rewards, personalized offers, and convenient ordering.

Chief Strategy Officer Matt Ryan says its vital to grow the “universe of digitally-engaged customers” as even modest increases in active customer numbers takes the company closer to greater long-term value:

The data are clear that when we acquire a new customer, the act of signing up for a digital relationship results in a sudden and sustained lift in spend, as measured by careful pre/post tracking. That's how we're able to drive so much value from a relatively small portion of customers, 13 3 million active reward customers compared to a total of approximately 75 unique customer visits to our stores each month.

The Starbucks Rewards loyalty scheme has been a long-standing tool to be used in this respect and Ryan says the shift to a spend-based program, while initially controversial, has actually resulted in a clear lift in member spend.

That combines with personalization, allowing Starbucks to target specific messages and offers to individual customers based upon their history with the firm, and mobile ordering and payments to increase customer engagement. Ryan says:

We're seeing results from our efforts at personalization that far exceed our own high expectations and recognize the value extending personalization to non-Rewards customers. Our marketing teams are now building the universe of customers that opt into direct communications from us. In the future, you'll hear more about our efforts to grow not just Starbucks Rewards, but the total number of people who engage with us digitally in any fashion, as our personalization engine will help us deepen engagement with customers beyond our core loyalty customers.

Coming up

So what’s next? According to Ryan, it’s “a new generation of digital innovation” that will begin rolling out in waves later this year:

This fundamental modernization of our technology stack will replace legacy rewards and ordering functionality with the new scalable cloud-based platform for rewards and ordering, improved customer data organization, and tighter integration with store-based operating systems, including inventory and production management.

The first phase of the platform rollout will be built around enabling Starbucks to flexibly change and configure rewards programs and become more nimble in creating new benefits for customers. The intention is to create the ability to award exclusive benefits to subsets of our customers, says Ryan:

For example, to customers who sign up for the new co-branded payment products we will be launching in the US with Chase. The first application of the new technology will support the rollout of Starbucks Rewards in Japan this fall, with other markets following thereafter.

The second phase will include new ordering functionality, adds Ryan:

We will still require stored value accounts for customers to receive stars with every purchase, but we'll no longer require customers to use a stored value account to place an order, removing a barrier to expanding usage of Mobile Order & Pay, a service that is highly incremental to our business.

This will result in digital relationships with a new pool of customers who have Starbucks accounts and payment credentials on file, expanding the universe of customers we can target with offers and communications driven by our personalization engine. As a first step, we'll be testing a guest checkout feature for first-time users of the app early in 2018.

Over time, our new technology platform will also flexibly interface with inventory and point-of-sale systems in our company-owned stores and inventory and point of sale systems owned by our licensed partners. This new foundational technology will also enable even more convenient ways for customers to order their beverages and food, providing even more reasons for customers to set up digital relationships with us.

All of this digital activity requires physical transformation in-store, he adds:

New ordering capabilities also means transforming our store operations, and as part of the next generation of technology in our stores, we're adding the Digital Order Manager, or DOM, now present in roughly 1,000 of our busiest Mobile Order & Pay stores. We are also making improvements to our inventory management technology, and in the future, we'll be adding capabilities to enhance customer service, including introducing tools that enable baristas to recognize customers that deserve differentiated treatment, perhaps customers celebrating birthdays or regular customers from one store who show up at a different store.

This is about long-term thinking, concludes Ryan, noting that building lasting digital relationships takes time and focus:

We see ourselves as pioneers and leaders in building digital relationships with customers and have a proven track record of success that is unrivaled in retail. At the same time, we recognize that digital companies are trying to get into traditional retail businesses, like grocery. In our business, where the scale of our physical footprint, our customers' relationships with our partners, and the third-place experience we deliver are so critical, we have an inherent advantage that digital companies will struggle to replicate.

We're not complacent and recognize that digital relationships will increasingly be the key drivers of demand generation, even in physical stores. By leading in the combination of physical and digital, we not only drive superior business results in the short term, based on rewards, ordering, and personalization, but we also make it very challenging for digital companies to outmaneuver us in the physical world.

While digital companies may win in other sectors, we will be the digital company that wins in ours. The current digital trajectory we have demonstrated is proof that we are winning today and will continue to extend our lead into the future.

My take

Long-term planning to build on early adopter digital foundations. Starbucks remains a digital retail exemplar.