Digital disruption done right - the Starbucks way

Stuart Lauchlan Profile picture for user slauchlan May 27, 2015
Seeing round corners is useful if you want to make innovation part of the corporate DNA, according to Starbucks CEO Howard Schultz.

howard schultz
Innovation by Schultz

If we embrace the status quo as an operating business principle, we are heading on a death march.

That’s an underlying principle for Starbucks CEO Howard Schultz, a man we’ve written a fair bit about here on diginomica as a digital leader who’s using technology both to disrupt his industry and grow his bottom line.

Schultz this week was speaking at the Bernstein Thirty-First Annual Strategic Decisions 2015 conference on Wall Street, where he offered some insight into the Starbucks operating model and how it works, with the pursuit of innovation as a key theme.

Schultz is all too aware that there’s a constant need to keep growing. There are plenty more coffee shops out there. He said:

We have to recognize that as good as we’ve been and as strong as our business is, it is very fragile and it’s not an entitlement. We have to earn it and earn it every day.

One of the ways in which we’re going to overcome these challenges, that are coming as a result of consumer changes, is innovative ways in which we can exceed the expectations of our customers. We are doing everything we can to create the kind of innovation that is customer-facing and really I think differentiates us from everybody else.

An ability to see around corners is a useful skill, he argued, citing that he had set Starbucks on a new course over two years ago on the basis that he saw “a seismic change in consumer behavior” that would disrupt every bricks-and-mortar retail business.

As lines in the mall got shorter, there would be a need to drive new forms of traffic. Being ahead of the game was going to be critical, he added:

Way before we talked about that publicly, we were anticipating and beginning to see it. We have to drive innovation at all levels of the company - product innovation, store innovation, new concept innovation, all kinds of things.

Mobile manoeuvring

Exploitation of mobile technology is a good case in point, he argued. Two years ago, Starbucks began to install the equipment necessary to enable mobile payment in-store. Today, 19% of all transactions occur via mobile payment.

While that’s impressive growth, Schultz cautioned about the dangers of investing in new tech just for the sake of it. It has to have a bottom line impact or it’s not worth the spend:

I don't think there is a company in the world that’s doing a million mobile payments a week and we are approaching 20 million mobile payments a week. Those numbers don't mean anything unless you can really demonstrate that it is having an incremental effect on your business.

I can guarantee you that it is. We cracked a code on integrating mobile payment, mobile transactions with a very interesting and relevant rewards program which is embedded in everyone's phone, which internally we call Stars as Currency.

Starbucks App feature better
Mobile Starbucks

Stars as Currency is an idea that came about as a result of wanting to disrupt the established and commoditized approach to loyalty programs, he explained:

Stars as Currency came to life as a result of the fact that we wanted to create a loyalty program that had real relevancy to our customers. We used Mileage Plus and those things as a commodity based thing and we said, ‘We don’t want to create something that is commodity-skewed; we want to create something that has real value.’

That’s value to the customer and to the company:

Those Stars and the rewards of those Stars have created a level of relevancy and stickiness and incrementality that we can measure very distinctly that is driving our business.

We believed that once we got to scale that Stars as Currency would have as much relevancy outside of the ecosystem of Starbucks that it has internally.

What I specifically mean by that is that we could demonstrate to a prospective partner that if in fact you rewarded your respective customers with Stars, that your business would probably go up. If you were in the subscription business you would have less churn and you would get more customers.

Where this theory is seen in action is the recent tie-up with music-streaming firm Spotify, which has become the first external participant in what Schultz sees as a Stars as Currency ecosystem:

Spotify will be buying Stars as Currency at a wholesale level, which will provide Starbucks with a new source of revenue, not the kind of source of revenue that's going to move the needle, but a new source of revenue.

Those Stars will be rewarded to existing customers, but the big idea is they will be an incentive for new subscribers to sign up and receive Stars as rewards. The incrementality will come as a result of the fact that the only place in the world that you can redeem those Stars is at Starbucks.

Incremental thinking

The focus on incremental growth also underpins the Mobile Order and Pay initiative, now live in 650 stores in Portland and Seattle, but heading for US nationwide deployment by year end. What interests Schultz here is the potential for growth given that those two markets are not seen as the prime targets for this push:

Unlike New York or Chicago or LA, those markets do not have the density in which Mobile Order & Pay would really be a primary vehicle of satisfying the need of our customers.

So, our own research strongly suggests that Mobile Order & Pay is going to be much more relevant and much more incremental than it even has been in markets that we are now in.

We have our own internal metric of what Mobile Order & Pay will do. We are exceeding it. It clearly will be an incremental driver of traffic, of throughput and speed of service, and fun for the customers.

Others have spotted the potential here, he admitted, but added:

Without criticizing I would just say that, in many cases, they are bolting that on to a system that is not integrated into the foundational IT of the company.

The beauty of Mobile Order & Pay is it sits on the IT stack foundation-ally. So, all of this is seamless for the customer.

Kevin Johnson - COO Starbucks
Kevin Johnson, COO Starbucks

Delivering that seamless IT foundation is now the responsibility of Kevin Johnson, recruited from the tech industry (Microsoft and Juniper) as Chief Operating Officer. Schultz paid tribute to his skills:

What he is bringing to the company is something important and that is whatever business we are in, everyone in this room has to recognize that technology is driving how our customers and consumers respond to what we are doing. He is bringing a level of insight and perspective to IT and technology that we’ve never had before.

Above all else, I think we are a value based company and culture. He understands the guiding principles and values of our business. He is a people person and is a great leader.

This is important, said Schultz, because Starbucks digital innovation needs to come from multiple sources:

The innovation of Starbucks is not one person, it’s not one group. The entrepreneurial DNA of the company, despite being in business over 40 years, is embedded and imprinted in who we are and what we do.

My take

Once again, I have to point to Starbucks as a great example of how digital disruption can be harnessed and exploited for both bottom line gain and an enhanced customer experience. A text book to learn from for other companies across multiple sectors.

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