Digital tech, not digital ads, is the way ahead says Starbucks CEO

Profile picture for user slauchlan By Stuart Lauchlan July 26, 2015
Starbucks CEO Howard Schultz denies being a digital clairvoyant, but his foresight has positioned the coffee company has a pioneer in digital transformation.

Starbucks App feature better
Mobile Starbucks

Here at diginomica, we’ve long held up Starbucks as a prime example of a company that has used digital transformation to optimum effect.

Late last week, the coffee giant announced its latest set of numbers and once again that digital investment is paying off in spades. Net income for the quarter ended June 28 rose to $626.7 million, from $512.6 million, while revenues rose 18% to $4.88 billion.

CEO Howard Schultz says the firm’s Q3 15:

stands as among the most remarkable quarters in our over 23 years as a public company.

Once again, Schultz can point to an early advantage when it comes to digital exploitation and enhancement of the Starbucks brand:

I was not clairvoyant. The coming change was apparent. Many traditional retailers and consumer brands have responded simply by substantially increasing their digital advertising budgets, significantly driving up their cost of customer acquisition and producing little to show for it. We on the other hand, took a very different approach.

By further enhancing our already world-class digital technologies through the introduction of capabilities like Mobile Order & Pay and soon to be delivery and expanding our loyalty program, we are driving traffic as reflected in the 4% growth in traffic in Q3. Bringing in new customers and deepening our connection to our existing customers, elevating the Starbucks brand and our customer experience and streamlining our in-store operations.

Mobile Order & Pay - where the customer places the order on the way to the store, then pays using their Apple smart device - is something that Schultz highlights as a recent innovation, but one that’s only begun to deliver on its potential. It was trialled at 150 ostores in the Portland area last December and then quickly expanded it to the full 650 store Pacific Northwest region in March. It’s now on offer in 4000 US stores with a target of being available across the entire US by the holiday season.

That gives Schultz the confidence to boast:

The real impact for Mobile Order & Pay and increased convenience remains in the quarters and years to come.
By enabling our customers to order ahead and avoid waiting in line, Mobile Order & Pay is enabling us to capture more on the go customer occasions, and the data is clear.

In those stores where Mobile Order & Pay has been deployed, lines are shorter, service is faster and in-store operations are more efficient. The net result is increased traffic, incrementality that is exceeding expectations, improved throughput and an elevated Starbucks experience for our customers.

On the wider m-commerce stage, mobile payments now represent 20% of all in-store transactions in Starbucks US stores, more than double the figure from only two years ago, with nearly 9 million mobile transactions processed ach week.

The next phase is to add Mobile Order & Pay functionality to the Starbucks Android app in the US, as well as introduce Mobile Order & Pay technology into international markets.

Loyalty boost

The firm is also looking to what Schultz calls “significant expansion” of the company’s My Starbucks Rewards (MSR) loyalty scheme. There are now 10.4 million active MSR members, up 28% from Q3 of 2014, with 6.2 million being Gold members, up 32% from Q3 last year. Schultz says it’s now time to exploit the synergies between MSR and wider digital capabilities:

Our plan all along has been to bring both our MSR membership and our digital capabilities to scale, and we are now there, and so then leverage the Starbucks brand, our deep engagement with customers, our global store footprint and our world leading mobile digital card and loyalty assets to create the foundation of a much broader external mobile digital and loyalty platform. One that would extend to purchases and experiences outside of the four walls of the Starbucks store.

This new digital external platform will enable businesses whose customer demographics are similar to our own and with whom we choose to partner. To purchase stars from Starbucks and then to distribute the stars in order for them to acquire, retain and reward their own customers with the gift of Starbucks. And what's really wonderful about this opportunity is that gift can only be redeemed at a Starbucks store.

Team work

The coffee giant has also begun putting in place digital partnerships to expand the reach of its loyalty program. The first was with Spotify, followed by loyalty points deals with The New York Times and Lyft. These relationships are competitive differentiators, argues Schultz:

What each of these partnerships affords is the opportunity for consumers to earn Starbucks Stars outside of Starbucks stores and then to redeem them for their favorite food and beverages within Starbucks stores, providing a unique opportunity for incrementality, increased profitability and the opportunity for us to serve, connect with and become part of the daily ritual of an even more larger based number of consumers, and adding further momentum to Starbucks unique increasingly global flywheel.

And since each and every Star has significant perceived value to our MSR customers, these digital platform partners will be conferring a meaningful benefit upon their new and existing customers and even their drivers in the case of Lyft.

We strongly believe that no other bricks and mortar retailer has the brand strength, digital and physical assets or connection to consumers to create, build and execute a program anything like this.

There will be more partners to come, he adds:

When we start looking at verticals and like-minded companies, it's very easy for us to integrate our data against the way in which our customers are shopping and spending their free time and spending their money. And as a result of that, we've identified a number of companies in unique verticals that we think sequentially can be part of this external ecosystem.

But Schultz says he is not prepared to be rushed:

I think that we have to walk before we run, and I think we have a core responsibility to demonstrate to the initial partners that in fact, the proposition that we created is going to drive incrementality for them.

I can tell you that the phone has rung with many, many inquiries from both regional and national retailers in all types of business, who are very much interested and intrigued to be part of what it is we're building.

My take

It’s easy to forget that we’re talking about a coffee shop here when you consider the digital leadership on show. Pioneering stuff in so many ways.