Mobile ordering is too popular at Starbucks - a digital dilemma

 

Over a weekend in which the wider corporate America outside of the tech sector held its tongue over President Trump’s ban on refugees from Syria, there were some honorable exceptions. Chief amongst them was Starbucks where outgoing CEO Howard Schultz defiantly committed the company to hiring 10,000 refugees over the next five years.

It’s a strategy that will apply worldwide, but will kick off in the US with the focus being on sourcing immigrants "who have served with US troops as interpreters and support personnel,” according to an email from Schultz to all Starbucks employees. He went on to state:

I am hearing the alarm you all are sounding that the civility and human rights we have all taken for granted for so long are under attack.

It's a positive message from a firm whose investment in tech has rendered it as a digital champion in the retail sector. Elsewhere however, Starbucks has problems of its own as Schultz prepares to hand over the CEO hot seat in April and ironically it’s one of its biggest flagship digital initiatives that’s causing it pain.

The firm’s Mobile and Order is proving so popular that the end result is lines in store for drinks collection that are too long and off-putting, both to those who’ve placed their order via a mobile device and to casual in-store consumers.

Schultz’s successor as CEO Kevin Johnson is conscious of the problem he’s inheriting here. Mobile Order & Pay has gone from making up 20% of total transactions at only 13 stores a year ago to nearly 1200 this year - and more to come:

There's significant uptick in the usage of Mobile Order & Pay, to the point where we doubled the number of stores that had more than 20% of their transaction volume coming in at peak. Now, what that creates is, when those orders come in at that volume, it's creating congestion at the handoff plane. When a potential customer might walk in the store, it used to be they would look at the line at the point-of-sale, and if that line looked too long, they might decide not to do a transaction at that time and come back later.

Now when customers walk into the store, we've alleviated the congestion at the point-of-sale line and now we have congestion at the handoff plane. So, they might look at the number of customers around the handoff plane and the number of beverages on the handoff plane, and that might create the signal to them that they are going to wait to do their transaction.

So what that means in real terms is some logistical rethinking in terms of how the offline in-store experience is organised, including giving some barristas mobile-only responsibilities. It’s an ongoing exercise, but an interesting example of a digital disruption to an existing operational model. Schultz says it’s a problem that can be fixed:

We are now laser-focused on fixing this problem, but the nature of it — too much demand — is an operational challenge we have solved before and I can assure you we will solve.

Digital legacy

But as Schultz prepares to step down, he can look back at his early and enthusiastic support for and investment in just such digital disruption with some pride:

Three years ago, I brought to attention what I anticipated would be a seismic evolving shift in consumer behavior resulting from the rapid acceleration of digital and online consumer retail purchase activity.

Today that shift is a foregone conclusion, increasingly challenging brick and mortar retailers of all descriptions and being particularly hard on retailers that are not destinations, do not reward loyalty or offer relative digital and online capabilities, or have not built deep authentic experiential connections to their customers.

He goes so far as to boast:

No brick and mortar retailer of any description is better positioned to navigate and profit from the ongoing consumer shifts under way than Starbucks.

Unlike traditional retailers whose online and digital or omni-channel activity often times comes at a price discount or cannibalizes in-store or both, further pressuring business models, Starbucks do not. Digital or online Starbucks Card loads are never cannibalistic and are very often incremental because the funds can only be redeemed at face value in a Starbucks store.

There are some powerful stats that appear to endorse Schultz’s perception of Starbucks relationship with its customers.

The firm added 1.8 million new Starbucks Reward memebrs in the US alone last year, bringing the total to 13 million, up 16% year-on-year. New card activations and reloads in the past quarter brought in $2.1 billion, up $300 million year-on-year.

For Schultz, the mantra appears to be that there’s no excuse for not being able to manage your relationship with your customers:

As retailers, we want to be in a position where we are in control of the things that we can control. We can't control weather, we can't control the downturn in traffic, but we can control the experience we create, the relationship we have with our customers and our partners.

The thing that I think I'm trying all the time to ask myself…is the ongoing reservoir of trust and relevancy of the Starbucks brand and experience. I think the primary data point is, look how many customers and how many dollars were bought with regard to reloads on existing people's accounts on phones and in gift cards. It's a record number, especially when you look at the backdrop of the retail restaurant sector and the fact that most people had a very poor holiday.

That, to me, is the primary indicator of the health of the brand, the health of the experience and the ongoing relevancy of the company and the confidence we have in what we've stated to-date.

My take

That mobile-driven congestion issue needs to be tackled quickly. Same store sales were down 2%, causing some jitters in the marketplace. But Schultz is correct when he says this is eminently fixable and not a long-term crisis. It might even, if we’re being generous, be argued that it’s a nice problem to have, justifying digital spend over the years.

Schultz can pat himself on the back on having digital vision for the firm at a time when it was able to establish leadership advantage. That digital focus is unlikely to go away under Johnson. It’s worth noting that Starbucks just scored a coup by adding Microsoft CEO Satya Nadella to its board of directors.