Starbucks goes 'trenta' on NFTs and Web 3.0 to create the digital third space, but is the timing right?

Stuart Lauchlan Profile picture for user slauchlan May 5, 2022 Audio mode
Summary:
Starbucks hasn't invested where it needed to over the past couple of years and the core business needs attention. So now's the time to go big on NFTs, right?

coffee

Is Starbucks half empty or half full? Listen, Starbucks is completely half full. 

That was the rallying cry from Howard Schultz this week as he made his first high profile appearance as returning CEO (interim) of the coffee giant. He’s been back in the office for around a month, during which time the firm has been embroiled in an ongoing dispute around unionization as well as finding itself under pressure operationally.

Arguing that “love and responsibility brought me back to Starbucks”, Schultz was candid about the situation in which the company finds itself in the Vaccine Economy:

The combination of shifts and customer patterns, accelerating demand and algorithms built for different customer behaviors has placed tremendous strain on our US store partners. Ordinarily, we would have anticipated and invested ahead of the shifts we're seeing, but COVID disruptions interfered with our ability to make the required investments in store design, operations, infrastructure and technology to do so. As a result, we've been unable to meet the relentless demand we're seeing in our US stores as seamlessly as our customers and partners expect and candidly deserve. Simply said, we do not, today, have the adequate capacity to meet the growing demand for Starbucks coffees.

That’s not to say there aren’t some successes to note, particularly on the digital and digitally-enabled parts of the business.

Mobile Order & Pay, now an over $4 billion business, is up 400% in five years, with 20% growth over last year, while the firm’s $500 million delivery business is up 30% year-on-year. Meanwhile the Starbucks Card is signed up to by nearly 120 million people, which the firm is keen to point out is larger on its own than “the entire gift card category”. 

But things are off kilter and something needs to be done. It’s not enough to say that Starbucks is the victim of its own successful, that its popularity exceeds its ability to meet consumer demand. Simply put, there needs to a course correction and that needs to be driven by Starbucks. Schultz insists that the firm is aware of this:

Going forward, we will be making investments in our partners and business to literally catch up on investments we have not made and make further investments to position the company ahead of the coming growth curve. We will also be accelerating our new store growth with 90% of new stores being high-returning drive-thru. Our newest class of drive-thrus will integrate new store designs, technology, including more handheld devices and equipment improvements that will increase efficiency, speed of service, and we believe deliver even greater profitability in the future.

We will then incorporate the new technologies and equipment into our existing stores and provide our people with the tools and resources they need to elevate the Starbucks experience we deliver to our customers and create even more demand in the future. And we'll be making significant investments to extend our digital capabilities and deepen our digital connection to customers and the emotional attachment our customers have to the Starbucks brand. Returns on our digital investments are consistently among the highest returns we generate.

Web 3.0

The digital emphasis is hardly surprising. Starbucks has, until now, had an impressive track record on the digital investment and innovation front, a strategic path set down by Schultz himself and, on the whole, executed impressively by the company’s tech teams. But now comes a whole new phase of that - and it’s proving to be somewhat controversial in places even before it arrives.

Essentially Starbucks is going large on Web 3.0 and NFTs. What’s on the menu is an extension of Starbuck’s long standing mantra of its stores being a third space, somewhere between home and the workplace. Now it’s pitching a digital third space, Starbucks Digital Community Web3. Schultz argues:

I believe Web 3.0 will create an authentic digital third place experience and drive substantial new revenue streams for Starbucks and be accretive to the brand. Our Web 3.0 strategy is a proxy for the greater ambition we have for the company going forward.

Alongside this, Starbucks also plans to get into NFTs, which is where controversy raises its head. Schultz first talked about this aspect last month when he addressed a company town hall meeting, telling employees that looking around at companies, brand and celebrities who are trying to create their own digital NFT businesses, that none of them has the “treasure trove of assets that Starbucks has from collectibles to the entire heritage of the company”.

That may well be the case, but at a time when the unionization row rumbles on and there’s a lot of dissent and unhappiness among staffers about pay rates, pitching a fintech vision might well be open to accusations of seriously not reading the room. Certainly social media was fired up with criticism of the announcement.

This week, Starbucks Chief Marketing Officer Brady Brewer, who will be spearheading this new initiative alongside former company Chief Digital Officer, now special adviser, Adam Brotman, expanded on the plans:

From our beginning, we've nurtured human connection and served a fundamental belief that coffee brings us together. We brought this to life in what we've called the third place, a place between home and work, where you could connect and feel a sense of belonging over coffee. Now we are extending the third place concept of Starbucks into a new kind of community. Emerging technologies associated with Web 3, and specifically NFTs, now enable this aspiration and allow us to extend who Starbucks has always been at our core. We are creating the digital third place.

To achieve this, we will broaden our framework of what it means for people to be a member of the Starbucks community, adding new concepts such as ownership and community-based membership models that we see developing in the Web 3.0 space. We will lead by aligning our initiatives with our sustainability commitments, making deliberate choices to build the community on environmentally sustainable Web 3.0 platforms.

Imagine acquiring a new digital collectible from Starbucks, where that product also serves as your access pass to a global Starbucks community, one with engaging content experiences and collaboration all centered around coffee. This community will further strengthen the Starbucks brand, engage our partners and we expect it to be accretive to our business. Starbucks has the history of taking leading-edge technology and innovation and making it accessible and approachable to the mainstream. You've seen it with our digital experiences, whether it was introducing ability to pay with your phone, mobile order or even access WiFi long ago.

Blockchain

That’s all still pretty vague - the launch of all this isn’t until much later in the year - but it builds on a blog post from Brewer and Brotman in which they go into a bit more detail about the attraction of NFTs to a coffee company:

Web3 refers to many things in the blockchain space, but the particular technology that has captured our imagination is NFTs (non-fungible tokens). Many people see NFTs as a new form of ownership of digital art, often traded in a highly speculative way. While that’s been true on some level in the early days in the space, we are fascinated by how NFTs allow people to own a programmable, brandable digital asset, that also doubles as an access pass.  

We believe NFTs have broad potential to create an expanded, shared-ownership model for loyalty, the offering of unique experiences, community building, storytelling, and customer engagement. And, while doing so also being a source of accretive business that can benefit a number of stakeholders in the process, while creating a new type of digital ecosystem to complement Starbucks current digital platform offering.

We plan to create a series of branded NFT collections, the ownership of which initiates community membership, and allows for access to exclusive experiences and perks. The themes of these collections will be born of Starbucks artistic expressions, both heritage and newly created, as well as through world-class collaborations with other innovators and like-minded brands.  

They go on:

Our approach to blockchain technology – while ultimately likely to be multi-chain or chain agnostic – will certainly start with collections backed by blockchains and infrastructure that is consistent with our multi-decade commitment to sustainability. We plan to take a phased approach here, willing to move fast, experiment, learn and collaborate. We plan to start with our first NFT collection, membership and community later this year, based on coffee art and storytelling. It will come with a host of unique experiences and benefits, worthy of a genesis NFT collection from Starbucks. And this first collection will form the core digital community and backbone against which we hope to build future collections and collaborations – all building on the same new ecosystem. 

My take

In the world we're living in today, our customer base is getting younger, they're digital natives, and they expect Starbucks to be as relevant outside of our stores as we are inside.

That's Schultz's worldview. Actually what customers are really looking for a cup of java of their choice, but the pursuit of modernity for its own sake is something that has driven/distracted - delete as applicable - business people and politicians alike for as long as any of us can remember. There’s nothing inherently wrong in that, of course, and there are plenty of other examples of food and beverage firms flagging up NFTs as a growth area, such as pizza firm Papa John’s and McDonald’s. Why shouldn’t Starbucks want a slice of that action?

But the issue here perhaps one of timing. Schultz himself admits that “the core business of Starbucks is under signifiant pressure”. He’s stepped up to the mark for now, but the firm badly needs to find a full-time replacement who is able to address the underlying issues impacting that core business, including highly vocal employee grievances, and provide the necessary course correction. That’s what Starbucks needs most right now. NFT excellence is a nice to have, not a need to have. Quite how investors will view this interest remains to be seen. 

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