A survivor's guide to omni-channel retail disruption from Starbucks management

Stuart Lauchlan Profile picture for user slauchlan May 1, 2017
Starbucks was a early starter when it came to recognising the need to adapt to the oncoming digital disruption of retail. CEO Kevin Johnson and Chairman Howard Schultz have some tips for those now struggling with the same issue.

Johnson and Schultz

There was a starting statistic in a recent Wall Street Journal article that pointed out that more retail stores closed down in the first three months of 2017 than in the whole of 2016. To add an extra dose of pain to that, more US retail stores are expected to close before the end of 2017 than have since the financial crisis of 2008.

It was a telling article, says Kevin Johnson, the new CEO of coffee behemoth Starbucks:

The article illuminated once again the seismic shift in consumer behavior underway and the devastating impact that this sea change in behavior is having on many traditional brick-and-mortar retailers.

This raises a critical question for all such firms, he adds:

What are the critical, transformative components required to propel a brick-and-mortar retailer into the future…what it's going to take for a brick and mortar retailer to survive in the future, and to explain how in the face of tremendous retail headwinds and cross currents underway?

These are questions that Starbucks has addressed to such an extent that Johnson feels that he has “a clear perspective on the answers” which he can share with the rest of the retail sector:

The critical transformative components required for any brick and mortar retailer to survive, let alone succeed in the future are an engaging, digital and mobile relationship with customers that is threaded into a branded, immersive, experiential retail destination.

The attributes of the destination will vary. They may include theater, intrigue, or romance. But the common denominator will be the creation of a consumer experience that evokes human emotion and connection. I firmly believe that these are the ingredients that will determine which brick and mortar retailers thrive in the future, and which become victims of the current trend.

The retail sector shouldn’t assume that its plight is somehow unique, argues Johnson. There are lessons to be learned from other markets:

The analogy from my years in the tech industry is how companies respond when a new disruptive technology, like cloud computing, for example, emerges. Those who recognize the disruption think long term and innovate for the future are the big winners. Those who don't, struggle. The retail industry is going through a period of similar profound disruption right before our eyes.

Early starter

Starbuck’s reaction to all this was heavily influenced by Johnson’s predecessor as CEO, Howard Schultz, now the firm’s Chairman. It was Schultz who recognized the need to rethink the business model to focus on digital relationships with customers, and branded experiential retail that are customer destinations:

We anticipated and we saw very early on that there was going to be a very, very significant disruptive, almost cataclysmic, change in the landscape of physical retailers. The number of store closures, consolidations, we're in the nascent stage of that - and there are going to be many, many losers.

Schultz believes that he can idenitify chartacteristics of such losers and, in contrast, the sort of firms that will emerge as winners. One element of this is striking the right omni-channel balance between online and offline presence, a balance that has been a topic of discussion across the entire retail sector in recent months:

Every retailer that is going to win in this new environment must become an experiential destination. Your products and services for the most part cannot just be available online and cannot just be available on Amazon.

You have to believe that in order to win and win big, domestically and globally, in this new environment, that a company's capability and competency as a four-wall bricks and mortar retailer must be as good digitally and on mobile in all things that make the brand as relevant outside of the store and on a mobile device as it is inside the four walls of the store.

We had a leadership position in our loyalty program in mobile payment, in Mobile Order & Pay, and, given what is in the pipeline in terms of the investments we're going to make over the long term, our ability to toggle back and forth between the physical and the digital world is only going to make our four walls retail business stronger in the future.

Mobile Order and Pay is a big deal for Starbucks, despite the problems that resulted as a side effect when bottlenecks in fulfilment of orders in store built up alarmingly. That said, 20% of of peak time transactions at Starbucks 1800 busiest stores in the US are being executed via Mobile Order and Pay.

The glitches that occured are being addressed successfully, says Johnson:

Steps we have taken since the beginning of the calendar year to increase throughput have enabled to us to better and more efficiently handle increased demand from both Mobile Order & Pay and non-Mobile Order & Pay customers at peak. We are maintaining sharp focus on further increasing throughput. Our action plan includes three ways to unlock growth in all day-parts, and particularly at peak.

This three point plan is:

  • Wave One - additional training and reallocation of staff roles to Mobile Order & Pay during peak, testing of additional labor at peak in select stores, implementation of new approaches to order consolidation at the hand-off plane, and new tools and processes to support beverage and food production.
  • Wave Two - the introduction of a new Digital Order Manager. This is a tablet-based device that provides baristas with visibility on all incoming orders and enables better tracking and real-time order production management. It also enables a digital notification to a customer's mobile app when their order is ready, reducing congestion at the hand-off plane.
  • Wave Three - sharpening focus on the selection and addition of in-store equipment and pursuing improvements in overall store layout and design, all with the goal of delivering a great customer experience and further increasing throughput.

Wave One is complete, says Johnson, while Wave Two is now underway, with DOM technology being rolled out to the highest volume stores. But there’s more to DOM than just congestion management, he adds:

As we deploy this high value, low cost technology across our store portfolio, we will create an extremely valuable source of new data insight around operations and customer experience. Data that will enable us to further optimize store operations, increase throughput, and elevate our customer experience.Looking to the future, this is all about how our digital relationships with customers intersect with experiential retail in our stores.

My take

Starbucks as retail sector digital exemplar has been a consistent theme at diginomica and it’s clear that Johnson’s priorities aren’t that different to Schultz’s, so there’s no reason to assume that won’t continue to be the case. Again, I find it interesting how the offline component of omni-channel strategies has risen up the agenda. The days of ‘stick everything online and that’ll work’ are well behind us.

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