How Mobile Ordering Can Impact Starbucks’ Valuation
In its earnings release for Q3 2015, Starbucks (NASDAQ:SBUX) stated that it will deploy its Mobile Order & Pay, which was available in 4,000 stores, to all of its U.S. company operated stores by the holiday season. Mobile Order & Pay allows Starbucks’s customers to order in advance via the app and pick up their order from the chosen location, thus eliminating waiting queues. Payments are made through the Starbucks loyalty card, which creates operational efficiency as it reduces credit card costs. This app can boost Starbucks’ revenues by increasing traffic due to shorter waiting time and improve margins through operational efficiency. There can be a 15% upside to our price estimate if the impact exceeds our expectations, as shown below.
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10% Upside To Price Estimate If Shorter Queues Attract More Customers
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As the Mobile Order & Pay app becomes more popular, its convenience and reduced waiting time will attract more users towards it. This technology frees up more employees towards production and enables faster execution of orders. With more people using technology, Starbucks can see shorter queues and less congested stores which can attract more walk in customers. Further, it can expect an increase in orders from regular customers, given the efficiency and enhanced customer experience. This definitely appears to be a win-win situation for both regulars and new customers. We expect a 40% increase in Starbucks’ number of daily customers in U.S. company operated stores by the end of the forecast period. However, if this increase is 50% (additional 10% increase in customers) it can lead to a 10% upside to our price estimate.
Additional 5% Upside By Margin Improvement Due To Operational Efficiency And Reduced Costs
The Mobile Order & Pay App can lead to improvement in Starbucks’s margins in two ways. Firstly, the payments via this app are through the Starbucks Loyalty card, which would reduce its credit card processing charges. Secondly, the increase in traffic implies high same store sales leading to operating leverage and thus improving margins. We forecast Starbucks’s company operated stores EBITDA margin to remain stable at around 20% during our forecast period. However, if there is a 300 basis points increase in the margin during this period, it can lead to an additional 5% upside to our price estimate.
The initial response to the Mobile Order & Pay app has been positive, resulting in increased customer satisfaction. According to a company spokesperson, 20% of all in-store transactions in the U.S. are through Mobile Order & Pay. The company plans to extend this facility to international markets as well. If it is able to scale this effectively and if its sees rapid user adoption, it could be a very happy holiday season for Starbucks.
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