Starbucks Changes Its Reward Program: Will This Increase Spend Per Customer?
Starbucks Corporation (NASDAQ:SBUX) recently announced changes to its loyalty program where consumers will now earn loyalty points or “stars” based on their transaction value as opposed to the current rewards based on number of visits. Through the new loyalty program called “Starbucks Rewards”, which will be implemented from April this year, customers will earn two stars for each dollar spent in Starbucks, as against the current one star per visit. The company stated that this change was a result of customer feedback through its “My Starbucks Idea” program and was the topmost requested change. We believe this change chould reduce operating costs and transaction times as customers would no longer split orders to gain more rewards. Moreover, big ticket spenders stand to gain more from this change and it could also increase the average spend per customer, driving sales for the company.
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According to Starbucks’ management, 1% of its total transactions are from customers “splitting” their order to get two or three stars from a transaction rather than one, which adds to its costs and extends the transaction time. The company now hopes to make its store operations more efficient with the new loyalty program by removing this distraction. As rewards get linked to dollars spent on the store and customers spend more, Starbucks can increase the food purchases from its outlets. While coffee is the major source of revenue for Starbucks, the new reward program could attract customers to purchase their sandwiches and other food itmes at its outlets too, to collect more reward points. According to our estimates, Food, Coffee Bean and Merchandize spend per customer visit at Starbucks will increase gradually from around $2.00 in 2016 to $2.20 by the end of our forecast period. If this number increases to $3.00 by the end of our forecast period, there can be a 10% upside in our price estimate.
Starbucks currently has around 11 million members enrolled in its loyalty program who spend three times as much as non-members and visit more frequently. While linking loyalty points to dollars spend could lead to higher spends and increase the ticket size per transaction at Starbucks leading to store efficiency, the company carries the risk of irking small spenders who visit its outlets more frequently. According to the company management, a vast majority of customers will earn rewards at the same or better rate with the change and a small minority will witness a slower pace of rewards. While the company is confident that the new program will impact most of its customers positively and it has the potential to lure customers to spend more every time they visit Starbucks, whether this change succeeds in increasing sales for the company will be visible in the coming quarters.