Part 1: Will Starbucks’ Stock Fly Higher In 2017 On The Back Of Its Digital Flywheel Strategy?

Starbucks has an iconic brand. People the world over are more likely to flock to a Starbucks store than any other chain to satisfy their coffee cravings, simply because of the brand it has so successfully created for itself. Furthermore, Starbucks ensures the same level of quality everywhere. However, despite being one of the brightest spots in the restaurant industry, Starbucks’ stock price hasn’t done well in the year, moving laterally.

Starbucks Stock Price Over The Last One Year

Worries about saturation levels in the U.S. and increasing strength of the dollar against emerging market currencies is what has contributed towards the Starbucks stock price being weighed down. More recently the news regarding payment of a €30 million or $32 million European Union tax payment wreaked havoc. Although the company said that this was an “errors of assessment” made by the EU, the stock price came down post this news.

In order to quell the worries about its future, Starbucks came out with a five year plan. The news followed the upgradation of Starbucks’ stock by S&P Ratings on expectations that the company’s solid operating performance and financial policy track will continue. In a series of articles we discuss in greater length the key components of this plan.

Digital Flywheel

Starbucks’ digital strategy is termed as Digital Flywheel. The onus of this strategy lies with the incoming CEO Kevin Johnson. It primarily has three components:

• Rewards: It offers customers a star point for every purchase made. This incentivizes customers to keep coming back. Furthermore, the star everywhere program allows for more partnerships, enabling customers to earn Stars at partner stores. Even purchases of consumer packaged goods are eligible for stars.
• Payments and Ordering: Starbucks’ customers are capable of placing and paying for orders using only their cell phones, which reduces labor costs and payment processing fees.
• Personalization: Customers who use the Starbucks app receive personalized offers with the goal of increasing sales and improving the customer’s experience. Starbucks aims to anticipate customer behavior through the analysis of his or her purchase history, preferences, contextual and third party data, in order to driver customer engagement. It has successfully increased personalized email campaign offers from 30 variants a week to more than 400,000 variants per week.

This approach towards orders is expected to increase the company’s average ticket size. The main flaw with Starbucks’ Mobile and Pay system was the lack of displays which led to lower impulse buys and thus lower ticket size. By means of simplifying its digital strategy the company hopes to cover up the difference between digital and in-store purchases. It believes its new reward program to be fairer as it rewards customers on the basis of the amount spent. The company has been helped by this new reward program in two main ways. The program has led to lesser order splitting and higher spend. For those who were worried about Starbucks losing its loyal customers due to this change, the new reward program has resulted in 94% retention (better than before).

As can be seen in the following graphs, the percentage of Starbucks rewards members has more than doubled in the last three years. Furthermore, the number of purchases made without a reward card has consistently gone down.

Some other impressive statistics relating to the digital program are that one in four transactions at Starbucks is through mobile, and transaction costs for reward card holders is one-third of transaction costs of using credit and debit cards. The popularity of the program can be understood by the fact that during the holiday season one in six U.S. adults received a Starbucks gift card as a holiday gift. To spread this popularity outside of the U.S., the company wants to increase the number of stores with access to digital flywheel to 80%, world-over, by the end of 2019. To extend its outreach globally, the company will move to a unified commerce platform, using the cloud. By offering unified localized experiences across licensed and company operated stores, in all its operating regions, Starbucks hopes to elevate the customer experience. While its near term drivers include growing the order conversion rate, increasing the ticket size, and increasing the number of stores with more than 20% of peak transactions, Starbucks’ long-term drivers for the digital strategy are:

• Introduction of curbside in the U.S.
• Introduction of delivery in China
• Introduction of second service
• Mobile Order and Pay for all customers

As a result, the company expects its incremental revenue through this digital strategy to double from the levels seen in 2016 by 2021.

Have more questions on Starbucks? See the links below.

• What Are The Challenges Facing Starbucks And How Can It Overcome Them?
• What Is The Path That Lies Ahead For Starbucks?
• Starbucks’ Continues To Grow In September Quarter, Though Downtrend In Comps Persists
• Starbucks Q4 FY 2016 Earnings Preview: Focus On China To Continue; Reverting Comps To Historical Levels A Priority
• How Is Starbucks Maintaining Its Competitive Edge?
• Why Are We Bullish On Starbucks?
• Why Is China The Center-Piece Of Starbucks’ Growth Story?
• Why Has Starbucks’ Stock Price Stagnated In The Year So Far?
• What Is Starbucks’ Growth Strategy?
• K-Cups, Expansion In China Drive Growth For Starbucks In The June Quarter
• Starbucks Q3 FY 2016 Earnings Preview: Continued Focus On China, Expansion Of The Single-Serve Segment To Drive Results
• Starbucks’ Expansion Plans in China & Digital Channels Drive Growth In Q2 FY 2016
• Starbucks Q2 FY 2016 Earnings Preview: New Developments In China/Asia Pacific Region To Steal The Limelight

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