How Starbucks Is Using Artificial Intelligence and IoT

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How Starbucks Is Using Artificial Intelligence and IoT

By Jamie Grill-Goodman - 10/31/2019

Starbucks is “dialing up” its artificial intelligence (AI) investments, according to its CEO Kevin Johnson, and the investment may be helping.

The coffee retailer had a solid fourth quarter 2019, modestly beating analysts’ expectations and sending Starbucks’ shares up 3%. Starbucks posted a 6% rise in U.S. comparable store sales, driven by a 3% increase in average ticket and comparable transactions, which marks its best performance in the U.S. in more than two years, Johnson noted on the company’s earnings call.

Its U.S. Starbucks Rewards loyalty program also grew to 17.6 million active members at the end of the fourth quarter, a year-over-year increase of 15%.

“This is an important growth driver because we know from experience, that when customers join Starbucks Rewards their spend level with Starbucks increases meaningfully,” said Johnson.

Johnson pointed to AI investments as an important element of Starbucks' digital strategy and work to grow digital customer relationships. Over the past year Starbucks has been “dialing up” its in-house capabilities and investments in AI through its “Deep Brew” initiative.

“Deep Brew will increasingly power our personalization engine, optimize store labor allocations, and drive inventory management in our stores,” noted Johnson. “We plan to leverage Deep Brew in ways that free up our partners, so that they can spend more time connecting with customers. Deep Brew is a key differentiator for the future.”

Starbucks' Q4 2019

  • Americas and U.S. comparable store sales up 6%, both driven by a 3% increase in average ticket and a 3% increase in comparable transactions
  • International comparable store sales up 3%, driven by a 3% increase in average ticket and a 1% increase in transactions; China comparable store sales increased 5%, with comparable transactions up 2%
  • The company opened 630 net new stores in Q4, yielding 31,256 stores at the end of the quarter, a 7% increase over the prior year
  • Consolidated net revenues of $6.7 billion grew 7% over the prior year
  • The company returned $2.7 billion to shareholders through a combination of share repurchases and dividends
  • Starbucks Rewards loyalty program grew to 17.6 million active members in the U.S., up 15% year-over-year

One way Starbucks is utilizing AI is through its Mastrena espresso machines, which the retailer is currently adding across its U.S. fleet with expectations to finish in the next 12 months, as well as internationally.

The machines have Internet of Things sensors built into them, meaning Starbucks gleans telemetry data from them that goes into its support center.

“We can see every shot of espresso that's being pulled and we can see centrally if there is a machine that's out there that needs tuning or maintenance,” explained Johnson.

With Starbucks’ Deep Brew capabilities and predictive analytics, Johnson said the company is “going to be able to determine if a machine needs preventative maintenance on it before it breaks.”

COO Roz Brewer anoted Starbucks has significant work in progress around inventory routines and automation, the food prep test, and backroom optimization, all of which are fueling the work around machine learning and its applications to fuel Deep Brew.

“We are making meaningful progress against our strategic priorities while streamlining the company, bringing more focus and discipline to everything we do," noted Johnson in a press release. "The investments we are making for the long term—in our partners, our stores, beverage innovation and digital—are collectively delivering an elevated Starbucks Experience, as evidenced by all-time-high customer connection scores in the fourth quarter."

Moving forward, Starbucks expects capital expenditures in fiscal 2020 to be $1.8 billion, roughly flat to fiscal 2019. Over 80% of the spending will be allocated to new stores and strategic store-related initiatives, including renovations of existing locations, and where it sees significant return opportunities within the Starbucks retail portfolio.