Starbucks' Digital Strategy Growing Sales and Loyalty

Starbucks Corp.'s digital strategy is driving sales and there's likely more to come as the coffee company rolls out real-time personalization and other initiatives tied to its successful loyalty rewards program and mobile app.

The company reports global comparable store sales increased 6% in its second quarter 2016, comprised of a 4% increase in ticket and 2% increase in traffic. Starbucks invested between $275-300 million in fiscal 2016 in its partner and digital initiatives globally and says the benefits and the returns from these investments are becoming increasingly apparent.

One area the company has been focusing on is its My Starbucks Rewards (MSR) loyalty program. Starbucks grew its MSR loyalty program 8% by adding 900,000 new members in Q2 and now has over 12 million active MSR members in the U.S. Last week alone the company added more than 280,000 new Rewards members.

Starbucks made changes to its loyalty program this month, basing rewards earned on how much a customer spends instead of just how many times they visit, which Howard S. Schultz, Chairman & CEO, said will "reward both customer frequency and overall spend, resulting in increased rewards for our best customers at the same time as it enhances in-store efficiency, speed of service and our customer experience overall."

"Loyalty remains the cornerstone of our digital flywheel," said Kevin R. Johnson, President, COO & Director.

Besides bringing in new customers, the program changes address an operational challenge. Under the old program, Starbucks said customers would ask baristas to ring up each item individually in order to get multiple stars, a time-consuming process that created additional work for employees, slowed service and lengthened lines.

"By completely eliminating any incentive to order split, we will improve in-store operations and efficiency and increase line speed," said Johnson.

As a result of the changes to the program, Starbucks anticipates a shift of about one point of comp between transaction and ticket.

Starbucks also released a new version of its mobile app this April, which over 86% of Starbucks' iPhone customers and 79% of its Android customers have already upgraded to. There are now almost 19 million users of the mobile app in the U.S.

The new version of the app added the option for members to redeem rewards and offers through the company's Mobile Order & Pay platform. Mobile payment represented 24% of total U.S. tender in Q2. Mobile Order & Pay transactions represented approximately 4% of total transactions in the quarter, which was a 40% increase sequentially.

"We are just beginning to see the full benefit of Mobile Order & Pay beyond the speed and convenience it affords to both our customers and partners," said Johnson. "Consider this: though still in its infancy, in 300 of our busiest urban stores, Mobile Order & Pay represents over 10% of transactions. And in those same stores at peak, Mobile Order & Pay represents nearly 20% of transactions. In Portland, where we first introduced Mobile Order & Pay in December of 2014, Mobile Order & Pay transaction volume in March was up approximately 150% from March of last year."

The new Starbucks Rewards program and Starbucks mobile app position the company for two initiatives that will unfold later this year. Through a partnership with JPMorgan Chase and Visa, a new Starbucks general purpose prepaid Visa card will enable Starbucks Reward customers to earn "Stars Everywhere" Visa is accepted. Stars earned can only be redeemed at Starbucks.

The second initiative evolves Starbucks' work to enable real-time personalization. One factor in the success of the company's rewards program has been the targeted offers made to customers via e-mail. Since launching the targeted offer program in 2013, the company has been providing ways for customers to earn extra stars for purchasing certain items or making additional stops at stores. According to Johnson, existing technology had constrained Starbucks ability to laser target, respond in the moment, and vary digital content based on what the company knows to be an individual customer's preferences and behaviors.

"All that is changing as we begin to introduce true real-time personalization across our entire digital ecosystem."
Starbucks can now send targeted communications to individual customers based on specific tastes and interests.

"Over time, we will expand this capability to a more robust mobile app centric model that enables us at the very moment a customer orders to provide relevant suggestions and recommendations and, when appropriate, incentivized offers to delight our customers," followed Johnson. "As you can see, we are managing a significant number of accretive changes related to loyalty, digital and Stars Everywhere."
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