If the most recent Starbucks investor call was any indication, technology and digital initiatives are becoming a huge priority for the coffee giant.
Starbucks executives spent a large chunk of the post-earnings call talking about the company’s investment in new technology and said the word “digital” more than 70 times.
“No traditional brick-and-mortar retailer is better positioned to navigate and flourish in the global retail industry of today or better positioned to lead in the digital retail world of tomorrow,” Starbucks CEO Kevin Johnson said. “And we will do so with speed, agility, and a focus on creating long-term shareholder value.”
Starbucks has long touted its “digital flywheel,” which includes everything from its rewards program, which represented 36 percent of the company’s U.S. revenues last quarter, to its mobile order-ahead feature, which accounted for 9 percent of transactions last quarter and is now causing less congestion at stores after initial hiccups.
“Our digital flywheel is a powerful proprietary asset that is driving deep customer engagement, revenue, and profit growth around the world,” Johnson noted.
But now it seems the company is placing even more emphasis on using technology to get its current customers to spend more with Starbucks, as well as to acquire new ones, too.
“Today, we are enabling a new generation of digital innovation that will begin rolling out in waves starting this fall,” Starbucks Chief Strategy Officer Matt Ryan said. “This fundamental modernization of our technology stack will replace legacy rewards and ordering functionality with the new scalable cloud-based platform for rewards and ordering, improved customer data organization, and tighter integration with store-based operating systems, including inventory and production management.”
Part of that rollout includes allowing Starbucks to flexibly change its rewards program to create new benefits for customers. Early next year, the company will also allow non-Rewards members to place an order via the Starbucks app — that includes folks who want to use the mobile order-ahead feature. Starbucks counts 13.3 million active reward customers, up 8 percent year-over-year, compared to 75 million unique monthly customer visits overall.
Ryan said expanding app features to non-rewards members will help Starbucks can target more customers with its artificial intelligence-fueled personalization engine.
“In the future, you’ll hear more about our efforts to grow not just Starbucks Rewards, but the total number of people who engage with us digitally in any fashion, as our personalization engine will help us deepen engagement with customers beyond our core loyalty customers,” he noted.
Personalization also includes tools to let baristas “recognize customers that deserve differentiated treatment, perhaps customers celebrating birthdays or regular customers from one store who show up at a different store,” Ryan added.
Starbucks Chairman Howard Schultz also touched on personalization.
“I think you’re going to see us play up customization at a higher level as we enter fiscal 2018, because we’ve always known how important that is, but it’s becoming more and more important with this millennial consumer,” he noted.
One related topic that came up several times was Amazon’s pending $13.7 billion deal to acquire Whole Foods.
“The evidence is clear that the pace of retail transformation is accelerating with a common theme: extending the in-store experiences to include relevant digital scenarios,” said Johnson, a long-time tech executive who became CEO earlier this year. “It is the driving force behind combinations including Walmart’s acquisition of Jet.com, the combination of PetSmart and Chewy.com, and last month’s announcement of Amazon’s intent to acquire Whole Foods. Each of these combinations demonstrate that pursuit of enhancing the physical retail experience with a relevant and complementary digital experience.”
Starbucks sits in a unique position in the ever-changing retail world, as it has a huge physical retail footprint — 27,000 stores in 75 countries serving roughly 90 million customer visits each week — with a robust digital platform.
Schultz, who stepped down as CEO but remains actively involved with the company, said that “we’re in the nascent stage of these kinds of commercial relationships that are going to elevate the experience of a brick-and-mortar retail company.” He hinted that Starbucks could partner with another tech company, much like it has done with Tencent in China, which has resulted in 2 million social gift transactions in six months.
“Starbucks is probably best positioned, given our national footprint, the demography of our customers, and where we’re located to have those kinds of conversations,” Schultz noted. “I think it would be premature to kind of get into who they are, but clearly, we are a very viable partner, given the change in the industry.”
Here’s more insight from Schultz on combining digital platform with physical retail, and why Starbucks has certain advantages:
“So, the other thing I’d say is when you asked the question, a lot of the answer is based on the fact that bricks-and-mortar retailers are in need of a pure-play digital partner. But what we’re also seeing in these discussions is that the digital companies and tech companies realize more than ever that there’s going to be one customer interface, and that interface is as important to a tech company to have a brick-and-mortar relationship as it is for a brick-and-mortar relationship company to have a digital relationship.
And so, once again, I think you’re going to see lots of these kinds of things take place, as well as what I’ve been saying for the last few years, and that is, a level of consolidation and store closures, which we’ve all seen. But Starbucks, despite the cyclical issue of the macro environment, we are in the mix not only in these conversations, but clearly, the level of store growth, the level of customer profile, and the continuation of the velocity of building the equity of the brand domestically and around the world, and as Kevin said, the power we have to grow two businesses at once, a more mature business that clearly is not saturated here in the U.S. with the number of stores we continue to open with great success, and as Belinda said, the very early, nascent stages of what we’re going to have, which is thousands of retail stores in China, multiple points of distribution in terms of product, and a digital relationship with multiple companies, based on the fact that the consumer in China is well more advanced than the U.S. consumer in terms of being a digital native.”
Johnson, a former longtime Microsoft exec, also talked about exploring potential partnerships with “pure-play tech companies” that could help create “significant breakthroughs.”
“Clearly, the entire retail sector is going through this massive disruption and it’s clear that the winners coming out of this are going to be those companies who find elegant ways to bring an in-store experience together with a digital experience,” he added.
It’s worth noting that Microsoft CEO Satya Nadella joined Starbucks’ board this past January. The two companies have worked together on joint products in the past.
Ryan noted that Starbucks is closely tracking how digital companies are “trying to get into traditional retail businesses, like grocery.”
“In our business, where the scale of our physical footprint, our customers’ relationships with our partners, and the third-place experience we deliver are so critical, we have an inherent advantage that digital companies will struggle to replicate,” he said. “We’re not complacent and recognize that digital relationships will increasingly be the key drivers of demand generation, even in physical stores. By leading in the combination of physical and digital, we not only drive superior business results in the short term, based on rewards, ordering, and personalization, but we also make it very challenging for digital companies to outmaneuver us in the physical world. While digital companies may win in other sectors, we will be the digital company that wins in ours. The current digital trajectory we have demonstrated is proof that we are winning today and will continue to extend our lead into the future.”