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Starbucks eyes bigger role in mobile payments with loyalty as linchpin

January 31, 2014

Starbucks' Mr. Schultz

Starbucks’ new leadership changes earlier this week position the retailer’s mobile and digital ambitions beyond its bricks-and-mortar stores to compete head-on in the emerging mobile payment space, underpinned by its loyalty program.

During a conference call on Wednesday, Howard Schultz, CEO of Starbucks, Seattle, revealed a new leadership structure that puts mobile and digital at the center of how the retailer plans to build its business going forward. An example of what this might look like is if consumers are able to earn Starbucks loyalty points — or stars — for using the Uber application to be dropped off at a coffee store.

“We’ve learned a great deal most recently about what we’re able to do in other channels of distribution,” Mr. Schultz said during the conference call.

“We’ve processed over two million Starbucks stars that have been processed as a result of people buying pounds of coffee in the grocery aisle – that is another indication to us that there is a currency that relates to stars that can go further in the future, and I think we’re just beginning to understand that,” he said.

“If you just take all of that and the seismic change, we are going to be on the right side of this debate, and we believe that we have the winning hand with assets that are significantly under-leveraged that are highly complementary to our core business.”

Mobile disruption
The goal behind the new leadership layout aims to help the coffee chain leverage its digital and mobile chops to extend itself further into the bricks-and-mortar space.

The new changes will give Mr. Schultz more control of Starbucks’ digital and physical assets that the executive claims are currently under-leveraged.

For example, Mr. Schultz cited $1.4 billion loaded onto Starbucks Cards during the first-quarter of 2014 as a big opportunity for the coffee giant to better tie the bricks-and-mortar and digital experiences together.

The growth of the digital wallet is fueling not only how consumers are primarily paying for goods and services, but also how the company maximizes its significant physical footprint.

However, industry experts are still mixed on whether Starbucks could realistically compete in mobile payments outside of its retail stores alongside heavyweights including Google, Apple, PayPal and major financial institutions.

The executive went on to explain during the conference call that leveraging physical and digital assets together will help the company do two things that expand loyalty outside of its own retail stores: Create new revenue streams and increase frequency and value for consumers.

For example, offering loyalty members the option to order and pay ahead of going into a store is an idea that Starbucks has floated around for quite some time.

Additionally, Starbucks has invested in Square as an alternative way for consumers to pay via mobile outside of the brand’s app.

These kinds of partnerships could be critical for Starbucks moving forward.

“I can see Starbucks making strategic partnerships with not only retailers, but other companies that align well with the Starbucks brand,” said Jordan McKee, analyst at Yankee Group, Boston.

“For instance, it’s not difficult to imagine a partnership with Uber, where users get a gold star every time they are dropped off at a Starbucks location,” he said. “The Starbucks app has 10 million users who are highly motivated by incentives. Other companies would be foolish not to look into the opportunities such partnerships could bring.”

Starbucks’ mobile payment

Last year, Starbucks began expanding its loyalty program beyond its own bricks-and-mortar stores into grocery stores.

The My Starbucks Rewards program was expanded to let consumers earn points – or stars – for buying branded coffee products in grocery stores or products at Teavana stores.

This is one of the ways that mobile specifically is helping Starbucks build an integrated loyalty program across its distributors, retail stores and digital.

Per Mr. Schultz’s mandate, Troy Alstead, chief financial officer at Starbucks will now become the coffee giant’s chief operating officer.

Additionally, Scott Maw will take on the role of executive vice president and chief financial officer at Starbucks. Mr. Maw’s current title is senior vice president of corporate finance.

Finally, executive vice president Craig Russell has been promoted to executive vice president of global coffee.

“As we sit today processing almost five million mobile transactions a week, we are so far ahead of any other national retailer with scale – I don’t even know if anyone is processing a million payments a week,” Starbucks’ Mr. Schultz said during the conference call.

“That has garnered the attention of the leading tech companies, all of whom are chasing with great fervor who’s going to be able to create the standard de facto of mobile payments,” he said.

“So, what I will say is that I think there are things that we can take advantage of and that we can leverage that are outside of the ecosystem of Starbucks, and this new organizational change will free me up to really create and innovate around not only mobile payment, but the things that we are doing with new channels of distribution, which we can cross-promote and cross-reward our customers with stars as currency.”

Consumers rack up loyalty points for paying through an app

Mobile powerhouse
The leadership changes will go into effect on Feb. 3 and build on the company’s first-quarter 2014 results that were announced last week.

It was reported last week that Starbucks is close to hitting five million weekly mobile transactions in its stores and has accumulated ten million app users (see story).

Part of the reason why Starbucks continues to be ahead of the game with mobile is because the chain is pushing consumers to use mobile on a consistent basis as a way to pay.

Fifty percent of Starbucks’ mobile app users are gold status members, meaning that these members make 30 or more purchases per year.

Starbucks has mastered the technology, loyalty and marketing that is involved in mobile.

The next iteration of Starbucks translating its mobile success beyond its own stores may be best suited towards loyalty instead of through a payment.

“Apart from the obvious – its investment in Square, I don’t see it having a role in mobile payments outside its stores,” said Paula Rosenblum, managing partner at Retail Systems Research, Miami.

“But building loyalty points wherever and whenever a Starbucks product is purchased will be a huge opportunity, especially if it’s accomplished easily — mailing in receipts, etc. is not easy,” she said.

Final Take
Lauren Johnson is associate reporter on Mobile Commerce Daily, New York 

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