Starbucks’ Digital Strategy, Why it Outperforms

Picture of a Starbucks store
 

By Tricia McKinnon

It seems unlikely doesn’t it that one of the retailers who leads in digital is a coffee company? What does your daily coffee fix have to do with eCommerce? Apparently, a lot. Starbucks, the largest coffee company in the world, also has one of the best digital businesses in all of retail. Starbucks foresaw the transition to mobile ordering long before others in the industry and is reaping the benefits with its digital sales accounting for about a quarter of all sales. If you are curious about how Starbucks became the one to envy not just because of its lattes but because of its digital strategy then consider these four elements of its strategy.

1. A world class mobile app. Starbucks is a company that has long known that the future of retail is tied to technology. Over a decade ago in 2009 it launched its mobile app. Then it began offering in app mobile payments in 2011. By 2014 Starbucks had rolled out mobile pre-order and pay before it was common to do so. Customers using this feature can skip the line (most of the time) in store by placing their favourite order from the most convenient location whether that is at home or on the way to work. Barron’s has even said that: “Starbucks identified the smartphone revolution years before most bricks-and-mortar firms.”

Starbucks’ mobile app is so popular that it was only several years ago when it had the most mobile payment users in the United States. Apple has since then passed Starbucks with more than 40 million mobile payment users while Starbucks comes in second with over 30 million users. That is a staggering accomplishment for Starbucks since Apple users can make payments at a range of retailers while Starbucks users only have one option. 

United States Mobile Payment Users by Platform

That high usage rate has lead to about 50% of Starbucks’ transactions being made digitally. Forrester Research says that Starbucks: “has [delivered] possibly the most successful mobile ordering app of all time. 

A key lever Starbucks has used to solidify its strength in mobile was to hire a CEO with a technology background. Kevin Johnson, the former CEO of Juniper Networks and a former Microsoft executive, replaced Howard Schultz as Starbucks’ CEO in 2017. Johnson has said that: "digital relationships drive significant long-term value to Starbucks through more frequent occasions, increased spend, improved customer retention, and marketing efficiency." The company has also stated that: “digitally engaged customers purchase 2 to 3 times as many products as those that are not digitally engaged."

2. Personalized experiences. Starbucks’ popular mobile app provides customers with personalized recommendations for additional products they may want to purchase based on their purchase history. Starbucks' former chief technology officer has said that the company uses “a data-driven AI algorithm based on your own preferences, your own behaviour as well as behaviours that [Starbucks is] trying to drive”. 

Starbucks has said in the past that its personalization initiative “is the single biggest driver” of improved spend per customer it has seen. “We continue to leverage the advantages of our mobile app to elevate the personalization of the customer experience and deepen customer engagement,” says Johnson.

3. Seamless integration between online and offline. By now most retailers know that offline locations are an important part of every retailer’s digital strategy. While we may like to place an order from the comfort of our homes how we choose to receive that order is a different story. Many consumers like to travel to a restaurant to pick up their online order with drive-thru coming in first at 52% as the most popular way to receive an off-premise restaurant order followed by carry out at 37% and delivery at 11%. Consumers don’t always want to pay for delivery fees or wait for an order to be dropped off.

Even before drive-thru and pickup sales took off during the pandemic, in 2019 Starbucks opened its first pickup only location in the United States. These locations are small and often do not have seating and are meant to cater to customers ordering using the Starbucks app who want to grab and go. "Our vision is that each large city in the US will ultimately have a mix of traditional Starbucks cafés and Starbucks pickup locations," said Starbucks in a statement.” The fact that Starbucks would be willing to introduce a new store format that is the complete opposite of the store format that was key to its success shows how important convenience is to consumers. 

While most retailers anticipated that consumers would increasingly enjoy the convenience of shopping online not many anticipated that would also mean that having a network of offline locations would also add to the convenience factor of shopping online. It wasn’t until the pandemic hit and in-store pick up and curbside pickup became widely popular did many realize how critical a store network is to digital sales growth. With this in mind Starbucks announced in 2020 it would close 400 locations and then open 300 new stores that focus on drive-thru and pickup. Of the 300 new stores 40 - 50 were slated to be drive thru or curbside pickup only locations.

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4. An in-demand loyalty program. Starbucks has one of the best loyalty programs in the retail sector with over 30 million members. Members earn stars for each dollar they spend. Those stars can then be redeemed for free food, drinks or merchandise. Those members generated 56% of Starbucks’ sales in the first quarter of 2023. While loyalty programs have been around for a long time they are now viewed as one of the best methods for converting the average consumer into a digital customer. In the past few years a number of retailers have launched their own loyalty programs. These retailers include Wendy’s, Taco Bell, Burger King and McDonald’s. These loyalty programs like Starbucks Rewards are tied to the retailer’s app meaning the most efficient way of accumulating rewards is by using the retailer’s app to make and pay for orders. 

On an earnings call in 2021 Restaurant Brand’s CEO Joshua Kobza said this about its loyalty program: “we are deploying loyalty programs at Burger King and Popeyes as well, which will help to reinforce the already large and growing number of guests engaged on our digital platforms at those brands. Fundamentally, what this allows us to do is work very differently and much more efficiently with our marketing funnels across our businesses. Many of the members of our rewards or loyalty programs tend to be some of our most loyal fans, and we can now personalize the offers and messaging that they receive to improve their experience and offer suggestions for other dayparts or menu items that they might like to try. We have also leveraged these channels to communicate about purpose driven messages that are important to our guests…at little-to-no media cost.” 

Starbucks former COO John Culver said this about Starbucks rewards members: “rewards members, as you shared, are spending at an elevated rate and visit our stores at a three times frequency rate versus our non-members.” Once you have a customer using your app frequently in the guise of accumulating points then it becomes easy to gather data on their shopping behaviour which you can then use to provide customized offers. There is no doubt that Starbucks had this in mind when it launched its rewards program years ago. The next time you see a retailer offering a freebie to get you to sign up for their loyalty program keep in mind that they are getting more from you than just your loyalty they are getting your data too. 

Tricia McKinnonStrategy & Growth, eCommerceComment