Starbucks' loyalty stars may be new mobile currency

Starbucks' (NASDAQ:SBUX) mobile commerce platform is driving growth and now there are plans for it to be the cornerstone of new opportunities. Starbucks is expanding Express formats, Mobile Order and Pay, and an initiative that lets other businesses offer Starbucks mobile rewards to customers. If successful, the stars Starbucks uses to reward loyalty members could become a kind of mobile currency.

Starbucks introduced Mobile Order and Pay in 150 stores in the Portland, Oregon, market in December 2014, expanded the test to 650 stores in the Pacific Northwest in March, and now offers the program to more than 4,000 U.S. company-operated stores. This expansion was complete near the end of Starbucks' third fiscal quarter on June 28.

The mobile order and pay service will be available in all U.S. stores by the upcoming holiday season.

Early results have Starbucks' management crowing. "Mobile order and pay is fueling both revenue and profit growth in every market in which it has been deployed with customer adoption starting faster and accelerating with each new phase we roll out," President and CEO Howard Schultz said during a conference call with analysts.

In the markets where the program is deployed, lines are shorter, service is faster and in-store operations are more efficient. The program is still only available to iOS users, but there are plans to add an Android app in the United States and expand the program to international markets in coming months. Upcoming enhancements include menu recommendations—a feature now being beta tested—and store-specific menu availability intended to drive up average orders.

Mobile technology is also making a new store format possible. Starbucks launched its first Express store in New York City's Financial District on April 30. The 538 sq. ft. location features mobile POS positions that let employees take orders and pay on a mobile device, creating mobile POS stations throughout the store. Digital menu screens rotate item selections and double as glowing art installations visible from the street at night.
A second Starbucks Express location will open in New York City by the end of summer. The coffee chain's new delivery service continues as a test there as well.

Starbuck's mobile loyalty program, My Starbucks Rewards (MSR), is the company's "most important business driver," Schultz said. Mobile payments now represent 20 percent of all in-store transactions in U.S. stores, more than double compared to two years ago, and the chain processes nearly 9 million mobile transactions each week.

Mobile technology is heralded as the key to Starbucks' growth by enabling new services, new formats, new customer acquisitions, and now, new partnership opportunities.

"Our plan all along has been to bring both our MSR membership and our digital capabilities to scale, and we are now there," Schultz said. Now the goal is to leverage the brand, customer engagement, global scale and digital programs to partner with other businesses that target a similar customer demographic.

The plan is to allow businesses to purchase the stars MSR members earn for purchases, then distribute the stars within that businesses' own loyalty program. Starbucks believes it has created a kind of currency with these stars.

The initiative launched with Spotify, letting the music service purchase Starbucks stars and distribute them to drive premium subscriber acquisition and differentiate itself from other music subscription services. The New York Times and ride-share service Lyft have also signed on to the program.

The goal is to extend this program to a number of already-identified businesses.

"We strongly believe that no other bricks-and-mortar retailer has the brand strength, digital and physical assets, or connection to consumers to create, build and execute a program anything like this," Schultz said.

Starbucks has a history of partnering with merchants that target a similar customer segment. It did that very thing in the early 2000s to extend its brick-and-mortar reach by putting coffee counters into Target stores, a retailer with a very similar customer demographic.

But the partnership program could well be revolutionary, not just for Starbucks, but for many retailers struggling to build a strong mobile or loyalty program of their own by offering a new kind of coffee currency to shoppers.

For more:
-See this conference call transcript on Seeking Alpha
-See this Starbucks earnings release
-See this Starbucks press release

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