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Starbucks 'uniquely positioned' as consumers shift to digital

The company processed 2-plus million new Starbucks card activations a day leading up to Christmas.

January 24, 2014

Never before the recent holidays have the shifts in consumer purchasing habits been so measurable. The 2013 holiday season was the first in which traditional (brick and mortar) retailers experienced in-store traffic give way to online traffic, according to Starbucks CEO/president and chairman Howard Schultz.

"This was also the first holiday in which consumers embraced the convenience and flexibility afforded by physical and digital gift cards with a passion. Instead of gifting a particular item, consumers instead chose the gift of choice," Schultz said during the company's Q1 earnings call on Thursday.

The "sea change" has been a boon for the coffee chain. Starbucks processed more than 40 million new card activations valued at more than $610 million in the U.S. and Canada during Q1. This included 2-plus million new activations per day in the period immediately leading up to Christmas, and $1.4 billion of card loads globally, Schultz said.

These numbers represent a significant increase over last year's card metrics.

"Starbucks is one of the very few retailers to benefit from the transfer of store sales to online sales and gifting of choice," Schultz added.

To further benefit the brand, executives say most of the gift card recipients are new customers, who will be exposed to Starbucks for the first time.

Mobile payments

The gravitation toward digital payments extends well beyond the holidays. Mobile and gift card payments now represent more than 30 percent of total U.S. payments for Starbucks. About 10 million customers now pay through the mobile app (first introduced in 2009), with nearly 5 million mobile payments per week.

Starbucks doesn't plan to rest on these laurels and has a "full pipeline" of new technological innovations coming in the quarters ahead.

"We're just beginning to appreciate the full magnitude and possibilities of the Starbucks mobile payment platform opportunity," Schultz said. "The mobile transaction platform is still in its nascent stage. There is an opportunity to extend that value to our customers in ways we have not yet shared."

Food rollout

Though very much a coffee brand, Starbucks' Q1 growth was lifted by its food offerings, which CFO Troy Alstead called a "disproportionate driver of the company's comps." The "complex" menu rollout is expected to be in place across all U.S. stores in two years.

"We're very encouraged across all aspects of this food program. All indications are that we have found something that resonates (with) customers. It's a chance to drive food as a faster growing part of our business and elevate food as a mix of the stores," Alstead said.

The chain's most successful dayparts thus far are midday and afternoon. The lunch program will continue to be "fine tuned" in stages, and will be rolled out broadly by early next fiscal year. Savory, warm breakfast and lunch innovations are in the pipeline.

And, because of digital initiatives, throughput at stores with food options has not been affected, according to Schultz.

"Because of the Starbucks card and the quick adoption of mobile payments, we are speeding up the level of service in our stores. There is no issue whatsoever (with throughput)," he said.

Fiscal Q1 by the numbers

Highlights from the quarter include:

• Consolidated net revenues up 12 percent to $4.2 billion;
• Global comp same-store sales up 5 percent, driven by a 4 percent increase in traffic;
• Americas and U.S. comp growth of 5 percent, driven by a 4 percent increase in traffic;
• EMEA comp growth of 5 percent (the highest in 13 quarters), driven by a 3 percent increase in traffic;
• China/Asia Pacific comp growth of 8 percent, driven by a 7 percent increase in traffic.

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