Starbucks’ Mobile Payments Jolt

Apple might want to take a bite out of Starbucks’ mobile payments strategy.

In its fourth-quarter earnings call last October, Starbucks CEO Howard Schultz said the launch of Starbucks’ mobile order and pay app in December would be the single-most important technology innovation introduced in 2014. And after the first earnings call of 2015, it’s clear that leading mobile payments is still on Schultz’s mind.

Analysts were quick to jump on the mobile order and pay bandwagon with a series of questions during the company’s first-quarter earnings call yesterday (Jan. 22). However, Schultz and team were sure to keep one important detail close to the vest: how specifically mobile order and pay is doing in its Portland, Oregon test market. Financially speaking, of course. The executive team didn’t hesitate to emphasize the success of the program’s rollout with specific numbers.

In terms of Starbucks’ mobile payment volume, the company announced it was nearing the average of 7 million mobile transactions a week, and it looks like that number brewed over the threshold as Schultz said the company has surpassed that mark and said that mobile transactions now make a larger portion of sales than ever. 

“We continue to see broad customer acceptance and adoption of our mobile payment technologies,” he said. “Today in the U.S. alone, over 13 million customers were actively using our mobile apps. And we are now averaging more than 7 million mobile transactions in our stores each week — representing 16 percent of total tender. That’s more than any other bricks-and-mortar retailer in the marketplace.”

Analysts continued to press the team on figures about mobile order and pay, its successes, its potential pitfalls and how the rollout will impact overall store flow. The response? Mobile order and pay will do exactly what Starbucks executives intend it to do – extend its reach in mobile payments and customer loyalty. Currently, the service is only available in Portland but will soon be rolling out to 600 stores across the Pacific Coast; the national rollout is expected to hit in the second half of 2015. 

“Our experience today confirms that once rolled out, mobile order and pay will bring a significant increase in mobile payment transactions overall, and have a fly wheel positive effect on our overall business in driving both increased MSR membership and app usage and creating significant additional one-to-one marketing opportunities,” Schultz said. 

What added to what Schultz called a seamless rollout, was the fact that Starbucks already had a strong infrastructure behind its mobile app. Without having to change much, besides adding an additional printer and feature at registers and a couple more employees at stores, mobile order and pay didn’t change much in terms of how Starbucks functions. 

“There are lots of companies who are ringing the bell on mobile order and pay but in my prepared remarks I specifically talked about that this is a proprietary integrated relationship that we’re building with our infrastructure and in turn with the customer,” Schultz emphasized. 

Starbucks’ success in its first quarter was also attributed to its strong holiday sales, which included an influx of gift card sales. On Dec. 23 alone, Starbucks sold 2.6 million gift cards in the U.S.; first-quarter gift card sales hit 1.6 billion, which was up 17 percent from the year prior. Card program, loyalty and mobile continued to be major drivers for Starbucks in a quarter that produced a revenue of $4.8 billion (up 13 percent). Operating income hit $934.8 million, up 18 percent from the year prior. And in a time when brick-and-mortar is slowing, Starbucks opened 512 net new stores in Q1, including its first Starbucks Reserve Roastery and Tasting Room.

Adam Brotman — the chief digital officer for Starbucks, who was also on the call — said that Starbucks’ mobile rollout already has a customer base behind it, so all Starbucks needed to do was mobilize that customer base with a new technology option.

And that’s what mobile order and pay did for the company, he said.

“We’re not starting from a cold start. We already have 13 million active mobile users. We have the POS and payment capabilities, we have MSR (My Starbucks Rewards) up to 9 million-plus,”Brotman said. “We are simply adding on mobile ordering on that staff of proprietary integrated technologies that allow us to do something like that. And it sets us up, frankly, for delivery as well. So the kind of pace of innovation, our ability to roll it out and positively influence our business overall is because we have built this and integrated it in the way it’s mentioned.”

Schultz jumped back in to say that what Starbucks has been able to do in its omnichannel efforts is in direct response to customer demand in a very rapidly changing consumer environment.

“Traditional advertising and marketing to try and overcome this seismic shift in consumer behavior is probably not going to work for most people,” he said. “The relationships that we have built with our customers through mobile payment, through MSR, through gold members, and now, through mobile pay and delivery is a significant driver — in not only elevating the relationship we have with our customers, but significantly lowering our traditional cost of customer acquisition. Especially when you compare it to other national retailers.”

Outside of mobile order and pay, the other major news for Starbucks that was announced yesterday (Jan. 22) was that Kevin Johnson, the former CEO of Juniper Networks and former president of Microsoft’s Platform Division, will take over as president and COO for longtime executive Troy Alstead, who is taking an extended sabbatical to spend time with his family. Both Johnson and Alstead were on the analyst call and it was emphasized that Alstead will be back after a year’s leave. 

The buzzwords for Starbucks’ Q1 analyst call was certainly digital, mobile apps, loyalty and mobile payments — with an emphasis on the “seismic shift” in customer behavior. It appears as though the decision to bring Johnson — who is a five-year Starbucks board member and digital native — is a strategic move to further its digital innovation and outlook at how mobile payments can impact a national retailer.