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Customer Engagement

Starbucks’ Digital Flyweel Strategy Continues to Pay Off

Starbucks keeps reinvesting heavily in its four-pronged tech innovation strategy, fueling growth across its business

An early darling of digital phenomenon, Starbucks brought on its first Chief Digital Officer over seven years ago. Since then a lot has changed in the business world, but one thing remains the same for the company. Starbucks keeps laying down some of its heaviest strategic bets on tech-led innovation.

“We believe that innovative ideas are fuel for the future, and we continue to build on this heritage,” CEO Kevin Johnson told investors several weeks ago at Starbucks’ annual shareholder meeting.

That heritage is rooted in early transformation successes in digital marketing, customer-facing technology, and point-of-sale technology improvements that stretch over a decade now. For example, the firm led the market way back in 2011 when it first started accepting mobile payments, years before major tech brands like Apple and Samsung were able to execute on mobile pay. By the time Apple got around to rolling out mobile pay in 2014, Starbucks was already processing 6 million weekly mobile pay transactions in the U.S.

The momentum built by initiatives like that drove company leadership to embed digital strategy throughout more and more lines of business over the ensuing years. This culminated in late 2016 with the formalization of a five-year innovation strategy that was “tightly coupled with our corporate business strategy,” explained Gerri Martin-Flickinger, CTO for Starbucks.

“It starts to look at those disruptive technology themes that are going to become mainstream over the next two, three, four or five years,” Martin-Flickinger said. “It takes thoughtfulness to plan out the logistics behind new, disruptive technology for our stores.”

At the heart of that strategy is what the company calls its ‘digital flywheel’ The digital flywheel consists of four digital competencies that cut across the business: rewards, personalization, payment, and ordering.

Rewards

Starbucks recently reported that its Starbucks Rewards loyalty program now drives about 40 percent of all sales in the U.S. The company has been putting significant digital resources into broadening the reach and depth of engagement in the program, which has grown its membership by 25 percent to get it over 16 million members.

“Starbucks Rewards continues to be a powerful enabler of loyalty and we are thoughtfully evolving the program to provide greater choice and flexibility for Rewards members,” Johnson told analysts during the firm’s last earnings call.

Personalization

Earlier this year Johnson told CNBC that the company is investing heavily in artificial intelligence (AI) for better customer insights and personalization.

The rewards component of the digital flywheel feeds a lot of data about customer segments and individuals into these efforts, but so do other forms of digital connections like its Mobile Order and Pay system. Overall, the firm reports that it’s got about 30 million digital connections feeding into its personalization systems. That’s everything from data about what times of day people usually order to which drinks they typically like, which can then be combined with other data like the geolocation and time of year to offer up personalized recommended items and offers.

Last year, the company combined its consumer insights, partner analytics, and marketing analytics functions into a single center of excellence to mine the data from these connections and refine them into more personalized experiences for customers.

Payment

Starbucks’ mobile pay ecosystem still has more users than Apple’s, but it’s not resting on its laurels when it comes to payment innovation. Last month the company reported that it’s taking a big equity stake in the cryptocurrency trading platform in a move that could make way for acceptance of Bitcoin-based payments at its coffee shops.

And it’s still putting resources into bread-and-butter payments innovations and tweaks. Payment is another element that works hand-in-hand with rewards program work. For example, the company last month updated its rewards redemption with a bevy of changes, including one that makes it such that points don’t expire when they’re tied to a prepaid card or a Starbucks Rewards Visa credit card.

Ordering

The goal here is to make it fast and convenient to order, and Starbucks aims to build off the work it’s done to refine its Mobile Order and Pay through its Starbucks Delivers program. Partnering with Uber Eats, Starbucks is slowly rolling this program out to broader markets. This month it says it’ll be running deliveries to about a quarter of its U.S. stores.

“From a customer perspective, Starbucks Delivers is being seamlessly integrated into the Uber Eats mobile app, enabling full beverage customization and fully integrating into our store operations to ensure a premium Starbucks Experience,” Johnson told investors last month.

The Digital Flywheel ROI

Almost halfway into executing on its five-year innovation strategy through the digital flywheel, Starbucks is seeing the payoffs. It’s posting strong annual and quarterly financial growth that executives say is a direct reflection of their on-going commitment to endless digital transformation. In fiscal 2018 it saw double-digit growth in topline revenue of $24.7 billion. Meantime, fiscal Q1 2019 had the company posting 9 percent growth and Starbucks shares have been on a steady upward trajectory since the start of the year.

At the shareholder meeting, Johnson called out out the digital flywheel as one of three business strategic initiatives driving Starbucks forward, sitting right up there with innovation in beverage and retail experience. While the flywheel forms the centerpiece of Starbucks’ digital strategy, the company clearly remains flexible in pivoting into new areas of innovation. For example, the company is halfway through a two-year exploration of bringing digital traceability to its coffee supply chain. And last month it also announced that its investing $100 million in Valor Siren Ventures, a new incubator for food and retail tech startups.

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