Starbucks Brewing Digital Transformation

With advances in technology happening at a rapid pace, we are seeing organizations having to define themselves with more than just their core offerings. A renewed focus on the customer experience, no matter what vertical or industry. Customers have more power than ever before and as a result, companies are having to transform themselves in order to compete.

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When you think of “digital transformation”, it would be easy to assume that it’s purely about focusing on transforming the digital experience when in actuality the focus is transforming the customer experience through digital initiatives. Since the emphasis is on the customer, there’s not a simple one size fits all approach.         To be successful with digital transformation, brands are having to reach deep down and figure out who they are at the core and define themselves through their customer journeys and using this information and intel to define a digital strategy that maps back to the organization and aligns with the overall initiatives and priorities of the company. Once a digital roadmap has been defined, “organizations can then create a digital transformation roadmap that dictates how the organization leverages data, analytics (data science) and application development capabilities to deliver cloud-native “intelligent” applications and “smart” entities” (Schmarzo, 2017). From a customer perspective, digital transformation can dramatically change the user experience by making things more seamless, more personalized, and more direct. As retail has declined, brick and mortar stores are having to find new ways to connect with customers; success in the future is digitization.

Starbucks opened its first store in Seattle’s Pike Place Market in 1971 and was one the initial retailers to bring dark-roasted coffee to the marketplace. The store focused on selling a variety of coffee beans as well as other coffee related items but did not offer ready to drink beverages that we now associate with the brand. Howard Schultz joined the company in 1982 and began traveling to Italy where he recognized the popularity of espresso bars and developed a similar concept for Seattle. By 1985, Starbucks began offering brewed coffee and espresso beverages leading to the eventual expansion of storefronts across the country.

By 2002, Starbucks had 5,886 retail stores and began offering WI-FI in stores, inviting customers to enjoy their cup of coffee in an inviting and relaxing environment that Schultz envisioned often referred to as a “third place”. He felt that customers had their homes and their workplace, and he wanted to Starbucks to become their third place that they could identify with. In the next several years, Starbucks continued to grow at a rapid pace and by 2008 had a total of 16,680 stores across the world. However, the company started to see the effects of the economic downturn and it was impacting their bottom line; profits were falling and they were forced to close stores and lay off employees.

During this difficult time for the brand, Howard Schultz returned as CEO and reignited the fire and passion around the Starbucks brand by refocusing the company back on to the customer. Schultz felt that during times of rapid growth and expansion, Starbucks had lost its edge and attention on the customer allowing for competitors to enter the marketplace. On his first day back in the office, he sent a letter to all employees that stated, “The company must shift its focus away from bureaucracy and back to customers.” (Hussain, Khan, & Mirza, 2014)

In doing this, Schultz implemented traditional strategies like rethinking the store layout and redesigning it to be more customer friendly. However, it was the non-traditional strategies that ended up being transformative and can be attributed to the overall revival of the company. Thus, Starbucks headed down a path of digital transformation. That same year, Starbucks Digital Venture (SDV) was established as an in house digital incubator for new ideas and concepts within the digital space allowing for agile creation and responses to the marketplace (Lee, 2018). During 2008, “My Starbucks Ideas” was also rolled out online which was a very early crowdsourcing tool that customers could visit and suggest new ideas for the company. This extension from the brand to customer was extremely successful and many of the ideas that were submitted ended up being implemented such as new drink flavors, changes to the drive-thru experience, Happy Hour offers and more.

With a focus in digital, Starbucks turned its attention to the untapped potential of mobile smartphones. The concept of a loyalty program was not new to Starbucks, they first introduced the concept in 2001 with a physical card that could be redeemed and used similar to a debit card. However, in 2009, Starbucks introduced the Mobile Card app for iPhone and iPod allowing customers to manage their Starbucks card through their mobile device. With this new digital extension, customers could manage their accounts, add more money directly from their phone, find nearby locations, and track rewards program.

The mobile app was the catalyst for developing what Starbucks refers to as “the Digital Flywheel” for its overall digital strategy. The current CEO, Mr. Johnson stated that “Our digital flywheel is a powerful proprietary asset that is driving deep customer engagement, revenue, and profit growth around the world” (Lee, 2018). Starbucks is using innovative technology through its mobile app to enhance the customer experience and find new ways to surprise and delight customers, keeping engagement and loyalty extremely high. The Digital Flywheel is focused on 4 key areas: rewards, personalization, payment, and ordering. (See Figure 1) Personalization

One of the key pillars of the Digital Flywheel strategy is the focus on personalization regarding the way Starbucks communicates with customers. Personalization is not a new concept to Starbucks, from the beginning they have written customer’s names on cups and encouraged customized orders but with digital transformation, they are taking personalization to a whole new level. By using historical customer data such as “order history, product placement preferences, location, email, objective information such as weather” (Lee, 2018). Starbucks provides a very unique and personalized experience increasing overall customer satisfaction. Relying on a cloud-based artificial intelligence engine, Starbucks can take the customer experience a step farther and offer recommendations that the customer didn’t even know they were interested in. (See figure 2)

In the beginning of 2016, much of Starbucks targeted marketing efforts were manual, time consuming, and didn’t allow for the type of 1:1 communication that they were striving for. Before implementing AI technology into their technology stack, Starbucks sent 30 variant email templates to customers. However, after they integrated AI, Starbucks could automatically generate and send 400,000 personalized email templates to customers with the overall goal of reaching their target audience and getting them to re-engage in the brand (Martin-Flickinger & Ryan, 2016). With better targeted and more focused communications, Starbucks saw an overall improving in campaign results and an increase in incremental revenue per redeemer per year. Ordering

With the development of a mobile app brought the ease and convenience of mobile ordering in 2015. Rather than waiting in line once they arrived at the store, customers could choose to order through the mobile app ahead of time and pick up items at the store later.

The initial roll out of mobile ordering caused some customers angst and traffic jams within the stores because customers were still required to wait in line to pick up their orders. Starbucks quickly responded to customer feedback by adding separate pick up stations for mobile orders which helped to alleviate congestion within the stores.

This innovative strategy has greatly reduced peak wait times and saves times not only for customers but as well as employees. Starbucks reports that the implementation of mobile ordering has redirected 100 million minutes for more value-added activities as well as a 20% increase in overall transactions at high adoption stores during peak hours (Martin-Flickinger & Ryan, 2016). Mobile ordering continues to grow quarter after quarter and has operational impacts to increase efficiencies, wait times, and customer satisfaction. (See figure 3) Payment

Another compelling feature of the mobile app is the ease and convenience of mobile payment. Customers have several options for going cashless when it comes to ordering through the mobile app, either by linking a pre-paid card to the account or syncing to a Starbucks Wallet which can be linked to a credit card, Apple Pay, Paypal or Chase. Both options are linked to a barcode payment system that can be used for a simple and easy transaction whether through mobile order or traditional method of ordering in store. By offering a variety of payment methods, Starbucks Mobile Order and Pay allows users to choose the method that is the most convenient for them, which leads to great satisfaction and sales.

By end of 2017, one in four transactions were on mobile and 38% of revenue came from pre-paid payments (Martin-Flickinger & Ryan, 2016). Starbucks also reported that one in six adults receives a Starbucks gift card during the holidays, which can either be digital or physical. For the physical cards that are given, customers can then register the card online and join “My Starbucks Rewards” where they can link the gift card into the mobile app for mobile convenience. All the while growing their mobile app adoption and leveraging the digital experience collecting data on customer behavior which feeds into the ecosystem of the digital flywheel strategy. Rewards

The Starbucks Rewards program has long been held as one of the best customer engagement tools implemented by a brand. When it was first rolled out, rewards or “stars” were action based, for each transaction, customers would earn a star. Customers could then redeem their stars for free beverages. In early 2016, Starbucks overhauled the rewards program and changed it from an action based program to a spend base program touting that this was a fairer way of managing a rewards program and encouraged spend and mobile actions. It also helped to stop transaction splitting which was time consuming and increased wait times.

In addition to earning two stars for every dollar spent, reward members also enjoy the benefit of free in-store refills, free birthday drink, and mobile ordering and pay. In return, “Starbucks solidifies an instant digital relationship with the 14.2 million active U.S. rewards program members. The loyalty program has seen hefty growth, with an 11% growth in users in Q2 2018. And Starbucks rewards program members in certain places actually spend more, representing 39% of the entire chain’s sales” (Oragui, 2018).

Starbucks has acknowledged that not all customers want to be a part of a loyalty program but would still like enjoy the benefits of the mobile experience. As a result, they are planning on offering mobile order and pay to all customers, not just rewards members which will increase the digital interactions and the data that they are able to gather on its customers. Revamp of Digital Flywheel Strategy

Starbucks has no doubt benefited from the renewed focus on the digital relationship with customers over the past decade and it has positioned them as a technology company that sells coffee versus the other way around. However, Starbucks is looking to the future and focusing revitalizing their technology stack allowing them to be more agile and personalized than ever before. The digital flywheel strategy has laid a very strong foundation for Starbucks to build from. At the core of the strategy is a unified commerce system and cloud architecture that focuses on integrating commerce and inventory systems with cloud infrastructure. (Figure 4)

Starbucks Chief Strategy Officer Matt Ryan stated that “this fundamental modernization of our technology stack will replace legacy rewards and ordering functionality with the new scalable cloud-based platform for rewards and ordering, improved customer data organization, and tighter integration with store-based operating systems, including inventory and production management” (Franklin, 2018). Starbucks is very uniquely positioned in an environment where retail is tapering off, Starbucks has managed to create a digital platform that goes hand in hand with the in-store experience driving foot traffic and increasing sales.

Starbuck’s digital transformation has helped to reinstate their position as a leader in the retail coffee industry and bounce back from the slump in revenue and downturn in 2008. The digital experience that Starbucks created through the flywheel strategy is not just a way to market to the customer but created innovative ways to positively impact the overall customer experience. As a result, it altered what customers expect from the retail industry and raising the bar for customer expectations. It has become increasingly more and more important brick and mortar companies to have a strong digital relationship with customers if they want to not only survive but thrive in an ever increasingly competitive environment.

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