Starbucks Attempts to Create a Caffeine-Based Currency

A Starbucks Corp. Location Ahead Of Earnings Figures

Pedestrians stroll by a Starbucks Coffee shop in Union Square in New York.

Photographer: Craig Warga/Bloomberg

Airlines have long given out miles to customers for credit-card purchases made at other stores. Now Starbucks Corp. is trying a similar feat with its loyalty program.

The coffee chain has forged deals with music service Spotify Ltd., the New York Times and ride-sharing company Lyft Inc. -- all of which will let customers earn points toward free drinks and food at their local Starbucks. The program doles out “Stars” when users make purchases, creating a form of currency that works with Starbucks’ mobile app or loyalty cards. The company credited the effort with helping drive a 4 percent gain in customer traffic last quarter.

Starbucks CEO Howard Schultz. Photographer: Andrew Harrer/Bloomberg
Starbucks CEO Howard Schultz. Photographer: Andrew Harrer/Bloomberg
Photographer: Andrew Harrer/Bloomberg

The challenge now is building out the Stars network beyond the first few partners. Chief Executive Officer Howard Schultz says the company is seeking out businesses in a range of industries that could work with the program, aiming to prod customers into visiting Starbucks more often.

“When fueled by partners, it drives people in the store that they might not have gotten otherwise,” said Roger Entner, an analyst at Recon Analytics.

Starbucks currently has 10.4 million active loyalty-program members, up 28 percent from a year earlier, Schultz said on a conference call Thursday. The effort has gotten a boost from more customers using their phones to pay for their Starbucks orders. In the U.S., mobile payments now represent a fifth of all in-store transactions, more than double the level two years ago.

New Bitcoin?

The program also is a step toward a future where Starbucks Stars are collected in a manner akin to airline miles, bitcoin, gift cards and gold. As part of their partnership with Starbucks, Spotify, the Times and Lyft all purchased a number of Stars themselves. The idea is to use them to reward customers when they sign up for subscriptions or buy rides.

“That’s something very close to being like a currency,” said James Wester, research director for IDC Financial Insights.

Future Stars partners could include companies like Staples Inc., Chipotle Mexican Grill Inc., AMC Entertainment Holdings Inc. and Netflix Inc., according to analysts. Schultz said on Thursday that future participants may be named in the coming quarters.

“We have identified prospective partners in multiple attractive business verticals,” he said.

If the Stars platform can build enough support, it could become currency for digital goods, said Chetan Sharma, an independent analyst for the wireless industry. That means customers could use the points to pay for songs, videos and online games.

Apple Support

Loyalty programs tied to smartphone apps are on the rise. In June, Apple Inc. said it will be adding support for rewards programs with its iOS 9 mobile software, coming in the fall. Google Inc., meanwhile, has integrated merchants’ loyalty programs into its mobile-payment service, Android Pay. That means loyalty points are automatically used at checkout.

In May, a coalition that includes AT&T Inc., Macy’s Inc., Rite Aid Corp. and Hulu LLC introduced Plenti, a loyalty program operated by American Express Co. It offers members multiple ways to earn Plenti loyalty points, which are redeemable at any participating retailer. Uber Technologies Inc., a Lyft competitor, also inked a deal with American Express, letting its customers earn points toward future rides.

An average American household participates in 29 loyalty programs, but is active in just 12 of them, according to Colloquy research. The number of loyalty-program memberships rose 26 percent since 2013, the firm said in February.

The trick for Starbucks will be to choose the right partners, and not cheapen its rewards, said Thad Peterson, a senior analyst at Aite Group.

“The biggest risk to a program such as this is dilution of value,” he said.

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