Starbucks Takes Its Pioneering Mobile-Phone App to Grande Level

  • Coffee chain expands order-ahead program, tests delivery
  • Handset payment may soon account for half of all transactions

Customers use mobile devices inside a Starbucks Corp. coffee shop.

Photographer: Victor J. Blue/Bloomberg

Starbucks Corp., a pioneer in getting consumers to pay for products with a mobile phone, is boosting spending on digital ventures this year as it enhances the capability of its app in Asia, Europe and Latin America.

The coffee chain is promoting a new feature, introduced last year nationwide at U.S. stores, that lets customers order and pay for beverages in advance and pick them up without waiting in the cashier line. It plans to bring the Mobile Order & Pay program to China and Japan in 2016. Starbucks is also testing delivery through the app this year in the U.S., where it will roll out features such as personalized food recommendations.

“The app is very important,” said Adam Brotman, the Seattle-based chain’s chief digital officer. “It’s become one of our core strategies.”

How a coffee purveyor -- and not a technology company like Google Inc. or Apple Inc. -- became a leader in mobile payments is a testament to the acumen of Chief Executive Officer Howard Schultz. In 2011, while tech companies like Google tried to get consumers to use complicated mobile-payment systems requiring new phones and revamped in-store terminals, Starbucks introduced an app that used simple QR codes. And perhaps just as important, the chain offered rewards like free beverages for using it.

The app was an instant hit, becoming what Richard Crone, CEO of mobile-strategy specialist Crone Consulting LLC, called “the most successful launch of a new payment type in history.”

Reshaping Cafes

Within a few years, Starbucks’ mobile app could account for more than 50 percent of all transactions in company-owned U.S. stores, Brotman said. That means it may even help reshape how cafes look, putting Starbucks on track to become a mobile-first company, akin to Facebook Inc. and Uber Technologies Inc.

More than 21 percent of transactions at company-owned U.S. stores now come through the app. In February, about 7 million orders were placed through mobile devices in U.S. cafés, the company said. The order-ahead feature already accounts for about 15 percent of those payments, and 3 percent of total transactions.

China Focus

One of the main areas of focus is China, the company’s biggest-growth market. Schultz has touted mobile payment as having the ability to boost sales in the Asian nation as consumers there have gone quickly from rotary to smartphones.

“The adoption that we believe we are going to have in China is going to be more significant and quicker than it has been in the U.S., which has already stunned us,” Schultz told analysts on a conference call in January.

The app is increasing transactions by 15 percent to 20 percent in the U.S. –- a percentage that will only increase, according to Jack Russo, an analyst at Edward Jones & Co. Those extra purchases are one of the reasons behind Starbucks’ 17 percent revenue growth last fiscal year -- the biggest gain since 2007, when the company was half its current size.

“The mobile and order-and-pay is just going to keep driving their growth going forward,” BTIG LLC analyst Peter Saleh said. “It helps to drive their average check higher. It also provides them with a lot of data.”

This year, Starbucks also is planning to start recommending additional purchases to its customers via the kind of smart technology long used by Netflix Inc. and Amazon.com Inc. With more personalized recommendations, Starbucks could potentially increase each sale amount by as much as 50 percent, according to Crone, the mobile-payments consultant.

Apple Store

As the app continues to flourish, it could alter the way Starbucks operates.

“You might see a real change in the store layout,” said Crone. “You’ll see a Starbucks that looks like the Apple store. You got rid of the counter, you got rid of the queues, you have latte stations and espresso stations, where you simply walk up to the station.”

The app is also reshaping the company’s finances. In the first fiscal quarter ended in December, consumers loaded $1.9 billion on their Starbucks cards, many of which are linked to the apps, an 18 percent increase over last year.

Playing Catch-Up

For that reason, Starbucks is quick to invest in technology. The company doesn’t break out specific spending on digital initiatives, but it said it will invest as much as $300 million globally on what it called “partner and digital” projects in 2016, up from about $145 million in fiscal 2015. By comparison, large pizza chains are spending just $25 million to $30 million per year on their digital ventures, according to Saleh. Many other restaurants are just starting to play catch-up to Starbucks, after seeing its app drive sales.

Customers may even see Starbucks-like technology at other companies someday. Because the app was created mostly in-house, other retailers are contacting the coffee chain about licensing it, Brotman said.

“It’s something that we are considering,” he said, adding that licenses are unlikely to become available anytime soon. “We’ve had these great conversations with other companies. Those conversations are continuing.”

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