Three Ways Starbucks (SBUX) Is Looking To Its Future

Starbucks (SBUX) is synonymous to coffee for millennials, much like Googling is synonymous for online searching.

Starbucks has always focused on three things: the perfect coffee, user friendly and engaging technology, and a satisfying experience for its customers. Kevin Johnson, president and CEO Starbucks, said, “The investments we are making for the long term—in our partners, our stores, beverage innovation and digital—are collectively delivering an elevated Starbucks Experience. This long-term focus is instrumental to how we are building an enduring company.”

1. Here’s how Starbucks is working to ensure sustainability in its growth

China is switching to coffee and Starbucks is increasing its footprint. Coffee has gained significant traction in China with its domestic consumption rising substantially over the last few years. Research done by the University of Kentucky highlights that the “rapid increase of coffee consumption in China, particularly from the years 2004/05 to 2013/14, can be compared to a similar trend that occurred in Japan from the years 1964/65 to 1973/74 based on International Coffee Organization figures.” It took 30—40 years for Japan to become a recognizable coffee consumer and become the world’s fourth largest coffee consumer. In comparison, China is still in the premature stages of the growth curve and there is a long way to go before the demand peaks, which reflects a huge opportunity.

The rising demand for coffee in China is supported by a strong growing economy, expanding disposable incomes and changing demand patterns.

“The presence of coffee shops is no longer a novelty, but rather an essential feature of the urban landscape. Although still predominantly a tea-drinking nation, China is rapidly developing a taste for coffee, which could have significant implications for the world market,” highlights a report by the International Coffee Organization.

Amid this, China is the fastest growing market for Starbucks outside the U.S. and the second largest market overall; there were 4,292 stores in China as on December 29, 2019—a 16% rise from the previous year. With its store expansion, Starbucks is trying to weave the coffee culture in China with the "Starbucks experience." Starbucks has maintained that its China MBU contributes meaningfully to both consolidated and International net revenues and operating income, and this does expose the company to any vulnerability the Chinese market.

To solidify its position, engage better with the customers and integrate deeper with the Chinese market, Starbucks collaborated with Alibaba (BABA). The partnership began with Starbucks' brick-and-mortar locations accepting mobile wallet Alipay for payment. It was soon followed by the launch of its first roastery outside of the U.S powered by Alibaba’s Mobile Taobao app and the company’s augmented reality (AR) technology. This has helped Starbucks to capitalize on the rising demand levels for coffee as well as cater to the appetite of the increasingly sophisticated tech-enabled shoppers in China. In addition, they two partnered on a new virtual Starbucks store that can be accessed from mobile apps for a seamless buying experience.

2. Starbucks is tapping into technology to deliver a good customer experience and drive engagement

It can be said that Starbucks is driven by technology and digital engagement.

“Everything we do in technology is centered around the customer connection in the store, the human connection, one person, one cup, one neighborhood at a time,” says Gerri Martin-Flickinger, Starbucks executive vice president and chief technology officer. To provide a consistently high-quality customer experience, it’s important to ensure that there are no glitches, which not only rack up service calls (hence cost) but disrupt operations. To reduce any such disruptions Starbucks is deploying connected Internet of Things (IoT) devices across its store equipment. The company uses ‘reinforcement learning technology,’ which is a type of machine learning on its mobile app to engage better with its customers.

During Q1 2020, the Starbucks Rewards loyalty program grew to 18.9 million active members in the U.S., up 16% year-over-year. This growth is very crucial as customers joining its rewards program tend to spend more displaying a strong positive correlation between the two. Even in China, the growth of its 90-day active Starbucks Rewards members saw a 40% growth over the prior year when the program was relaunched.

Starbucks is currently the second most popular mobile payments app in the U.S. behind Apple Pay. With approximately 25.2 million users in 2019, Starbucks app represents 39.4% of proximity mobile payment users, according to eMarketer.

3. Ethical sourcing of its coffee

Moving ahead with a responsible approach. Starbucks has always been conscious about sourcing its coffee from ethical sources. The company has managed to achieve the milestone of sourcing 99% of its coffee ethically through Coffee and Farmer Equity (C.A.F.E.) practices. The company is now embracing the blockchain technology, powered by Microsoft Azure. Microsoft’s blockchain service is enhancing the transparency of its supply chain by recording each step on shared, immutable ledger that would provide all parties a complete view of their products’ movement.

Starbucks CEO recently shared that the company aspires “to become resource positive—storing more carbon than we emit, eliminating waste, and providing more clean freshwater than we use.” To achieve these, Starbucks would move to a more environmentally friendly menu, adopt reusable packaging, develop more eco-friendly stores and operations, among other things.  

Final Word

In addition to the above, Starbucks is working on increasing its global reach through its alliance with Nestlé, which has delivered encouraging results so far. With the growing consumerism and rising demand for coffee in markets like India, its licensed store model should become more rewarding going forward. The company continues to work on better operational efficiency while ensure investor interests via regular dividends. Overall, there is a long way ahead for Starbucks, which is set to turn 50 years old in 2021.

Disclaimer: The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared, and any exclusions or errors in reporting are unintentional.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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