Be Careful, Starbucks

I'll say this for Starbucks (Nasdaq: SBUX  ) : Its most free-spending regulars aren't stupid.

But they are unhappy. They don't like the switch from the coffee champ's membership-driven Gold Card 10% discount program to what the company now calls My Starbucks Rewards, officially activated last week. The math doesn't favor Starbucks loyalists, writes reader Michael Turner at the blog StarbucksMelody.com:

This is a total step down for current Gold Card members. Assume someone goes every morning, at $4 a trip. After 15 stars they've spent $60 and will get a coupon worth $4, a 6.6% savings. The new program will be an improvement for the guy getting a daily drip coffee if he spends that coupon on a latte, but definitely not for the super regulars. Starbucks needs to add a third level to the program for super regulars – 50 stars? – and bring back the 10% discount.

He's referring to the tiered system inherent with My Starbucks Rewards. At the first tier, Green, achieved after five qualifying purchases, members get free refills on brewed coffee, free add-ons such as syrups, and a free beverage with every purchase of a pound of whole bean coffee.

Gold members get more -- just not the 10% discount for which they paid an annual $25 under the old program. Regulars earn a free drink after 15 qualifying purchases, and receive both a personalized card and coupons.

The wrinkle: My Starbucks Rewards is exclusively for those who purchase with a prepaid card. Cash and credit were acceptable under the old system. Now, Starbucks wants the float provided by such prepayments all to itself.

That's understandable. Capturing cash ahead of goods sold creates high cash conversion, as has been true for e-commerce titans such as Amazon.com (Nasdaq: AMZN  ) and Dell (Nasdaq: DELL  ) . It's also what makes insurance such an attractive business as well.

But this change also may be more than a nice-to-have step for Starbucks. Gross margin fell two percentage points in fiscal 2008, the year Starbucks first introduced its first Gold Card program, and has yet to recover. The implication? Gold card regulars may have been getting far more than $25 worth of value from the program, costing the coffee king points on the top line.

Starbucks also has strong competitors in Green Mountain Coffee Roasters (Nasdaq: GMCR  ) and Peet's Coffee & Tea (Nasdaq: PEET  ) , among others. Management appears to be acutely aware of the pressure to increase margins where it can.

"We expect positive comparable store sales this year. And the combination of that with increased cost [savings] are what we believe drives the margin improvement in the year ahead," said Chief Financial Officer Troy Alstead during the fiscal fourth-quarter conference call in November, according to a transcript made available by Seeking Alpha.

My Starbucks Rewards could help in that effort, but only so long as loyalists like Michael Turner keep buying as they have. Be careful, Starbucks. You can't afford to anger or alienate your core customers right now.

Now it's your turn to weigh in. Are you more or less likely to frequent Starbucks as a result of its new rewards program? Make your voice heard using the comments box below.

Amazon and Starbucks are Motley Fool Stock Advisor selections. Green Mountain Coffee Roasters is a Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers didn't own shares of any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy enjoys a good half-caf from time to time.


Read/Post Comments (9) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 12, 2010, at 3:24 PM, hannibal666 wrote:

    People eveywhere: Shout NO! to @starbucks and $4 venti coffee drinks. Think Frugal. Small can be so beautiful!

    @hannibal666

    http://twitter.com/hannibal666

  • Report this Comment On January 12, 2010, at 4:43 PM, KitKatMom97005 wrote:

    Last year I spent over $22,000 as a project manager buying travelers and pastries for daily meetings at my project sites. All from StarBucks thanks to the 10% reward program.

    This year, StarBucks wants me to advance them funds in the form of prepaid card. Only purchases made with the card count - if I pay cash - no gold star. Other vendors with punch cards give me a free drink after 10 or 12 purchases and I don't have to give them money to float their company in advance and the turnaround on the reward is faster. Also, under the new program if I buy a traveler - no stars. If I buy 5 lattes at once - 1 gold star. Go to a competitor and buy 5 lattes - you get 5 punches on their rewards card. So Starbucks - with your brilliant new plan - you can say byebye to at least $20k of revenue from this former customer. I have to buy more than at other companies, I have to loan you money, and you don't even give me credit for everything I buy - just one lousy "gold star". You can treat us like kindergardners with the gold star, but even a kindergardner can tell when they are being taken to the cleaners. This is no reward program.

  • Report this Comment On January 12, 2010, at 7:50 PM, swilson007 wrote:

    Starbucks is losing me.

    With the 10% discount card I used to (daily) buy a grande mocha which after the discount ended being $3.45. The new program discourages me from spending more so I now buy a tall at $3.05.

    I've sent 2 online complaints, discussed this with my area regional marketing manager, and complained to my local store management. The local store can't do anything and has said they've been hearing many other complaints as well.

    My new plan is to go significantly less and try other shops (coffee bean & tea leaf is nearby).

    Maybe it's just me, but it seems like bad business to take away a program your customers really like and replace it with one that makes them upset.

  • Report this Comment On January 13, 2010, at 12:16 PM, Sivster wrote:

    I see the general reasoning behind the new Sbux rewards program. I see why they want to remove the Gold Card. I don't even get it here in Canada. They want everyone to come to Sbux more often, not just

    the 'elite' gold card members. But I think their idea to separate stars via entire bills instead of individual purchases is frustrating for everyone in stores. The policy makes no sense. Baristas will have to ring up individual items, and customers will feel guilty for annoying baristas. Or customers will be frustrated because they did not annoy the baristas and separate the order. Overall I think that there should have been a newer technology that took every drink into account-- a system that recognizes and separates drinks from other items and awards a star for each drink. This system is ridiculous.

  • Report this Comment On January 13, 2010, at 6:41 PM, TMFMileHigh wrote:

    Thanks for the comments, everyone.

    Earlier today, I spoke with a member of Starbucks' PR team. She asked that I point out a couple of things that need clarifying, and I'm happy to do so here.

    First, the initial level isn't Green but instead "Welcome," and includes some free Wi-Fi and a free beverage on your birthday when you register a prepaid Starbucks card.

    Second, to earn My Starbucks Rewards stars, patrons have to pay at least a *portion* of their bill with a prepaid SBUX card. Full details at this FAQ (scroll all the way to payment, and to the question about paying partially):

    https://www.starbucks.com/card/rewards/faq/

    Thanks to Starbucks for reaching out. I'm still not sure loyalists will love this program, or that drop-ins will become loyalists as a result, but I'm glad to see Starbucks trying to raise margins while preserving at least some loyalty benefits for its customers.

    Any further comments?

    Thanks and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On January 13, 2010, at 8:27 PM, Fool wrote:

    If you don't like the new starbucks rewards card go to mystarbucksidea.com and complain. I am a barista at Starbucks, and believe me, I have heard plenty of complaints.

  • Report this Comment On January 13, 2010, at 10:52 PM, Fool wrote:

    I turned in my Gold card today when I was informed I needed to pre-load the card. Starbucks should learn that customers do not like to jump through hoops. Marketing efforts need to be easy and simple. I have now switched my allegiance to the Coffee Beanery. Good bye Starbucks. FYI, I buy 1 quad-venti carmel macchiatto every day and one for my wife on the weekend. I spend $5.61 a day during the week and between $20 and $30 on the weekend buying my kids frappacinos and ham and bacon artesian sandwhiches. You add up how much it is costing them. $3500 a year?

  • Report this Comment On January 18, 2010, at 12:49 AM, ozzfan1317 wrote:

    Just save yourselves the trouble and Buy Some Single servings through GMCR and take your fave flavor to work in a Mug problem solved..:)

  • Report this Comment On January 28, 2010, at 9:08 PM, joelrothschild wrote:

    It's worse than you think. I purchased two beverages at the same time on my SB card and they only gave me a single "star." Stars are given per-purchase, not per beverage.

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