How Starbucks' Tech-Savvy Strategy Keeps it Ahead of Other Brands

From mobile payments to innovative rewards programs, Starbucks is using technology to keep its products and services on top.

Feb 11, 2014 at 1:50PM

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For most brick-and-mortar businesses, the threats of technology and online sales are making business harder. Starbucks (NASDAQ:SBUX), however, has been positioning itself to use technology, especially mobile devices, to make an even better experience for its customers. The company is finding ways to use digital innovation to drive more growth.

Lower traffic at physical malls and shopping centers has been a topic during the recent holiday season, and this could have meant lower foot traffic at Starbucks stores, which are often placed in shopping areas. However, Starbucks' traffic rose 4% during the last quarter. The company's ability to continually increase traffic has helped it post net income in 2013 of $530.7 million, up from $432.4 million in 2012. Aside from increasing traffic, Starbucks is increasing customer loyalty and interaction. To do so, management is continually developing a tech-savvy strategy for Starbucks that results in a better customer experience.

Allowing customers to take service into their own hands
If time is money, then that $5 coffee actually costs much more because of the time it takes to wait in line. Long lines, often full of those "grande, quadruple shot, half-caf, upside-down, skinny, vanilla latte" kind of people (you know the kind) have been a pain point for many otherwise happy consumers. Starbucks wants to change this by allowing customers to place orders before coming to the store via its smart phone app. The consumers will be able to pay on arrival or directly from the app, and their drinks will be waiting for them when they get to Starbucks.

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The Chipotle app allowing customers to choose their burrito options ahead of time.

Starbucks first started talking about this idea back in 2012, but the company is only just now reporting that it is close to launching the app feature. With the success of the Starbucks mobile app, which already allows consumers to find nearby stores, view menus, and more, this new feature is one more way to get consumers to take service into their own hands while also decreasing wait times in stores.

Starbucks is not the first company to use mobile pre-ordering. Other food service brands, such as Chipotle Mexican Grill (NYSE:CMG), already allow consumers to order before coming into the store, and Chipotle has done this since 2010. Smart moves like this, which show that food brands can be innovative, are part of the reason why investors are bullish on Chipotle and help explain why its share price has increased 76% over the last year regardless of its relatively high P/E multiple of 55. While Starbucks may not be the first to take advantage of pre-ordering, the company already has over 10 million customers using its mobile app, which means that the coffee chain will likely be able to implement this new feature with quick success.

Connecting with the customer and getting $1.4 billion in pre-sales
One way Starbucks has been able to get 10 million people to use its app is through its loyalty program, which rewards customers with free drinks and food after they buy a certain number of drinks on a registered card/app (the two can be synced), as well as on their birthdays. A unique feature of the app is that with the "stars" feature customers can keep track of their rewards until they receive a free drink, in a fun and interactive way.

The app also sends customers free Apple iTunes downloads and other goodies. These are the ways that Starbucks uses its mobile app to connect with the customer, and gets the customer to continue using the app to purchase drinks. By continuing to use the app, consumers continue to load money into the app for mobile payments which ensures that the money will be spent at Starbucks and not at a competitor. This is how Starbucks was able to get customers to load a record $1.4 billion onto gift cards and mobile apps, essentially pre-sales, during the last quarter of 2013 alone.

The customer loyalty rewards system is catching on within the coffee industry, and competitors are trying to catch up. Dunkin Brand Group (NASDAQ:DNKN), the owner of Dunkin' Donuts, made headlines the other week with the announcement of their own loyalty program. The DD Perks Rewards program is now implemented into the Dunkin' Donuts app, allowing customers to gain points toward free items with each visit. This month, the company will also integrate mobile payments into the app. Dunkin' Donuts will continue to try and push its own mobile marketing strategy as Starbucks has done, but without a foundation of users comparable to that of Starbucks it is not clear if the strategy will work as well.

Foolish bottom line: Starbucks will continue to innovate
These technological developments have made the customer experience at Starbucks even better than it would be otherwise. The good news for these customers is that Starbucks will continue to use technology to innovate its products and experiences. In an interview about the digital strategy, comments were even made that hinted at the use of a "Starbucks currency in other retailers outside Starbucks." Customers, and investors, can be sure that Starbucks' digital strategy will only get better from here.

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Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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