Increasing afternoon traffic has remained elusive for Starbucks (NASDAQ:SBUX), but that has not stopped the company from trying. Now, it's getting a little smarter with its efforts and using its app, along with what it knows about customers, to drive traffic during lesser-visited times.
In this segment from Industry Focus: Consumer Goods, host Shannon Jones and Fool.com contributor Daniel Kline discuss the coffee titan's moves aimed at increasing afternoon traffic.
A full transcript follows the video.
This video was recorded on Jan. 29, 2019.
Shannon Jones: Let's actually dig more into the strategy. It's not just about technology. It's not just about having a good cup of coffee. It's also about when and how you target people. Let's shift gears and talk a little bit about how they're trying to drive more traffic throughout the day.
Dan Kline: The afternoon is the coffee shop holy grail. We talked about this back and forth when we were planning this show. We could probably spend an entire half hour just laughing about things that Starbucks and Dunkin' Donuts have tried to get you to go there in the afternoon. Beer and wine. Dunkin' Donuts had pizza. Starbucks had the physio sodas. What's your favorite failed Starbucks afternoon initiative?
Jones: I don't know if I would call this "failed," but it was certainly worth a lot more effort than it actually put out, the Unicorn Frapp.
Kline: [laughs] The Unicorn Frapp was more of a way to get kids in than so much a way to get you in in the afternoon. And it was terrible. I don't know if you were in the office when former Industry Focus host Michael Douglass and I walked around sharing one with everyone, but it was dreadfully sweet.
Jones: Absolutely, and certainly, for my part, it was one of the worst things I tasted. I didn't even know how to describe it at that point. To your point, they've tried a lot of different unique offerings, unique takes throughout different times of the day. Even like what you saw with the 2017 holiday season, they had this huge menu of offerings, they even started to pare that back this year to become a much more focused company in terms of what they're offering to customers.
Kline: I think they realized, when it comes to dayparts, nobody is going to say, "Hey, you know where I'll go for dinner? Starbucks." So, instead of focusing on, here's a new magic product that's going to get me to come in at three in the afternoon, they started analyzing their data. They've looked and said, "OK, Dan comes in in the morning and he buys an iced coffee every day. He comes in on the weekend and has his son with him, so he buys a refresher and some gummy bears or a bagel or something else." And they analyze that data and they say, "Here's a free offer specific for Dan," a buy-one-get-one or a discount or extra stars for the rewards program, whatever it is. And they say, "If you come in after two o'clock and do these things, we'll give you this." And that absolutely drives behavior. That makes me say, "Well, I wasn't thinking about walking to Starbucks with my son after school, but maybe we'll do that because they're giving me buy-one-get-one, so I won't be spending as much money." It's a much smarter strategy than throwing some ice cream and some coffee and trying to lure people in.
Jones: Not only that. To your point about the market being oversaturated with all these retail locations, if you can drive more customers to the store throughout the day, you're actually being able to leverage these existing locations and just crank out more revenue per location. It makes sense to focus on that. But, with all the failed opportunities that they've had, Dan, certainly easier said than done. It's also changing consumer behavior to get them to come to a coffee location for something like dinner.
Kline: Yeah. Look, I don't think Starbucks is going to become more than a secondary lunch option. They have the whole Mercato menu that they're testing some places. I'm sure, if you work near a Starbucks and can pick up a lunch and take it to go, you might do that. I don't think it's going to become a place a ton of people go in and sit down. But, they're open. If you're a Starbucks in a business district, maybe you're open until seven o'clock at night, and you're very busy until 10 o'clock in the morning. So, from 10 to seven, every new person you can bring into that store basically brings your costs down and your profit up. You already have the staff. You're already putting the lights on. Your incremental cost of serving a customer is almost zero. So, as I said earlier, they've gotten very smart. They're using their existing customers, their most loyal people, and they're trying to figure out -- I've probably gotten 20 different emails in the past two months with different ideas trying to lure me in in the afternoon. And I'm sure they're parsing all that data, figuring out what works, figuring out if there's different parts of the year where different offers work. Sometimes it's, "Come in at three o'clock and get a deal on mugs or other merchandise." That's bizarre, but maybe I was thinking about buying a mug, and that would put me over the top, and when I'm there, I'll buy a cup of coffee and a pastry. So, they're getting very smart about it. And I think, whatever they figure out, you'll see Dunkin' copy within the next six months.
Jones: Yeah, totally agree. Just to continue on the technology front, just with the Starbucks app in and of itself, consider this. Starbucks, 90 million transactions a week in over 30,000 stores now worldwide. The Starbucks app is actually considered one of the most popular mobile payments app -- hello, Apple Pay -- in the world, which is amazing to me. They've got 30 million users, 16 million of which are actual active rewards members. You can see how a company like Starbucks, with all of this data on so many users in terms of what they're buying, what time of day they're buying it, you can see how they can begin to leverage that data to target some of those upsell opportunities, to target their marketing and even their distribution and delivery, which we'll get to in a minute. You can really see how this is taking shape. Even more importantly, Starbucks has an AI cloud-based system to predict what a customer may actually like, even if they've never tried it before. So, Dan, maybe that mug that you saw in the store that you were enticed to buy, you would have not thought about that unless you actually had the app.
Kline: It's also one of the easier-to-use apps. I point this out because my mom does not use Apple Pay, but she absolutely uses the Starbucks app. The reason for that is, you can walk into a Starbucks, do your whole order. It all takes place in the app. If you're using Apple Pay, you have to figure out exactly where to hold it to the reader, it doesn't always pop up correctly, in different stores it works different ways, sometimes you have to put a pin in and sometimes you don't. The Starbucks app, if you mobile order and pay, you put your order in, you can customize it exactly how you want -- that's obviously contributed to same-store sales. If I'm walking up to a barista, I'm probably not going to say, "I'd like my Frappuccino with heavy cream, extra whipped cream, and could you grind up a cinnamon roll on top of that?" Whereas in the app, you can do all of those things with no shame. That's something we've talked about on the Consumer Goods show regarding app-based and kiosk-based ordering a whole lot of times. It's definitely helping push up sales when I can add a pastry or a piece of cake or a cookie or whatever without having to directly tell another person that I'm doing that on top of my coffee.
Jones: Absolutely. More importantly, if I have the app open, I'm much more likely to spend more time actually perusing the menu than I would if I just walk up. Naturally, I'm just going to order what I normally order anyway if I just walk up. But when I have a chance to actually sit and look at the menu, I'm more than likely going to have a higher order size. It's interesting because with Starbucks and this app, what they've found is that mobile app users are actually spending about three times more than the average Starbucks customer who's just walking in. It's really interesting there.
Daniel B. Kline owns shares of AAPL. Shannon Jones owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL and Starbucks. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends DNKN. The Motley Fool has a disclosure policy.