Most workers understand the importance of having their usual morning cup of coffee before heading off to the office. The caffeine helps to boost their alertness and gets them through tedious workloads and meetings. Starbucks (SBUX 0.43%) is the ubiquitous coffee joint that has a presence on almost every street corner. Not only does this beverage giant serve up fresh coffee to its burgeoning customer base, but it has also developed an effective strategy to both grow and retain that base. This fact alone makes it one of the most attractive restaurant stocks to own.
Known as the Starbucks digital flywheel strategy, it was developed five years ago as part of the company's foray into artificial intelligence (AI). A flywheel is a device that is able to store rotational energy, and Starbucks has coined the term "digital flywheel" to represent the momentum it obtains when the strategy is effective and in full swing.
By combining AI with marketing, Starbucks has managed to grow and expand its Starbucks Rewards program. In its Q3 2019 earnings call, management announced that the program now has 17.2 million active members, and the growth of 90-day active rewards members was 14% year over year. The company is an expert at generating customer loyalty. Here's a look at how the digital flywheel strategy creates such sticky customers.
The Starbucks Rewards program gathers a huge amount of data on customer spending and preferences. This means that Starbucks is able to personalize the experience for each and every customer based on their unique preferences and spending habits. The AI mines the data to suggest new food or drink choices and even goes so far as to customize recommendations according to the time of day.
The system also allows for personalized marketing and offers discounts to engage customers to keep coming back. Real-time triggers and push notifications create a deeper level of connection with customers. Users get a sense that Starbucks is aware of their preferences and is tailoring the experience to make it more fulfilling.
New store locations
The data obtained from the flywheel is also used to determine the optimal place to build new Starbucks outlets. This allows Starbucks to minimize the effect of cannibalization and ensure that a new store is able to capture the critical mass of customers that flow through certain areas. Though it may feel that there is a Starbucks located around every corner, such locations are actually carefully chosen after analyzing reams of data. This careful planning of new outlets stands in stark contrast with competitor Luckin Coffee (LKNC.Y 0.05%), whose store count has more than tripled to 2,963 stores versus the prior year in an apparently haphazard attempt to capture as much market share as possible.
Brightloom is the result of a merger of a restaurant technology company formerly known as Eatsa and the software license of specific elements from the Starbucks digital flywheel. As the company works with more and more licensees in various parts of the world, management wants to ensure it delivers a consistent Starbucks digital experience no matter which location they visit.
Starbucks is now able to provide digital flywheel services to its global license partners. Each licensee can incorporate elements such as ordering and the personalization engine into the Starbucks outlets they run, ensuring that customers are able to enjoy the same consistency. If I visited a Starbucks outlet in Singapore or Mexico, I would still enjoy the same characteristic experience and ambiance.
In Starbucks' latest Q4 2019 earnings call, a new AI initiative known as Deep Brew was mentioned. Deep Brew will further drive Starbucks' personalization engine, help optimize store labor allocations, and help manage inventory within the stores. These objectives, if achieved, would free up time for staff to actively connect with customers and provide that important personal touch.
Flywheel strategy driving member growth
Starbucks' flywheel strategy has resulted in impressive growth in its member base, with active members increasing by 15% year over year to 18 million at the end of fiscal year 2019. In China alone, the member base has crossed the 10 million mark for stunning 45% year-over-year growth.
Seeing such numbers, I'm confident that Starbucks can continue to leverage Deep Brew to report even more impressive results in the future.