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Keep an Eye on Starbucks' High-Tech Ideas in Its Q1 Report

By Anders Bylund - Jan 18, 2020 at 12:18PM

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The coffee chain is using artificial intelligence and the Internet of Things to accelerate its international expansion.

Coffee giant Starbucks (SBUX 2.03%) had a few quiet years recently but returned to market-beating form in the summer of 2018. The stock has gained a market-stomping 78% over the last 18 months, including a 45% climb in 52 weeks.

The company will report results for the holiday season on Jan. 28. Starbucks is investing in new technologies in order to perk up its operating efficiency in the long run. Here's a look at three of the company's most interesting tech ideas, and how they might affect the upcoming first-quarter 2020 report.

Extreme close-up shot of a Starbucks cup.

Image source: The Motley Fool.

Better coffee machines everywhere

The high-performance Mastrena machine isn't exactly new to Starbucks. The highly automated coffeemaker, which can grind your beans and pull three espresso shots at once (all while also steaming some milk), was introduced in 2008 and is now standard equipment for company-owned Starbucks stores in the U.S.

But Starbucks is still rolling out Mastrena machines to its international locations, and not all franchise stores are on board yet. The company intends to complete those upgrades by the end of 2020.

That's a big deal because the Mastrena can do so much more than Starbucks' older coffeemakers ever could. The ability to produce espresso shots 50% faster limits the time customers spend waiting for their drinks. The machines also come with built-in Internet of Things (IoT) sensors, connected to Starbucks' support center.

"We can see every shot of espresso that's being pulled and we can see centrally," CEO Kevin Johnson said in the fourth-quarter earnings call. "If there is a machine ... that needs tuning or maintenance, that allows us to improve the quality of the shots that we're pulling."

Artificial intelligence

The IoT sensors tie into an artificial intelligence (AI) system Starbucks has dubbed Deep Brew. Based on real-time data from every Mastrena-equipped Starbucks store, Deep Brew analyzes the information from many different angles. The system then spits out recommendations on everything from inventory orders and local advertising plans to personalized drink recommendations and equipment maintenance warnings.

"Deep Brew is a key differentiator for the future, and as we continue our quest to build world-class AI capabilities to better support partners," Johnson said. "With the Deep Brew and our predictive analytics, we're going to be able to determine if the machine needs preventative maintenance on it before it breaks, and so that simplifies things for our partners."

So a store with the Mastrena has access to Deep Brew features that just aren't available to stores that are stuck with older machines. Together, Mastrena and Deep Brew should boost each store's efficiency in myriad small ways, adding up to significant improvements over time. This is not a short-term strategy but a proactive way to drive a stronger and more sustainable business in the long run. Expect to hear more about Mastrena and Deep Brew installations in the first-quarter report, especially as they relate to international expansion.

Online orders in China

On that note, Starbucks opened more than 600 locations in China last year, and the store network in that country now stands at over 4,000 coffee shops. The way to modern Chinese customers' hearts appears to go through their mobile devices, and Starbucks is exploring digital strategies to expand its business in the country as quickly as possible.

Johnson said: "As we expand our store footprint, we have also been investing in innovative retail formats, including our Starbucks Now store in Beijing that opened in July, a unique express retail experience that seamlessly integrates physical and digital touchpoints to enhance the mobile-order-and-pay and the Starbucks Delivers customer experience. We recently celebrated the one-year anniversary of our China digital partnership with Alibaba (BABA -1.03%), and I'm pleased to share that we surpassed our goal of expanding Starbucks Delivers to 3,000 stores in 100 cities by the end of the fiscal year."

Mobile orders accounted for 10% of Starbucks' second-largest and fastest-growing market in the fourth quarter. That includes a 3% contribution from the mobile-order-and-pay system that was introduced in China just one quarter earlier. Look for more details on mobile-order growth in China as that strategy plays a large part in Starbucks' expansion plans there.

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