Starbucks' (SBUX 0.53%) brand is no doubt its greatest strength. Consumers worldwide recognize the company's mermaid logo, and they are willing to pay premium prices for what is, in many ways, a commoditized product. Management has done an excellent job at maintaining the brand's relevance over time.
A lot of credit for the company's prosperity goes to Starbucks' incredibly successful loyalty program. The business ended the latest quarter (as of April 3) with nearly 26.7 million active reward members in the U.S., up 17% from a year ago. That's enough reason for investors to like the stock right now.
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Driving customer loyalty
Those who sign up for Starbucks' rewards program can earn points (called Stars) that are redeemable for free beverages, food, or merchandise. And in addition to getting a free drink on your birthday, members are often presented with various exclusive offers throughout the year to earn more points. The mobile app is easy to use and navigate, allowing customers to place orders ahead of time for pick-up and delivery.
Starbucks was one of the first retail-based businesses to launch a loyalty program, and it has worked extremely well because of people's love of caffeine. Coffee is the ultimate product that lends itself to repeat purchases. And consumers have an unlimited number of choices, so introducing a rewards program was a prudent strategic move by Starbucks to build a loyal fan base of repeat customers.
In the most recent quarter, 54% of sales at U.S. company-operated stores came from Starbucks' nearly 27 million rewards members, the highest percentage on record. They tend to visit stores more frequently and spend more, on average, than regular customers. And the business doesn't have to spend a lot on marketing as these consumers are already well aware of the brand.
Operating a top-notch rewards program provides Starbucks with other benefits as well. Management has a valuable channel to engage with its customers. For example, Starbucks currently has a mobile game called Road to Paradise that allows users to win points, gift cards, or even a new car. The app allows plenty of opportunity for interaction, which helps keep the brand on consumers' minds.
Because the rewards program has been available for more than a decade, Starbucks has collected (and continues to collect) massive amounts of data about its customers, such as their favorite drinks and food, times of the day they are likely to order, or what payment methods are popular. This info helps to inform marketing, product, and store decisions.
In fact, because of consumers' increasing propensity to order through the app for pick-up, Starbucks is adding more drive-thru locations in the U.S. in an effort to raise accessibility and convenience. Lowering the friction for customers can ultimately lead to higher demand and sales over time.
The successful rewards program reinforces Starbucks' brand strength. It's a tremendous asset that the company has developed, and it will propel the business going forward. Starbucks has proven that even restaurants can find ways to incorporate technology into their operations in order to drive customer loyalty.
Investors should appreciate Starbucks' forward-thinking mentality.
