Starbucks' (SBUX -1.11%) latest financial results, for the third quarter that ended July 2, were impressive in that they showed that same-store sales jumped 7% in the U.S. and 46% in China. Earnings per share also exceeded Wall Street estimates.
These figures were certainly encouraging for shareholders, especially for a business that was severely challenged by the pandemic. But I have my eyes on one other metric that Starbucks just announced, which I believe demonstrates the true strength of the company.
Here's what investors need to know about this top coffee stock.
Loyal members
In 2009, Starbucks launched the version of its rewards program that consumers know and love today. They can earn points (called stars) when making purchases, which can be redeemed for free food and drinks. Propelled by the rising popularity of smartphones and digital payments, it has proven to be incredibly successful, with 75 million 90-day-active members across the world today.
It's hard to deny how valuable the rewards program is to Starbucks' success. In the U.S., for example, there are just over 31 million members, up 15% year over year. In the last two fiscal quarters, these members accounted for 57% of sales at all company-operated domestic stores (its licensed stores are excluded here). That's a majority share of revenue coming from less than 10% of the U.S. population.
The rewards program counts 20 million members in China, Starbucks' second-biggest market. Based on the country's population, which is more than four times that of the U.S., and a middle class that's projected to have 1.2 billion people by 2027, the rewards program is poised to become even more successful than in the U.S. The company is focused on expanding in China over the next several years, which will certainly help attract loyalty members.
Another factor to keep in mind is how dense China's major metro areas are, which lends them more to digital ordering, since that is what's most convenient for customers. Starbucks is already opening digitally enhanced stores, and this should drive people to sign up for a rewards account.
The advantages for Starbucks
The program, with its various promotions as well as the increased accessibility and convenience, drives greater loyalty and repeat purchases. Without the affinity that the rewards create, customers might go to a rival's location that is less busy, cheaper, or closer.
Loyalty is important, no doubt, but encouraging repeat purchases is crucial. Coffee is the rare purchase that lends itself to frequent transactions. This means that customers are building daily habits. Starbucks has known this for a while, and it has capitalized on it. All of this strengthens the already powerful brand.
For management, it's a wonderful advantage. It creates a more predictable and steady business, allowing the company to uncover near-term trends that can assist with budgeting and investment decisions.
There are two other advantages in Starbucks' loyalty program. One is the massive amount of data that it collects, providing insights into consumers' food and beverage preferences, their typical purchase amount, and what time of the day they usually place an order. It's information that can help guide marketing to encourage even more spending.
The other is the cash infusion the company gets up front from all the consumers who earn more stars if they pre-load the Starbucks mobile app before making a purchase. As of July 2, it had more than $1.6 billion in a category it calls "stored value cards and loyalty program." That's essentially a free loan that it can then turn around and earn interest on, which matters even more in a higher-rate environment like today.
Investors are definitely familiar with Starbucks, but they should now have a better understanding of what really makes the company special.