Before the recent run-up, Starbucks (SBUX 0.47%) stock had gone practically nowhere over the last four years, up less than 10% between Halloween 2019 and Halloween 2023. But the company's master plan is finally taking shape. It centers around the Starbucks Rewards program, mobile order and pay, and tailoring stores based around convenience and speed instead of coffeehouse comforts.
Here's what these initiatives mean for the coffee stock and whether it is a buy now.
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Starbucks is working to adapt and evolve
When Starbucks got started in Seattle's Pike Place Market in the early 1970s, it gave customers coffee, tea, and spices sourced from around the world that you couldn't easily get from another coffee shop or grocery store. Howard Schultz joined Starbucks a decade later in the early 1980s and positioned the company's business model around Italian-style espresso and coffeehouses. In other words, hot drinks and a focus on atmosphere. It was a unique approach that caught fire.
Starbucks went public on June 26, 1992, for a split-adjusted price of $0.27 per share -- or around 380 times less than the company is worth today. And until the release of Starbucks' first mobile app in 2009, growth basically came from the same business model that had worked since the early 1980s paired with drive-thrus.
Starbucks didn't know it then, but the launch of the mobile app would signal the next phase of the company's evolution and would lead it to stray further and further from its roots. Starbucks may be one of the best and most easily understood examples of the old adage "evolve or die."
Starbucks is completely different today than when it started a little over 50 years ago. In Starbucks' fiscal fourth quarter (ended Oct. 1), cold drinks made up around 75% of total drink sales. And much to the chagrin of coffeehouse lovers, Starbucks is all about processing as many transactions as possible, for as much as possible, as fast as possible.
The pandemic accelerated the trend of shutting down coffeehouse-style stores in favor of stores with drive-thrus and mobile order pickup stations. If you live in a big city, you may have even encountered Starbucks stores that are little more than a countertop of drinks and food items and a couple of baristas busily fulfilling mobile orders. These are called Starbucks Pick Up stores. And they embody the direction the company is headed.
One of the greatest challenges with a coffee shop business model is that money is made from transactions, not from people hanging out or working in the coffee shop. In the early days, value adds like a cozy place to work with fast internet and free in-store refills on base tea and coffee provided worthy incentives to get customers to go to Starbucks. But then, Starbucks began leaning more and more on to-go orders, drive-thrus, and in-store pickup.
Today, fast internet is no longer a differentiating factor. And a local coffee shop or market can easily outdo Starbucks when it comes to unique coffee, tea, and spices. Rather, Starbucks' edge is customization and convenience, an advantage that has been amplified by its mobile app, mobile order and pay, and the Starbucks Rewards program.
Starbucks Rewards continues to grow quickly
In Starbucks' latest quarter -- which featured its highest revenue in history and capped off its best fiscal year for revenue in history -- North American 90-day active Starbucks Rewards members increased by 14% year over year to 32.6 million. Meanwhile, China now has over 21 million active loyalty members, a 22% year-over-year increase.
Like any food and beverage company, Starbucks' recipe for success is higher sales volumes and higher prices. The best way of achieving those results no matter the economic cycle is to have a loyal customer base. Starbucks has had that for decades. But the rewards program takes it to new heights. And it's a key reason why Starbucks is putting up impressive profitability despite sizable pay increases for its employees and inflationary pressures.
Starbucks encourages customization
Another key element to Starbucks' next stage of growth is highly successful seasonal drinks and customization options. Even from its early days, Starbucks leaned heavily into customization. It gave customers the ability to get a very specific drink they probably couldn't get elsewhere. But today, Starbucks has taken that concept much further through added options that can go with any drink, like various cold foams, to variants of popular drinks, like nitro cold brews, seasonal cold brews, and more.
The Starbucks app is essential for supporting this customization because it ensures the order is communicated correctly from customer to barista. And since it is done ahead of time, it also helps limit clogging up the order queue and reduces or eliminates how long a customer has to wait for a complicated drink.
In sum, Starbucks has always wanted folks to order some wildly complex and expensive drink. But now, you can get an even more custom drink, get rewards for it, and you don't have to wait in line to order or pick it up. It's a win for the customer that naturally drives organic growth.
A rewarding strategy for Starbucks' shareholders
Fifteen years ago, Starbucks Rewards, mobile ordering, in-store mobile pickup, and Starbucks Pick Up stores were not a part of Starbucks' business model. Today, these elements are what is driving the company's next stage of growth.
Starbucks' latest record earnings were the best example of the full power of all of these factors coming together at once. The fiscal fourth quarter is usually its best quarter since it includes the summer travel season and the launch of fall beverages like the pumpkin spice latte in late August. And this quarter, Starbucks exceeded expectations thanks to higher prices and higher volumes, which drove revenue growth and a higher operating margin.
Starbucks is only beginning to unlock the full potential of the Starbucks Pick Up concept. It is engaging better than ever with its core customer base and growing that core base with new Starbucks Rewards members.
All told, this company is undergoing a complete transformation that is likely to benefit shareholders for years to come.
