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Starbucks Craves More Growth: Will Mobile Remote Ordering Do the Trick?

By Joseph Gacinga – Mar 25, 2014 at 11:32AM

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Starbucks must perform a delicate balancing act when it launches its mobile pre-ordering program to avoid lowering the quality of its customer service.The program, if successful, could provide a much-needed boost to revenue growth for the company.

For close to four years now, Starbucks (SBUX -1.41%) has been recording very impressive growth numbers which are more commonly seen from young upstarts, not behemoths like the coffee chain. Prior to the last quarter, the company had put up an amazing run of 15 successive quarters with revenue growth in excess of 6%, partly spurred along by its gift cards, which have been phenomenally successful.

Over the Christmas holidays, 10% of American adults received Starbucks gift cards. Starbucks customers loaded $1.4 billion onto the cards in the last quarter alone, and $4 billion during the whole year. The program has been so popular that Tonx, a Los Angeles-based coffee start-up, now accepts Starbucks gift cards as payment for its coffee.

After its remarkable run of high revenue growth, Starbucks saw its top-line growth decline in the last quarter to 'just' 5%. Quite naturally, the giant coffee brewer would like to return to its high-growth story, and this time it's betting on mobile remote ordering to drive new growth. A number of restaurant chains, including Chipotle Mexican Grill (CMG -0.34%), already offer mobile pre-ordering.

Through the mobile pre-ordering system, customers will place their orders through Starbucks' mobile app and then pick up their orders later. Starbucks has brought up the idea before--the company's management first floated the concept back in 2012. However, executing the idea is a lot more complicated than it looks at first. It's probably easier for Chipotle to pull off mobile pre-ordering than it would be for Starbucks since the former predominantly serves fast food while Starbucks mainly serves coffee, although it has a rapidly growing food portfolio.

The company needs to first look into some logistical and business aspects of the program before kicking it off. If pre-ordering really takes off, will it diminish impulse purchases of packaged food, pastries, and other goods, which now provide good revenue sources for the company? Will the company prioritize pre-orders through its mobile app, or in-store orders by customers who visit its stores? Starbucks would obviously want to make buying coffee and food easier and more convenient for its customers, but not if it comes at the expense of overall sales. That may be why the company has been biding its time with the planned roll-out, as it may intend to avoid making any big missteps that could harm its core business.

On the other hand, pre-ordering would make a lot of sense for Starbucks since the coffee giant is increasingly serving food along with its coffee. Food takes longer to prepare than coffee does, and customers who order before checking in 30 or 45 minutes later would find their food ready when they finally arrive. Starbucks CFO Troy Alstead recently pointed out that the food opportunity looks very promising for the company.

However, serving food comes with other challenges for the coffee brewer. Food preparation is more complicated than brewing lattes or cappuccinos, and it could slow down service times at the company's stores considerably. The last thing Starbucks wants is for customers to see it as just another McDonald's (MCD -0.87%), as long customer queues have become synonymous with the fast-food giant.

McDonald's recently received the No. 1 ranking in Wall Street's list of America's most-hated companies with the worst customer-service records (although the bone of contention there was the low wages it pays its workers). So, ultimately Starbucks will have its work cut out for it as it tries to implement mobile pre-ordering without lowering the quality of its customer service.

If Starbucks does finally decide to launch mobile pre-ordering, one thing that would work in its favor is the fact that more than 10 million of its customers already use its mobile app when they pay for their orders. The mobile pre-ordering platform would, therefore, only require an iteration of the existing app and perhaps a little marketing from Starbucks to tell customers about its availability.

Growth through opening more stores
Starbucks has been having a field day with new store openings in the U.S., as the new stores have been making more money than older stores have. Since the return of CEO Howard Schultz, Starbucks stores have seen a marked improvement in quality of products served, efficiency, and productivity. The average Starbucks store in the U.S. makes $1.3 million in sales ever year, while those in Europe and Asia average $1.1 million and $900,000, respectively. As long as fixed costs do not increase, rising sales lead to fatter margins, which is a good thing of course.

Starbucks now wants to capitalize on the success of its new stores by opening 1,000 new ones throughout the world in fiscal 2014. Since Mr. Schultz's return the company has slammed the brakes on its store opening rate, which had begun to impinge on its quality of service.

The year of 2013 was the first year when in-store traffic at many retail stores gave way to online shopping in a big way. Starbucks has been quick to capitalize on this trend as it has also opened an online store.

Peers in comparison
Starbucks' shares are not too expensive given the company's healthy top-line growth, and the shares compare favorably with those of peer Dunkin' Brands Group (DNKN).

Chipotle's shares are quite pricey as the company has a forward P/E in excess of 50. Investors seem to love the fast-casual eatery theme, and they have consistently bid up the company's shares from a bottom of $36.86 in 2008 to more than $575. The company has been growing phenomenally, mainly through new store openings, and it has a five-year annualized growth rate of 33%.  It also sports an impressive 17% operating margin. Chipotle's earnings have grown admirably by 17% and 30% in the last two quarters, and 21% earnings growth sits squarely in the cross-hairs for the current quarter.

Dunkin' Brands is another top performer in the space. Dunkin has mainly concentrated its stores within New England and the tri-state area. However, the company is currently undertaking an aggressive expansion program in the U.S. in which it hopes to leverage its powerful brand that is well-known in New England. The company also sports one of the highest operating margins in the industry.

Foolish bottom line
Although mobile pre-ordering likely presents a considerable challenge for Starbucks, its highly popular mobile app will ease the path for the company. The company is also likely to see more growth from more store openings, especially in the U.S., without seeing a huge increase in costs. Starbucks' infrastructure of distribution is well built out and its cost of advertising can be kept down by amortizing the cost across more stores.

Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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