"I would just add one thing; that is the sense [that] what we are establishing is the Starbucks currency."
-- Starbucks CEO Howard Schultz, fiscal fourth-quarter 2013 earnings call.
In recent months, Starbucks (NASDAQ:SBUX) executives have drawn attention to the company's success in three distinct areas: its digital strategy, which includes its tremendously successful mobile app, its deep social engagement with its customers, and Starbucks' mushrooming loyalty program. At the tail end of last year's fourth quarter 2013 earnings conference call, CEO Howard Schultz, as quoted above, tied these various strands together in a brief discussion of the Starbucks "currency." Schultz touched on the ease with which customers of any Starbucks brand (i.e. Starbucks, Teavana, La Boulange) could use their preloaded loyalty cards or mobile apps to shop and earn rewards interchangeably. He also alluded to the flexibility of this so-called currency across channels. For example, a customer can earn "stars" (rewards points, in the Starbucks parlance) by purchasing packaged Starbucks coffee at a local grocery store.
While this concept on the surface may seem like a proud CEO's bluster, Starbucks has developed a system that indeed functions in many respects like a currency. At its most basic level, this currency can be thought of as the total of prepaid funds plus stars that a customer carries in his or her Starbucks.com account. The currency exhibits characteristics of a few different payment vehicles. The loading of money on both physical cards, and the Starbucks mobile app is characteristic of a prepaid debit card. The "stars" system of rewarding purchases with points recalls branded affinity credit cards in which customers earn exchangeable benefits such as airline miles. The "Tweet-a-Coffee" program, which facilitates sending merchandise of monetary value (coffee!) to a friend via Twitter, uses a social network to mimic the functionality of M-Pesa, the text messaging payment system popular in Africa.
The difference between an investment and an expense
Why would it be in Starbucks' interests to develop its own medium of exchange? If you think it's primarily to make it easier for consumers to buy the company's products, I'm with you. But the idea that the currency itself can function as a revenue generator is also driving this push. Starbucks has historically avoided the massive advertising and marketing spends its peers undertake. Its management team intuitively favors opportunities to use fixed cost investments to generate additional sales over one-off advertising. The capital, time, managerial attention, and other resources being plowed into this initiative represent an investment rather than a pure expense. Promoting the Starbucks.com account is a way to pursue additional purchases from a customer base that already exists, versus the indiscriminate, notoriously hard-to-measure return on traditional advertising.
As for the size of this investment, we don't know how much Starbucks is funneling into its digital technology. We can surmise that management accounts for some technology and software improvements in its capital expenditures. Between fiscal 2012 and 2013, the company's capital expenditures jumped by more than one third, from $856 million to $1.2 billion. According to SEC filings, Starbucks plans to spend at least $1.2 billion again in fiscal 2014. While the coffee giant continuously pours cash into both existing stores and its roasting capacity, it's a safe bet that spending on digital capabilities is behind some of the recent bulge in capital expenditures. The capitalized technology and software finding its way onto the company balance sheet is one of the factors spurring the company's growth rate.
"I need a fix, 'cause I'm going down"
As the Beatles so eloquently communicated in "Happiness Is a Warm Gun," sometimes you've just got to get a fix. Starbucks' recurring daily purchasers are the legions who are caffeinating its currency in real time. This aspect of the investment is difficult for a quick-service chain with less frequent customer visits (take any major U.S. fast food chain) to replicate. From its base of loyal customers, the company vies for new converts, through its Tweet-a-Coffee program mentioned earlier, and also through its relentless promotion of gift cards.
As its payment prowess continues to evolve, Starbucks will attempt to move as many as transactions as possible from cash and unaffiliated debit and credit cards to Starbucks.com accounts. At the moment, Starbuck's payment app, as the most widely employed digital app in the U.S. (used by 5 million customers each week), is both a leader in, and indicator of, the global trend toward mobile transactions.
Starbucks "has currency," but is it fleeting?
In addition to possessing its own serious coin, Starbucks also has "currency" among desired consumer groups, in the sense of having prevalence or immediacy. As Mobile Marketer website recently reported, Starbucks' mobile app is "nailing it" in reaching the prized consumer group of millennial moms, by offering relevant rewards, quick and easy access to payment features, and engaging, often free content such as app downloads and music, to connect with this segment.
Starbucks' caffeinated currency may only exist as a temporary edge over its peers, as its success has already spurred development of competing mobile payment apps in the quick service restaurant sector. And while Starbucks utilizes elements of social networking to increase its brand property, it can't afford to slip on what really draws its customers -- its coffee and accompanying baked goods. Corporate traction with social engagement is notoriously fickle. Still, CEO Schultz has freed up day-to-day responsibilities to focus on digital development, and he clearly believes the future of the company extends beyond coffee. Watch out, Bitcoin?
Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.