Can delivery do for coffee what it did for pizza and what it promises to do for groceries? Starbucks (NASDAQ:SBUX) thinks so, and is moving forward with plans to bring your daily dose of java right to your desk.
Although the coffee slinger was a bit cagey in its latest conference call about exactly how it would roll out the new service, Starbucks said it believes delivery will enhance engagement with its customers, further extend their loyalty, and meld together seamlessly with its mobile apps for ordering and payment. Pilot programs should start appearing soon.
While there is potential to increase customer loyalty and sales just as Starbucks envisions, it's not nearly as simple as hanging up a sign in the window that says, "We deliver."
A lawsuit waiting to happen
Hailing from a family that has owned and operated numerous pizza parlors, I've seen firsthand how delivery changes the dynamic of the business -- and once introduced is difficult, if not impossible, to end. Delivery can dramatically increase business, but also carries its own set of problems.
Everyone remembers Domino's (NYSE:DPZ) 30-minutes-or-less guarantee that had to be discarded because of the multimillion-dollar lawsuits that arose from car accidents, including several fatalities, involving its delivery drivers. In one case, the victim's family received a $79 million judgment.
While Starbucks probably won't guarantee a delivery time, and there will likely be specialized equipment to keep the coffee hot, the logistics of speedily getting the order to the customer will still be costly and complex. Some of the issues the company will need to consider include:
- Hiring drivers versus using existing baristas
- Using a company-owned vehicle or the driver's car
- Ensuring drivers have clean driving records
- Setting up auto insurance and liability from accidents
- Whether to pay drivers less because they also get tips, creating a two-tier pay system
- Quality control
By rolling out delivery in targeted areas, Starbucks will gain the opportunity to see what works and what doesn't. It will also initially only offer the service in urban areas, which provide the greatest density to make delivery viable.
While CEO Howard Schultz called delivering hot or iced coffee Starbucks' "version of e-commerce on steroids," he also needs to protect the coffee giant from the equivalent of "roid rage."
A traffic cop on every corner
Traffic has the potential to degrade the quality of the coffee, which raises the question of how customers will react to receiving what might be a lukewarm cup of joe when they're used to getting it piping hot from the pot. And though not every cup of Starbucks is a $5 latte, will a delivery charge be added to the bill, resurrecting the perception that Starbucks coffee costs too much?
Coffee prices are already elevated because of a drought in Brazil, and while Starbucks says it anticipates pricing to remain neutral in 2015 as it remains "patient" waiting for the the market to normalize, coffee is still around 60% higher than it was a year ago and that will eventually filter into Starbucks menu.
And speaking of traffic, investors are concerned that foot traffic at Starbucks has slowed perceptibly. This past quarter the coffee shop reported a 1% increase in customer traffic was responsible for a 5% rise in comps, but analysts were expecting a better than 6% jump. Delivery might take off some pressure at the coffee counter occurring during the morning rush that can slow service down, but an influx of orders over the phone or via Starbucks' mobile app can lead to confusion and even slower service.
Delivering the goods
Introducing delivery proves Starbucks is once again an innovative leader in the industry. But while it will derive some benefits from the service, they may not be enough to drive the kind of changes investors and the markets are looking for to turn its stock around.