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Just How Big Is Starbucks Mobile Order & Pay and What Does It Mean For Rivals?

By Daniel B. Kline - Jan 26, 2016 at 7:00AM

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It's certainly not good news for Dunkin' Donuts and Panera Bread.

Starbucks ( SBUX -0.16% ) has not only changed coffee consumption in the United States, it has also been a digital pioneer.

The company has been well ahead of the curve with its app, first pushing into mobile payment and now offering the ability to order and pay without standing in line. This has forced competitors including Dunkin' Donuts ( DNKN ) and Panera Bread ( PNRA ) to invest in their own apps, but they're late to the party. Starbucks has a huge percentage of its customer base not only using its app, but using it to pay and avoid standing in line.

CEO Howard Schultz and his executive team shed some light during it's Q1 2016 earnings call as to just how big the company's app has become. What he shared should not only cheer Starbucks investors, but should send a chill down Dunkin' and Panera executives' spines.

What Starbuck's leaders say?
The coffee chain has a good quarter with revenue jumping 12% to a record $5.4 billion, but Schultz seemed most excited about the company's digital growth.

"Technology innovation is further strengthening our brand, improving our efficiency and in-store execution, increasing our profitability and most importantly, enabling us to deliver an elevated Starbucks experience to our customers, particularly to Millennials," he said.

During the call COO Kevin Johnson pointed out that the company's mobile rewards platform (its app) now has 11.1 million customers in the U.S., a 23% increase over Q1, 2015. Those users not only signed up, they actually used the app.

Mobile Order & Pay is easy to use. Source: Starbucks app

"In the quarter, over 21% of total U.S. transactions were paid using the mobile apps with December accelerating to 22%, and we are seeing further acceleration in the month of January," Johnson said. "Over 1 million customers in the U.S. used our Mobile Order & Pay capability in the month of December and those customers averaged approximately five mobile orders in the month, driving meaningful revenue growth and incrementality."

The COO also said, "The use Mobile Order & Pay is growing and we are now processing over 6 million mobile order and pay transactions per month."

Why does this matter?
In creating a huge audience for its app, Starbucks has solved a number of problems. First, through its generous rewards program it has built enhanced customer loyalty. Just like the old punch cards where buying a certain amount of sandwiches or pizzas gets you a free one at your local sub shop or pizza place, Starbucks gives customers a free beverage for every 12 stars earned.

But, more than just offering a digital take on an old promotion Starbucks has been very clever with how it doles out reward stars. By offering more for certain purchases or in specific dayparts, the company can manipulate consumer behavior. This can do everything from encourage sampling of new products to get people into stores during slower parts of the day.

In addition to being a loyalty driver, the Starbucks app has also made it so people don't have to pull out cash when buying something from the chain. This benefits the company as studies have shown that "credit cards can stimulate overspending," according to Psychology Today. There are a number of reasons why that is true, but the one that matter here is that "it is less psychologically painful to swipe a credit card than to physically hand over cash."

It's even less painful to hold up your phone pay for a purchase and in many ways it feels more like playing a game than spending money. 

The last benefit of the app is that Mobile Order & Pay makes stores more efficient and it shortens the line. By taking orders without using a person, the app allows the company to put more behind-the-counter personnel into production positions. This lets more customers gets served faster and has the fringe benefit of making wait times shorter for casual, non-app customers who might have otherwise kept walking.

Good for Starbucks, bad for competitors
The Starbucks app makes its customer more loyal, allows for them to spend freely without thinking about it, and lets stores serve more customers while also making lines appear shorter. Panera's app, and to a lesser extent Dunkin's, actually offer many of the same features (Panera even has its own version of Mobile Order & Pay), but Schultz's company has a first mover advantage.

Panera might be its closest competitor in terms of digital ordering, but the company will only have about half of its company-owned locations equipped to take app orders by end of the year, according to its CEO Ron Shaich, during its most recent earnings call in October. Dunkin is even further behind since its app has loyalty and payment options, but mobile ordering is not offered.

Starbucks pushed its customers into the digital world and it remains a step ahead. Its app now offers Spotify integration allowing customers to save songs heard in stores as well as listen to special playlists. That might not be as important as mobile payment, but it shows that the company remains a step, maybe a few steps, ahead of its rivals.

By being an innovator the coffee chain has made it so consumers may not even want to bother signing up for Dunkin Donuts or Panera's apps. Why would they need to when Starbucks has over 23,000 U.S. locations where people can order in advance via app and pick up their drink/food without waiting in line?

This may not be an insurmountable lead for the coffee company, but it's a pretty big barrier to competition, which should fuel sales growth for a long time to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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