Mobile Strategy: Winners And Losers

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 |  Includes: AAPL, DNKN, KKD, MCD, SBUX
by: Daniel Lauchheimer

The smartphone has brought many benefits to users. Apple (NASDAQ:AAPL) has sold around 385mm iPhones all across the world, and Android (NASDAQ:GOOG) activated somewhere around double that amount (1bn total, around 750mm for phones). The innovations provided by these devices have permeated every area of our lives -- maps, mail, internet browsing, just to name a few. The innovations have also gotten to a very industry specific level with airlines, restaurants, and hotels creating apps specifically for their businesses.

In the area of restaurants, independent app developers like Belly, Punchh, and mVirtual Card have led the way in creating loyalty apps for large and small establishments both in the USA and abroad. The larger establishments created their own apps internally, and some have deployed them with great success. Starbucks (NASDAQ:SBUX) reigns supreme in this area, with its app used in 30% of total transactions. In this article I will try to unpack the significance of this trend, and add some substance in terms of what mobile engagement can mean for sales. I will then take that information, and see how it could apply to other restaurants.

Starbucks

Starbucks rolled out its rewards card app in September 2009 with features that allowed users to keep track of their card balances and locate stores. The card got a huge upgrade in January 2011 when not only could you keep track of rewards on your phone, but you could also load money onto your card directly on your phone. This addition led to dramatic changes. Starbucks CEO Howard Schultz revealed in a conference call that mobile transactions accounted for 10% of all US transactions. Further, CFO Troy Alstead noted that mobile payments make for a, "a very sticky transaction by virtue of the fact that people have preloaded their money". We need to ask how much does this 10% mobile payment adoption effect/add to the top line.

In order to do this we need to examine two figures; first, store revenue, and second, store openings. We need to examine both because revenue can grow for many reasons, chief among them, expansion. In order to accurately try to parse out the different elements of Starbucks' revenue (and see where mobile card processing fits in) we need to include both of these numbers in our calculations.

As you can see from this chart, sales increased dramatically since the app gained traction, and picked up even more velocity when Starbucks introduced the ability to load your card in 2011. Rising prices also will raise revenue -- this year Starbucks instituted a 1% price hike, factoring that in gives us 12.32% growth YTD over 2012.

While we cannot measure why more people came to Starbucks, and spent more money, we can say it happened. I think we can definitely attribute some of this success to their app strategy. How many extra customers came into the store because of the app? How much more money did they spend because of the app? I don't know. But I think we can definitely attribute some of their remarkable sales growth by analyzing some of their newer initiatives -- namely, the mobile app strategy.

Opportunities For Other Restaurants

Many other food establishments across all different segments have adopted a mobile strategy. Dunkin Brands (NASDAQ:DNKN) has a similar strategy to Starbucks -- an app that you can load with money, and use to find deals etc. However, some restaurants in the fast casual/fast/coffee space still have not gotten onboard.

McDonald's (NYSE:MCD) sticks out in this group as a complete laggard. Their mobile app doesn't do much of anything besides for giving store locations and nutritional info; frankly, it sucks. Considering the evidence we presented above for the strong growth Starbucks has seen in their business from implementing a mobile strategy, McDonald's should strongly consider following suit. Their app could mimic Chipotle's (NYSE:CMG), which allows you to order from your phone, or they could establish a slightly less ambitious model. Either way, McDonald's has been missing out on this potential revenue stream, and it behooves management to implement something of substance.

Lastly, Krispy Kreme (NYSE:KKD) also has a poor mobile strategy. Considering they compete directly with the likes of Starbucks and Dunkin they need to craft an aggressive mobile strategy if they want to compete.

Bringing It All Together

Investors who believe strongly that mobile payments will continue to drive sales have two strong takeaways from the above analysis.

  1. Go long Starbucks -- they have clearly played the strongest hand in this game, and continued growth in this area should help the stock

  2. An overhaul of the McDonald's and/or Krispy Kreme app could catalyze those stocks upwards both in the short and long term.

Again, a lot of this hinges on the weight you place on the strength of the mobile payment space. If you think a lot of Starbucks' aforementioned growth came as a direct result of its mobile strategy, and assume they will continue to drive adoption then go long the stock. But the less you think the mobile strategy had to do with recent growth, the less compelling you will find the above two takeaways.

Final Thoughts

Earlier this year Tim Cook participated in an interview at the All Things D Conference. In this interview Mr. Cook spoke about the success of Apple products not only in terms of sales figures but also in terms of engagement figures. Mr. Cook noted that while iOS products only make up about 20% of total mobile devices they account for 59% of mobile internet traffic. These figures get even more extreme in the tablet space where the iPad accounts for 80% of all internet traffic, and double the amount of online transactions.

The emphasis of these numbers by Mr. Cook points to an important theme -- that companies like Apple not only want to sell products to their customers but they also want to offer a compelling and engaging experience. Part of this experience will come from increased engagement in the app space where device makers like Google and Apple need third party developers to offer great experiences for their users. As such, the continued development of high quality apps will not only directly increase the sales of third party developers like Starbucks, and Dunkin, but also increase engagement for the device manufacturers themselves.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.