Winners (And Loser) Of New Starbucks Rewards Program

| About: Starbucks Corporation (SBUX)
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Summary

Starbucks new rewards program makes sense as it rewards dollars spent rather than transaction total.

The company benefits in numerous ways and many consumers win as a result.

As always, there is still room for improvement.

Throughout Starbucks' (NASDAQ: SBUX) ascent from a small, local whole bean retailer in Seattle to the premier global specialty coffee and tea brand that it is today the company aspired to never betray the trust built with the company's customers. This truth manifests itself throughout all the literature documenting Starbucks' story. In fact, CEO Howard Schultz's Onward and Pour Your Heart Into It as well as former company president Howard Behar's It's Not About the Coffee all go out of their way to highlight Starbucks' relentless commitment to uphold promises with both consumers and partners.

It seems paradoxical, then, that at a time of great growth for My Starbucks Rewards the company would completely alter the reward structure. In fact, some Starbucks customers online saw the recently announced rewards reconfiguration (detailed below) as a betrayal of that very strong trust.

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Could it be that Howard Schultz and company are actually conspiring to increase short-term earnings at the expense of the trust of loyal consumers? Is the new move one that transitions away from rewarding loyalty? After examining three separate customer scenarios we will see that the move is actually more effective in rewarding loyalty, since it awards degree of loyalty. We will also see both the clear and latent benefits the transition offers the corporation and its shareholders.

Rewarding Degree of Brand Loyalty

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Early reactions to the Starbucks blog post debuting the plan featured some outrage over the new 125 star requirement to receive a reward. One customer said "So, let's see. Since I just stop for a cup of drip in the morning it will now take me 30-odd visits to earn a reward, not 12. Thanks a lot." Another customer even went as far as saying that Starbucks has lost their business altogether: "No longer a Starbucks customer when April 2016 arrives! I was a big fan of Starbucks and their rewards program. They had the best rewards program. But as of this April, when you roll out your new rewards program I WILL NO LONGER BE A STARBUCKS customer. This is a huge disappointment to me regarding the lack of benefits with this new rewards plan."

These reactions are not without merit, as the chart above depicts those purchasing only a tall coffee each morning stand to lose considerably from the move. Rather than receive a free reward after 12 visits, the tall coffee-only consumer must visit Starbucks over 31 times to receive a reward under the new system.

For consumers running to competitors as a result, it is worth noting that it seems unreasonable for this trend to be meaningful in quantity as it does not make financial sense. Consumers paying 1.95 for a single 12 ounce coffee (regardless of how representative of total Starbucks consumer this pattern is) are actually still better off at Starbucks, since the per-ounce cost for coffee at Starbucks (independent of any rewards) is $.1625. The consumer running to Dunkin Donuts, where a small 10 oz coffee costs $1.65, or $.165 an ounce, is actually losing money by switching.

Some may suggest that it is the principle of the matter, that Starbucks is no longer rewarding brand loyalty and that action is cause for jumping ship. But the reality is such that Starbucks is extending the extent to which they reward loyalty. Consumers spending more are rewarded more, and under the new system Customers 2 and 3 in the above chart are narrowly better off and much better off, respectively.

Rewarding the size of expenditure rewards the extent to which a consumer is loyal, showing consumers that if they spend more, they shall receive more in return. Under the old system, a $2 order was rewarded the same as a $15 order, perhaps signaling to the higher spender that their larger order was not appreciated. Choosing to be loyal to Starbucks in more ways than one (by buying merchandise and food items, for example) is rewarded precisely under the new system. Thus consumers displaying a high degree of loyalty via spending more are rewarded more.

While many have debated (and will continue to debate, understandably) whether the higher threshold for rewards (above $60 in spending) was the right choice, the numbers above show that many customers are winning under the new program. In order to be better off under this system a consumer must exceed an average ticket size of $5.21, which -- for many like Customers 2 and 3 -- makes the new system a source of more frequently offered rewards. As a barista I see far more customers spending closer to or above $5.21 than I do those spending under $3, making far more consumers winners (or at least nearly breaking even) under the new system.

Benefits for the Company:

As passionate as Starbucks is about advancing social causes, inspiring and nurturing the human spirit, and staying true to its core, at the end of the day it is still a for-profit entity. One can understand, then, that a big move like reorganizing a rewards program must have some measurable benefit for the company.

Starbucks benefits in numerous ways from the new program, including the company's new ability to have more flexibility in running rewards promotions, expanding margins (though many have pointed to this, it is likely too soon to prove this point entirely), ability to incentivize higher ticket orders, and opportunity to demonstrate that they listen to consumer suggestions.

The first of these benefits -- the ability to more flexibly run rewards promotions is nearly unlimited in scope. Under the old systems the currency, stars, was fueled only by transaction, thus promotions to sell individual products had to be centered around offering transaction-equivalent stars. If Starbucks wanted to sell more of a given product and offer stars as a reward, they were limited to give out one, maybe two stars. Now, however, Starbucks has flexibility and the ability to be creative in offering more specific quantities based on the desire of driving the promotion's effect.

That is, if Starbucks wants to sell more breakfast sandwiches and it's urgent to do so they can increase the starcount offered. Sure, this was possible under the old reward system, but it was limited due to the fact that 12 stars equaled one reward, therefore most promotions carried similar weight (one or two stars).

Before it may not have made complete business sense to use the star system to reward Mobile Order & Pay orders. Under the new system it becomes a large possibility as the number of stars being offered is more flexible. Whereas it may not have been worth it for Starbucks to offer one star out of 12 (in addition to the customary) one star from the transaction before, offering a couple stars now to accelerate the adoption of Mobile Order & Pay is a large possibility.

By incentivizing larger ticket orders Starbucks can encourage at the margin decisions for consumers to purchase more than just a coffee, providing a rewards boost by adding that breakfast sandwich or slice of cake. This effect can also drive in-store sales of Keurig Cups, Via Instant Coffee, drinkware, and coffee beans. The more a consumer spends, the closer they get to a reward, a paradigm not honored under the old rewards system.

The move, though poorly received by some, also signals a receptiveness to consumer input. Part of the aforementioned original blog post by Starbucks highlights the fact that changing the rewards program in this way was the number one request on My Starbucks Idea; honoring the idea shows that Starbucks truly cares about suggestions made by consumers.

Starbucks is continuing to find new ways to delight their most loyal customers, as those spending more will receive more under the new program. There is still room for improvement and perhaps a system can be designed to delight those who are spending less per order. As there are numerous company benefits and a clear advantage to many customers, the new rewards program is another step in Starbucks' journey to delighting more and more customers. It is certainly not likely to be the final step, and I expect Starbucks to be unrelenting in evaluating the success of the new program and imagine improvements will be made where needed.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SBUX over 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.

Additional disclosure: I am a part-time barista at a licensed Starbucks store, all views are my own.