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Why Starbucks thinks retailers will want to become its partners on mobile

Starbucks said last week that regional and national retailers could become key marketing partners as the coffeehouse chain provides more clarity on its mobile ambitions, from using My Starbucks Rewards as a currency to scaling its ordering and delivery platform.

In a conference call with analysts last week to discuss the company’s fiscal third quarter results, president and CEO Howard Schultz discussed the unique digital partnerships the chain is making across a number of verticals. Recently announced partnerships with Spotify, New York Times and Lyft as well as future ones, including possibly with retailers, will leverage digital assets such as My Star Rewards, Mobile Order & Pay as well as delivery, thereby helping Starbucks reduce its cost of customer acquisition and drive incremental traffic.

“Now our plan all along has been to bring both our MSR membership and our digital capabilities to scale, and we are now there, and so then leverage the Starbucks brand, our deep engagement with customers, our global store footprint and our world leading mobile digital card and loyalty assets to create the foundation of a much broader external mobile digital and loyalty platform,” Mr. Schultz said. “One that would extend to purchases and experiences outside of the four walls of the Starbucks store.

“This new digital external platform will enable businesses whose customer demographics are similar to our own and with whom we choose to partner to purchase stars from Starbucks and then distribute the stars in order for them to acquire, retain and reward their own customers with the gift of Starbucks. And what’s really wonderful about this opportunity is that gift can only be redeemed at a Starbucks store.”

Mr. Schultz reported that Starbucks has received many phone calls from regional and national retailers who interested to be part of the chain’s mobile ecosystem.

Mobile transactions
Starbucks reported last week that mobile payments now account for 20 percent of all in-store transactions in the United States, more than double what they were two years ago. Additionally, the chain is now processing nearly 9 million mobile transactions each week.

The chain also reported that global comp store sales grew 7 percent during its fiscal third quarter while traffic grew 4 percent.

These results are being driven by Starbucks’ investments in digital technologies with the introduction of Mobile Order & Pay, the imminent launch of mobile-driven delivery and expanding its successful loyalty program. These moves are helping drive traffic, as reflected in the 4 percent growth during the third quarter.

In comparison, Mr. Schultz pointed to what he sees as a mistake made by traditional retailers and consumers brands over the past couple of years, which is increasing their digital advertising budgets. This has driven up the cost of customer acquisition with little return on investment, per the executive.

Coffee delivery
Starbucks first introduced Mobile Order & Pay in 150 company-operated stores in the Portland area last December. By March 2015, the program had expanded to 650 stores in the Pacific Northwest region.

With the strategy driving strong results, the company accelerated its roll out and now offers Mobile Order & Pay in 4,000 locations and expects to have it available in all stores in time for the upcoming holiday season.

Starbucks is planning to add the Mobile Order & Pay feature to its Android app in the U.S. and to introduce the technology into international markets in the near future.

Mobile Order & Pay will also be expanded with new features such as suggested menu recommendations, which is currently still in beta mode.

Mobile Order & Pay is also a key component of Starbucks’ first new express store in New York, which is just 500 square feet big.

The next big initiative from Starbucks will be delivery, which will be piloted in Seattle and in the Empire State Building in New York before the holidays.

Operational challenges
While a number of merchants have jumped into mobile ordering, early reports highlight the operational challenges. In some cases, consumers are reportedly waiting longer for orders placed in advance via mobile than if they had waited to order in person once they arrived at the store.

Comments made by executives during last week’s call with analysts suggest the chain is puling ahead in figuring out how to efficiently integrate mobile ordering into the store environment.

“Mobile Order & Pay is fueling both revenue and profit growth in every market in which it has been deployed with customer adoption starting faster and accelerating with each new phase we roll out,” Mr. Schultz said.

“By enabling our customers to order ahead and avoid waiting in line, Mobile Order & Pay is enabling us to capture more on-the-go customer occasions, and the data is clear,” he said.

“In those stores where Mobile Order & Pay has been deployed, lines are shorter, service is faster and in-store operations are more efficient. The net result is increased traffic, incrementally that is exceeding expectations, improved throughput and an elevated Starbucks experience for our customers.”

Final Take
Chantal Tode is senior editor on Mobile Commerce Daily, New York