Starbucks to step up rollout of 'digital flywheel' strategy

Starbucks is one of the few retail operations showing strong growth. A focus on digital relationships with customers is giving the company an edge. Now Starbucks is gunning for an agile, cloud and personalized approach.

Written by Larry Dignan, Contributor July 28, 2017 at 3:00 a.m. PT

Starbucks will start rolling out more of its "digital flywheel" strategy in the fall as it aims to keep store sales growing via customer personalization, frequency and its rewards program.

In its fiscal third quarter results, Starbucks said that its Starbucks Rewards membership was up 8 percent from a year ago to 13.3 million members. Starbucks Rewards also accounted for 36 percent of U.S. company operated sites. Mobile payment was 30 percent of transactions in the U.S. and mobile order and pay was 9 percent of transactions.

Add it up and digital was a primary driver of Starbucks comparable sales increasing 5 percent in the third quarter.

Starbucks charts its digital future as CEO Schultz sets to depart

On a conference call with analysts, Matthew Ryan, global chief strategy officer, said elements of Starbucks' digital flywheel strategy will be filled out in the months ahead. The strategy, outlined in December, revolves around customer acquisitions, spend-based rewards, personalized offers and convenient ordering.

Ryan noted:

The data are clear that when we acquire a new customer, the act of signing up for a digital relationship results in a sudden and sustained lift in spend as measured by careful pre-post tracking. That's how we're able to drive so much value from a relatively small portion of customers, 13.3 million active reward customers compared to a total of approximately 75 unique customer visits to our stores each month. We know that even modest increases in the total universe of active customers drive tremendous long-term value.

At the center of Starbucks' digital strategy is a unified commerce system and cloud architecture. There will also be a lot of integration between Starbucks cloud infrastructure, commerce and inventory systems. Ryan added:

Last year, we deployed new personalization technology and a new front-end experience in our app, investments that have contributed to the measurable success in digital we are experiencing. Today, we are enabling a new generation of digital innovation that will begin rolling out in waves starting this fall. This fundamental modernization of our technology stack will replace legacy rewards and ordering functionality with a new, scalable, cloud-based platform through rewards and ordering, improve customer data organization and tighter integration with store-based operating systems, including inventory and production management.

This platform will enable Starbucks to change rewards programs on the fly and target subsets of customers. The first phase of this personalization technology rolls out shortly. The second phase will include new ordering features. Ryan said that Starbucks wants to expand the use of mobile order and pay by no longer requiring customers to use a stored value account. This expansion of guests will allow Starbucks to build a digital customer relationship with personalization tools.

In the longer term, Ryan said the technology platform will integrate with inventory and point-of-sale systems. A tool called the Digital Order Manager will streamline inventory management in the company's busiest mobile order and pay stores.

The Starbucks marketing teams will use the company's personalization engine to engage with customers and develop loyalty. The game plan for Starbucks is to boost the reach of the reward program.

Ryan noted:

We're not complacent and recognize the digital relationships will increasingly be the key drivers of demand generation, even in physical stores. By leading in a combination of physical and digital, we not only drive superior business results in the short term based on rewards, ordering and personalization, but we also make it very challenging for digital companies to us in the physical world.

What's unclear is how Starbucks is building its digital tools and how much of it is custom vs. off-the-shelf. In October, Starbucks hired Tal Saraf as senior vice president of engineering and architecture. According to Saraf's LinkedIn, his role is to hire developers to bring the digital flywheel to life. Saraf is also at Starbucks to build a modern cloud architecture.

And Saraf appears to have cloud chops since he was a general manager at Amazon Web Services and vice president at Cisco's cloud services unit.

Starbucks' job listings provide some information on its tech stack. Requirements for developers roles include development on Amazon Web services, Docker and experience with Cassandra and Kafka. Other roles require experience with Microsoft Azure and Google App Engine with others needing as-a-service delivery experience and microservices and distributed architecture knowhow.

Starbucks executives are betting that a digital approach can continue to juice sales in a tough retail environment. By the end of fiscal 2019, Starbucks is aiming to give 80 percent of its global stores access to the digital flywheel.

Relevant topics include:

Digital transformation

DevOps

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Starbucks to step up rollout of 'digital flywheel' strategy

Digital transformation

DevOps

Managing vendors

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