Customer Convenience = Starbucks Cash Flow
Starbucks’ primary digital asset is its mobile application. Used by over 12 million customers, the app allows for quick and easy payment, rewards for loyalty, and additional features like store locator and music recommendations. How does Starbucks translate a great app into great economics? Well, for one thing they get your money upfront. Think of all the transactions you make in a day or week – how many of them do you actually pay for before the service has been received? Somehow the convenience, rewards, and predictability of the Starbucks experience allow customers to mentally justify the prepayment proposition. In 2016, Starbucks achieved 38% of its revenue, $6 billion, from pre-paid cards. This favorable working capital line item translates to serious cash flow for the coffee giant. In recent years, the company has achieved an annual net cash benefit of $150 million from prepaid cards, which will only grow as customers join the platform.
More Cash Flow = Better Innovations
Starbucks, therefore, gains an advantage in reinvesting in what CTO Gerri Martin Flickinger refers to as the “Starbucks digital flywheel,” innovations that continue to enhance the Starbucks experience and facilitate value capture (see slide). This includes game-changing initiatives like the 2015 introduction of Mobile Order and Pay. This new functionality allows customers to conduct the entire purchase process within the app and simply pickup their ready-made drinks in stores of choice. The feature now accounts for ~8% of Starbucks transactions. While there have been some minor operational growing pains in adapting to this immense demand, mobile ordering platforms have proven to increase customer loyalty, purchase frequency, and average ticket sizes. Thus, Starbucks is poised to reap the benefits of this innovation in the coming years. In fact, its confidence in the feature was recently manifested in its partnership with Amazon’s Alexa to create a “virtual barista” to facilitate seamless voice ordering. 
Better Innovations = More Sales
Customer-centric innovations like the above drive regular customers to migrate to the digital platform which further contributes to Starbucks’ bottom line. After joining the rewards program on the Starbucks app, spend has increased by a minimum of 20% across all customer segments (see chart). App users in general are more loyal and reportedly spend three times more than the average Starbucks customer as well. Digital conversion also drives value by facilitating the seamless collection and utilization of data. With 12 million active users, almost 20% of all Starbucks customers and growing, the company can observe customer and store data in real-time and use it to create personalized targeting. In addition to bolstering the Starbucks’ brand, this one-to-one communication has already shown signs of financial success by making marketing spend more efficient and driving increased promotion redemption and related sales.
By crafting an operational and financial model that leverages its digital offering to better serve customers, capture incremental value, and fund future innovations, Starbucks is well-positioned to continue to thrive as the traditional retail model evolves.