Crypto-Coffee: How Starbucks Is Using Technology To Stay Ahead Of The Competition

Be honest, how ‘basic’ is your Starbucks order? Whether you ask for a pumpkin spice latte (PSL) or the latest single-origin roast, digital supply chain technologies are making your coffee experience better.

Starbucks has grown from one store in 1971 to over 24,000 locations across 70 countries today. [1]  However, scale creates operational complexity with potential for costly inefficiencies that can impact a company’s ability to deliver on its customer promise.  Demand for high quality coffee has outrun supply for the third consecutive year as climate change and labor shortages have impacted growers, creating short-term and long-term potential for variability in coffee bean supplies. [2]  In addition, pricing pressure from competitors, mobile-ordering bottlenecks in stores, and recent brand reputation challenges resulting from political statements made by senior executives are causing Starbucks to cede market share, creating concerns about the company’s ability to meet sales forecasts. [3] [4]  To maintain profit margins, flexibility to match these swings in supply and demand with one another is critical and can provide a competitive advantage over peer companies.  Investing in supply chain technologies can provide Starbucks the agility and cost control necessary to stay on top in a highly competitive industry.

A Behind the Scenes Look at Starbucks Global Supply Chain [10]

Management has made significant short and mid-term investments in digital technologies to reduce waste and limit inefficiency in their supply chain in recent years.  One such example is their adoption of an automated information system combined with a centralized logistics planning network.  This allows real-time monitoring of demand down to the store-level, as well as up-to-date information on inventory levels, storage capacities, and trucking schedules.  With this level of visibility at each stage of the process, the company can create and adapt production and distribution schedules that match consumer demand. [5]  This is particularly important given the perishable nature of coffee and the short window after roasting beans where freshness is ideal for brewing a great cup of java.

Other applications of technology in the distribution system that consumers are more aware of are the My Starbucks Rewards Program and Mobile Order & Pay system.  While these are certainly marketing and operations-driven initiatives, the data collection with these systems for regional and seasonal demand fluctuations in product mix related to customization further enhances the responsive capabilities of their digital supply chain systems.  In his 2015 fourth quarter earnings call, Howard Schultz discussed how “customer-facing and partner-facing mobile and retail experiences…are improving our efficiency and in-store execution, increasing our profitability, enabling us to further extend our lead over competitors and…deliver an elevated Starbucks experience to our customers.” [6]  As consumers increasingly demand higher levels of customization and transparency in their products, Starbucks will have to continue to innovate to maintain a competitive edge.

When assessing the biggest threats facing Starbucks over the next decade, I question if the company will become a victim of its own success.  Shultz has acknowledged that brand ubiquity has started to threaten its reputation as an upscale provider of premium coffee beverages. [7]  In addition, as growers are stressed to adapt to climate change, Starbucks could face rising prices and declining quality with the volume of beans they have to source to meet customer demand. [2]  Starbucks management could address these concerns by investing in blockchain technologies within their supply chain.

Imagine being able to track coffee beans from “crop to cup” and provide detail and transparency on every touch-point in the process to farmers, partners, and consumers.  That is exactly what blockchain startup Bext360 is building the capabilities to do.  Machines equipped with sensors that can sort and identify coffee cherry size and ripeness, indicators of quality, are used to grade and digitally attach this information in an identification tag that will follow the beans for the life of the product. [8]  Layered on top of the existing digital infrastructure, customers would have the ability to see where the beans for each coffee beverage they order were sourced, what average grade was assigned to the cherries from that blend, and when those specific beans were roasted.  Customers could also verify sustainability practices, in addition to a virtually limitless potential for personalization.

Combining this data with soil readings and weather reports would also allow growers to quickly leverage each other’s best practices in adapting to climate change, helping alleviate potential future sourcing complications.  John Deere and AGCO are two companies in the agricultural business that are already beginning to create these systems-of-systems to optimize on overall farm performance metrics. [9]

These are lofty goals however, and questions remain about the implementation and scalability of blockchains in the coffee industry:

Is it too early in the development cycle of blockchain technology for Starbucks to invest in a pilot project?  Is their sourcing market too fragmented to commercially implement this type of technology?

(760)

 

Sources

[1] Starbucks, “Starbucks Company Profile,” https://www.starbucks.com/about-us/company-information/starbucks-company-profile, accessed November 2017.

[2] Nassos Stylianou, “Coffee under threat: Will it taste worse as the planet warms?” BBC News, June 19, 2017, http://www.bbc.co.uk/news/resources/idt-fa38cb91-bdc0-4229-8cae-1d5c3b447337, accessed November 2017.

[3] Leslie Patton, “Starbucks Loses Market Share as Rivals Roll Out Drink Deals,” Bloomberg, March 8, 2017, https://www.bloomberg.com/news/articles/2017-03-08/starbucks-loses-market-share-as-competitors-roll-out-drink-deals, accessed November 2017.

[4] Kate Taylor, “Starbuck’s biggest problem is only getting worse,” Business Insider, March 9, 2017, http://nordic.businessinsider.com/starbucks-traffic-declines-in-february-2017-3, accessed November 2017.

[5] Michael Hoban, “What Can We Learn From Starbucks’ Supply Chain Management?” blur Blog, blur Group, January 7, 2016, https://www.blurgroup.com/blogs/supplier-diversity/starbucks-supply-chain-management/, accessed November 2017.

[6] Seeking Alpha, “Starbucks (SBUX) Howard S. Shultz on Q4 2015 Results – Earnings Call Transcript,” seekingalpha.com, October 30, 2015, https://seekingalpha.com/article/3624326-starbucks-sbux-howard-s-schultz-q4-2015-results-earnings-call-transcript?part=single, accessed November 2017.

[7] Kate Taylor, “Starbuck’s is spending millions of dollars to fix its ‘basic’ image problem,” Business Insider, September 11, 2016, http://www.businessinsider.com/starbucks-doesnt-want-to-be-basic-2016-9, accessed November 2017.

[8] Robert Hackett, “How This Startup Plans to Use Blockchain to Revolutionize the Coffee Supply Chain,” Fortune, October 24, 2017, http://fortune.com/2017/10/24/blockchain-coffee-bext360/, accessed November 2017.

[9] Porter, M. and J. Hepplemann, “How smart, connected products are transforming competition,” Harvard Business Review (Nov. 2014).

[10] Starbucks Coffee, “A Behind the Scenes Look at Starbucks Global Supply Chain,” YouTube, published November 30, 2012, https://www.youtube.com/watch?v=ElYNhGbOTOQ, accessed November 2017.

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4 thoughts on “Crypto-Coffee: How Starbucks Is Using Technology To Stay Ahead Of The Competition

  1. So neat to hear about the aspirations of Bext360 (beyond coffee). In general, farmers continue to suffer because their efforts are constrained by regulations and poor infrastructure. Certain countries suffer far more than others — for example, Pakistan’s agriculture accounts for ~20% of the country’s GDP, while employs an astounding 43% of the labor force [1]. This clearly speaks to the efficiency gaps. Most of the world’s coffee is grown by small farmers, many of whom depend on unreliable income (often less than $2 per day) [2]. After having visited coffee farms in Colombia, I can speak to their struggles caused by limited resources and inefficient processes. This creates a large gap between their efforts and payouts. That’s why I like the idea of Bext360 helping create equitable pay for the farmers’ efforts. Given there’s a long tail of small farmers (25 million) who produce 80% of the world’s coffee, their financial well being is important for the future viability of coffee production [3].

    That said, there’s no question that such practices need to be in place to help farmers. The challenge is figuring out the forum of implementation. I believe it’ll be extremely difficult for a Starbucks to implement this technological and infrastructure change to the enormously fragmented base of suppliers. Rather I feel Starbucks should partner with coffee regulating bodies such as the Colombian Coffee Growers Federation, who mission since 1927 has been to ensure coffee growers have transparency around pricing and employ best farming practices in the fields [4], to bring rigor and transparency around the entire coffee value chain (via help of Bext360). It’ll be more feasible for the federations to lead the change effort, while Starbucks focuses on the resourcing.

    [1] https://en.wikipedia.org/wiki/Agriculture_in_Pakistan
    [2] http://www.worldbank.org/en/news/feature/2016/02/25/a-year-in-the-lives-of-smallholder-farming-families
    [3] http://fortune.com/2017/09/29/national-coffee-day-starbucks-blockchain/
    [4] https://www.federaciondecafeteros.org/clientes/en/sostenibilidad_en_accion/

  2. It sounds like Starbucks is doing a good job of tapping into the front-line of data in their stores and utilizing it in their supply chain decisions. It also seems like they have efforts going forward to collect more data for demand prediction. As for piloting blockchain technology and Bext360, do you think Starbucks is better off owning this technology, making it unavailable for competitors? Or should they simply be a customer, avoiding the investment and allowing their coffee beans to be scored up against their competitors’ beans? If Starbucks truly feels their brand is becoming ubiquitous and losing its reputation as “high quality,” then having the entire coffee industry measure up with Bext360 should help their brand image. However, if other lower-quality competitors choose not to participate, then this doesn’t really change things for Starbucks.

  3. Really interesting to hear about Starbucks’ supply chain and how they’re digitizing on that front after leading the way in digital retail payments. I’m fascinated by their use of My Starbucks Rewards and Mobile Order data to better forecast customer demands. If they are using the data from those programs to get a better understanding of demand on a customer-by-customer level (vs. store level or transaction level), I can totally understand why that might lead to better forecasting capabilities. In addition, it seems like the rewards program also gives them the ability to quickly test marketing strategies digitally to see what kind of customer reaction a certain marketing program would have, thus allowing for better forecasting [1].

    In response to Brext360, I wonder what happens if beans from different farms get mixed together. I’m sure not every single bean can have its own blockchain ledger. And if beans remain grouped together by farm for most of the supply chain, shouldn’t it be easy for Starbucks to understand the quality of each farm’s beans today? Surely by the time the coffee reaches consumers, the beans are mixed from various farms – otherwise, I would imagine the taste / quality of the coffee would have much less consistency than it does today. It’s interesting to think about how blockchain would work for products that don’t have discrete units. And if customers get a list of every farm whose beans made it to their cup of coffee, I wonder if that’s better than Starbucks simply providing a more transparent list of all of its coffee suppliers, the sustainability practices at each one, and the rates they pay each of the farmers.

    [1] https://controlmousemedia.com/starbucks-rewards-data-driven-marketing/

  4. Thanks for a great read, Elliott. Your question of whether Starbucks can fall victim to its own success is particularly relevant given a recent example for the business.

    In your article, you mentioned the overarching benefits of the Mobile Order & Pay system at Starbucks. Although the system has created efficiencies for stores by allowing customers to start their transactions elsewhere, its growth and adoption have inadvertently created congestion where customers pick up their orders, leading to some customers leaving stores without completing a purchase.[1] Here, the company’s success has led to challenges for the business: as Starbucks innovated to shift and improve its processes in stores, a new bottleneck was created requiring further attention.

    This example emphasizes the importance of thinking carefully about some of the challenges you mention, ones which companies like Starbucks must continually manage as they grow and shift.


    [1] Kevin R. Johnson, President, Chief Operating Officer & Director, Starbucks Corp., remarks made during Q1 2017 Starbucks Corp. Earnings Call, Call, January 26, 2017. From transcript provided by Starbucks Corp, https://s22.q4cdn.com/869488222/files/doc_financials/quarterly/2017/transcripts/SBUX_Q1-2017-Earnings-Call-Transcript.pdf.

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