Strong brew: Starbucks CEO promises to compete on mobile payments, reveals on-demand delivery plans

By Michael Carney , written on October 31, 2014

From The News Desk

The era of mobile payments has arrived, seemingly overnight.

But while plenty of companies have attempted to enter this market in years past, none have managed to drive mainstream adoption of their technology. None, that is, except for Starbucks. Which is why public statements this week by Starbucks CEO Howard Schultz that the company will “have a major role to play” in the future of the payments category should not be dismissed as ivory tower bluster.

Yes Apple Pay has entered the market with a vengeance. PayPal (including subsidiaries Braintree and Venmo) has a massive installed base and ever-improving technology. And Google has its Wallet platform, along with existing relationships with millions of consumers and merchants.

But according to Schultz, Starbucks accounted for approximately 90 percent of all mobile payment transactions in the US last year. In other words, this isn’t an upstart looking up at established giants and promising to compete. This is one of the most mature mobile payments platforms in the market saying, “we relish your competition.”

Schultz said during yesterday’s earnings call:

While we have been investing in the development of our world-class mobile technologies for many years, and there has been a great deal of activity and speculation around the mobile payments space recently, mobile payment and consumer adoption of the technology overall is still in its infancy. Please consider this metric: In 2013, payment for purchases by use of all mobile devices in the U.S. totaled $1.3 billion. That was the entire market. Now, listen to this, over 90 percent of those purchases taking place in a Starbucks store. That means we had 90 percent share of mobile payments in 2013, while bricks-and-mortar commerce in 2013 totaled more than $4.2 trillion. ...

Already, close to 7 million transactions per week, 16 percent of all transactions conducted in U.S. Starbucks stores, occurs via a customers’ use of a mobile device. No company and no retail store, domestically or internationally, even comes close. And while that figure has been growing by almost 50 percent per year, the real growth is yet to come. Starbucks Coffee Company has cracked the code at tying mobile payment to loyalty, and we are now receiving great interest in partnerships from mobile payment companies who see the value of our rewards program and the mobile payment behavior we have established. And therein lies Starbucks' secret sauce. The company hasn’t developed any earth shattering technology to speak of, but what it has done is take a fanatical customer base and incentivized the use of mobile payments with rewards. It’s been a win-win for both consumers and the company. Consumers avoid having to carry a physical rewards card with them and yet get all the benefits of frequent purchases in Starbucks stores. The company, on the other hand, gets data about its customers’ purchase habits, which is critical for delivering personalized promotions. It also drives loyalty and repeat purchases due to pre-loaded card balances – which the company surely earns interest on – and rewards.

This has allowed Starbucks to acquire payment credential information for millions of US consumers. There’s no doubt that many businesses would be interested in getting access to this audience. And unlike Apple Pay, the Starbucks payment platform works on both iOS and Android and across new devices (like the iPhone 6) and prior generation phones. This compatibility and reach will be a major selling point for Starbucks (as well as PayPal) when trying to onboard merchants.

The issue with the above, however, is that these are likely short-term advantages. Assuming you believe that mobile payments will inevitably one day become ubiquitous, Starbucks offers nothing that other companies and platform providers aren’t better equipped to provide, or won’t be in a few years’ time.

One of the core beliefs in Silicon Valley is that if something is not your core focus, someone who makes it their core focus will beat you. Starbucks’ core focus is building out physical storefronts and serving its customers beverages and food, all in an enjoyable neighborhood cafe atmosphere. A software-based payments platform, while a massive opportunity, will (or at least should) always be a secondary focus for the company, because if its core coffee shop offering slips, then the payments platform will lose much of its appeal for consumers as well.

Conversely, PayPal, for example, is focused exclusively on building the world’s best payments platform – a focus that will only become stronger following its plan spinout from eBay next year. And while Apple is not first and foremost a payments company, it is a company focused on delivering software-based services alongside its hardware products, and creating the maximum consumer value so as to create an ecosystem lock-in effect. Apple Pay fits squarely within that mandate.

So where does that leave Starbucks? If the company moves quickly and capitalizes on its current advantages of a large installed base and consumer familiarity then it could likely line up some interesting partnerships with other merchants. How defensible those integrations would be is another question.

The problem is, integrating a payments system is non-trivial (although it’s becoming easier) and switching from one to another is something that companies are reticent to do. So for Starbucks to land substantive integrations, it will need to convince its fellow merchants that it offers the best solution for the mid- to long-term, not just the short-term.

Even in that case, there are questions to be answered around how Starbucks could extend its popular loyalty program, which would likely be a key motivator for interested merchant partners. It’s unlikely that many of these other merchants would be excited to reward their customers with free coffee, but Starbucks has yet to introduce a platform capable of supporting multiple branded loyalty campaigns. Whether it has one in the works or has the capabilities to build and support such a platform is unknown. And none of this considers the future loyalty program that Apple is widely expected to introduce.

Another interesting wrinkle in this scenario is Starbucks’ announcement during the same earnings call that it plans to offer on-demand delivery of food and beverages across the US in the next year. If the company can eventually offer other merchants not only a mobile payments and loyalty platform, but also a local delivery and logistics solution, that may carry more appeal. At the same time, that’s an entirely different operational challenge and would bring Starbucks into direct competition with Amazon, Uber, Shyp, Deliv, and plenty of others.

One thing’s certainly clear, Schultz and Starbucks aren’t resting on their laurels, content to have a wildly popular captive payments and loyalty platform. The company continues to think big and invest its time and resources in advancing that platform, evidently beyond the walls of its own brick-and-mortar storefronts.

“We are playing offense here,” Schultz said during last week’s call. “We understand that there is a macro issue, and a consumer shift. And we began that last year right after holiday, and come this holiday and calendar (2015) we are going to be in a position to win. End of story.”