Yahoo Finance How Starbucks is using AI to fuel its growth, deepen customer relationships
Starbucks (SBUX) is creating a future in which artificial intelligence and digital technology will help the coffee giant fuel its growth.
In an exclusive interview with Yahoo Finance Live this week, Starbucks COO and group president Roz Brewer described the tech-enabled future of the coffee chain's growing drive-thru stores, including customizable menu boards that leverage A.I. to suggest beverage and food items based on factors such as the weather, time of day, store inventory, popularity, community preferences and the customer's purchase history.
“[It's] helping us actually really speak to the customer and help them decide, but also, it's improving what we could see in terms of expanding tickets and being suggestive about what a customer might be interested in,” Brewer explained.
Starbucks' internal artificial intelligence program, known as "Deep Brew," is allowing the coffee giant to innovate and experiment with machine learning and artificial intelligence not only to personalize its drive-thru experience but also to automate time-consuming tasks such as inventory management and preventive maintenance on its internet of things (IoT) connected espresso machines.
“We're using a lot of the business intelligence we're gaining from A.I. not only to accommodate directly the customer experience but even the partners' experience,” Brewer said.
Fueling store growth
Starbucks, which has long established itself as a destination — or a "third place" between work and home, as the company likes to call it — says technology will continue to play a critical role as it emerges from the depths of the COVID-19 pandemic and plans to ignite future growth. Before COVID-19, approximately 80% of U.S. store transactions were already “on the go.”
As Starbucks reopened its stores following initial pandemic lockdowns, the coffee chain adapted to social distancing via contactless pickup, mobile ordering, and less in-store traffic. Starbucks also saw its customers migrate from dense metro centers to suburbs, from cafes to drive-thrus, and from early morning coffee runs to more mid-morning and weekend visits.
At its biennial investor day this month, Starbucks said it plans to expand from 33,000 stores worldwide across more than 80 markets to 55,000 stores across 100 markets by 2030, a move CFO Pat Grismer described as “a level that is currently unmatched by any other single food and beverage retail concept, fueled by unparalleled brand appeal globally and strong unit-level economics.”
In the U.S., the area Brewer oversees and the coffee chain's largest market, Starbucks plans to add 800 stores each year, reaching 16,000 company-owned locations by 2023.
“[It's] important to know that we're going to be repositioning our footprint across North America. Primarily, you have heard us talk about some of the store closures we're doing, but we're doing that in order to meet the customer where they want to access coffee," Brewer said.
This summer, Starbucks detailed plans to transform Starbucks' stores by adding more drive-thrus and Starbucks Pickup stores — accelerating the coffee giant's initial transformation timeline of three to five years with a focus on adding walk-thru options in core urban markets. Formally called a Starbucks Pickup store, the walk-thru creates a much smaller footprint that requires the company to deploy less capital but still offers the same beverages and food items found in a traditional store.
At its investor day, for example, Brewer showed a slide depicting Midtown Manhattan's daytime population shifts and its store footprint. In 2019, Midtown's population of 160,000 would swell to 980,000 during the workday. In the future, Starbucks predicts that the daytime population will go from 160,000 to 730,000. As such, the 79 Midtown stores, which include 78 cafes and one pickup location, will shift to 64 cafes and 15 pickup locations, according to her presentation.
As Starbucks looks to expand its footprint across metro suburban areas and in cities and states through the center and bottom of the country, approximately 40% of all locations will be drive-thru formats and 5% pickup locations.
"We're able to bring in new formats and really look at our drive-thru format, which is really a high productive model for us and the way that our customers enjoy accessing coffee even during the time the cafes are open or during this time when we're social distancing," Brewer said.
As customers flocked to drive-thru locations during the pandemic, Starbucks deployed handheld point-of-sale (POS) devices to increase the throughput and reduce the long lines. Starbucks will also create a new drive-thru format with a double, side-by-side drive-thru line that will speed up the out-of-the-window (OTW) time.
A 75 million person addressable market
One of the biggest underpinnings of Starbucks' transformation is its popular mobile app. At the end of the fiscal fourth quarter, the decade-old Starbucks Rewards app boasted 19.3 million 90-day active members in the U.S. What's more, the app's members account for nearly 50% of Starbucks' revenue. According to Brewer, close to one in every four transactions comes from Starbucks mobile order and pay.
The company has high ambitions for growth to bring more customers into its Rewards program and digital ecosystem. Brewer estimates the addressable market is about 75 million, and the company is already seeing momentum in app downloads.
In mid-September, before the close of the fourth fiscal quarter, Starbucks expanded its loyalty program with its "Stars for Everyone" launch allowing customers to earn two “Stars” per $1 with a preloaded Starbucks card or one “Star” per $1 spent when paying with cash, debit or credit, or a mobile wallet.
"It's giving people the flexibility in terms so how they want to transact with us. Then, it gives us the opportunity to grow that occasional member to a Starbucks Rewards member, which is our highest performing, most routinized customer that we have."
According to Brewer, the flexibility of the enhanced reward program "is the next step in closing that gap in addition to the work that we're doing with A.I., so that our customers know that we know them better and that we want to create a relationship with them. It also allows our baristas to really interact with who's coming through the drive-thru, who's stepping into the store. And [there’s] nothing like, especially in a time like this, for someone to address you by name and make you feel at home in a warm and welcoming environment."
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.
