Few brands on this planet that enjoy the sort of brand devotion Starbucks Corporation (SBUX) does. Could it have something to do with the fact that its main product is loaded with caffeine? Almost certainly. But the brand itself has also become iconic, and the company now has a massive cult following.
Customer loyalty is a big reason SBUX stock has been able to outperform the market year after year. Starbucks shares have dramatically outperformed the S&P 500 in the last one-, five-, and 10-year periods.
Starbucks customers are well acquainted with the main tool that the coffee giant has used in recent years to foster its rabid brand devotion: Starbucks Rewards, a loyalty program in which SBUX customers earn points for their patronage.
Once you’ve gotten enough points (called “stars”) you get a free reward.
But recent changes to the Starbucks Rewards program were not received well.
In fact, the backlash has been so overwhelmingly negative that it could lead some investors to wonder whether SBUX stock can continue to outperform — or if once-loyal customers may start opting for Dunkin Donuts (DNKN) instead.
SBUX Owners: Don’t Get the Jitters
While I think that in the short-term this hubbub may seem like a threat to Starbucks and perhaps even its stock price, a year from now we may scarcely remember the commotion.
What was the change that SBUX had the hutzpah to make? Instead of giving customers a “star” for every time they visited Starbucks — regardless of order size — you now get stars proportionate to how much money you spend.
This is a brilliant plan, and SBUX stock owners should be rejoicing.
Notice how it rewards big spenders, who now have further justification for their larger ticket sizes. More importantly, it encourages those with smaller ticket sizes to spend more (“Maybe I’ll get a venti instead of a grande”), which should boost same-store sales, all things being equal.
It also eliminates an inefficiency in the old Rewards program, which arose when customers who planned on buying multiple items — perhaps they want a hot coffee and a bag of roast — split up their shopping into two separate trips to maximize their star rewards.
Starbucks’ management estimated that around 1% of total transactions were the result of people “splitting” their orders. That’s a blatant inefficiency, and Starbucks has found a clever way of disincentiving it. Bravo!
Not everyone agrees. Stephen Anderson, an analyst for Maxim Group, thinks it may actually cause customers with a low spend-per-visit to jump ship to DNKN, which he feels has a more appealing rewards program.
This seems highly unlikely. Starbucks and Dunkin’ Donuts are both in the coffee business, but their products are actually dramatically different.
If you’re at the point where you’re debating the economics of a coffee rewards program, you’re likely an avid or frequent coffee drinker, which means you know what you like and don’t like.
This sort of customer won’t quit drinking coffee they like better to drink inferior coffee somewhere else just because they’ll get a free cup of inferior coffee eventually.
Sure, perhaps some low-ticket customers throw a brief tantrum and go to DNKN a few times more than they would have otherwise this quarter. But if they’re real coffee drinkers and they were consistently frequenting Starbucks, they’ll go back to their old ways — permanently — relatively soon.
Caffeine is a helluva drug, Starbucks, is a helluva brand, and they’ve got a helluva product. That makes SBUX a helluva stock in the long run.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
