Starbucks Corporation (SBUX) upset the coffee cart last week by changing the way its customers reap rewards for their loyalty. The media was highly critical, and upset customers took to social media to vent their frustration.
Investment pundits, too, have weighed in on the implications for Starbucks’ stock; as anytime change is introduced, corporations run the risk of alienating their customer base and tarnishing their brand.
Nation’s Restaurant News reporter Lisa Jennings wondered if the change plays into the hands of Dunkin Donuts (DNKN), one of Starbuck’s biggest competitors. Maxim Group analyst Stephen Anderson sees this happening.
In a note to clients last week, Anderson wrote:
“In light of the higher dollar threshold for SBUX’s program (relative to that of DNKN), we believe that customers with a lower average dollar spend will shift visits to DNKN, which we argue has a more generous rewards program. According to our model, the average SBUX customer who spends $2.19 for a medium coffee (based on the average price in the Northeast U.S. markets where both DNKN and SBUX compete) will need to make 29 visits before earning a reward, while the average DNKN customer who spends $2.00 for a medium coffee will need to make only 20 visits before earning a similar reward.”
I’m one of those who spends $2.19 for a medium coffee and there is no chance I’m ever going to switch to either Dunkin or Tim Hortons, owned by Restaurant Brands International Inc (QSR).
Why This Won’t Affect Starbucks Stock
I’ve been going to Starbucks since the mid-1990s when I lived in Vancouver, the company’s home away from home, just a short drive north of Seattle. When they introduced My Starbucks Rewards in 2009, I thought to myself how great it was to be rewarded for my loyalty. Who doesn’t love a freebie?
But I couldn’t help but feel a little sheepish about the reward when I knew many people were spending a great deal more than me on their morning and afternoon coffee, and here I was getting a reward of equal value.
The baristas often egged me on to order something a little wilder than black coffee for my reward, such as a venti mocha frappuccino, but I shied away. I hadn’t earned this extravagance, nor did I want it. I’m a plain old coffee drinker, so I settled with a venti Pike and one espresso shot, otherwise known as a “Redeye.”
That’s my reward and I’m grateful for it.
Under the old system, I was getting one reward after spending $26.28 (12 times $2.19) while the other customer was getting that same reward for spending $78.84 (12 times $6.57). Under the new system Starbucks is rewarding both of us equally for spending $62.50 at one of its locations. Those who spend more do better under the new system.
Fair is fair.
By leveling the playing field across the customer spectrum, Starbucks has rightly recognized that some customers are worth more than others, including myself — and that those customers should be better rewarded for their loyalty.
You can talk all you want about the penny pinching coffee drinker bolting for the competitor, but at the end of the day this is the right business decision, one that will help Starbucks stock continue to move higher.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.