It's December again, and the holiday shopping season is upon us. Whether it's a Saturday at the mall or a quick escape from the office to pick up a few gifts during lunch break, there are two things I notice consistently. First, people love to treat themselves to a coffee while they're out and about. Second, people hate lineups. Starbucks helps people get more of the former while avoiding the latter. I'll reiterate what I said in my first Strategy Lab column on this stock last December: While you're buying Starbucks gift cards for your friend, you might want to consider buying some shares for yourself.
Retailers, especially bricks-and-mortar food and drink retailers, don't usually think of themselves as technology companies. But the mobile Internet is changing things quickly. Mobile apps are everywhere. Great apps can help build a business, but poorly designed apps, or apps that don't integrate well into the operations of a business, can become a source of customer frustration and hurt the bottom line.
Starbucks is a great example of a retailer that thinks and acts like a technology company. Its widely successful mobile app lets people find stores, reload credit into their account and, most importantly, pay for things straight from their phone. At the end of the most recent quarter Starbucks had 21 per cent of all U.S. transactions happening through its mobile app, up from 16 per cent just nine months earlier. It doesn't take a genius to realize that mobile transactions may represent the majority of all transactions within a few years.
This fall, Starbucks rolled out a new feature of the mobile app called "mobile order and pay." I think it's a big idea with incredible business potential, and Starbucks is the ideal type of business to implement it. After all, Starbucks describes itself as a $20-billion (U.S.) business with an average ticket price of about $5. That's a lot of repeat customers making the small-dollar transactions based on impulse but sometimes avoided by lack of convenience. Eliminate the line and you eliminate a major inconvenience – wasted time. Starbucks customers can now whip out their phone, order and pay in advance through the mobile app. Within minutes, a fresh cup of coffee and perhaps a snack is ready for pickup at the most convenient store for the customer. People report walking in, picking up their coffee and walking out all in a span of 20 to 30 seconds.
I'm sure there will be initial problems with the system, and Starbucks is probably being smart to avoid broadly advertising mobile order and pay until they get the bugs ironed out. But the long-term potential is truly incredible. People don't like lines, and the majority of customers know what they're going to order before they get in line. Mobile technology gives a business like Starbucks the opportunity to serve more customers by wasting less human time taking orders and reinvesting that time saved in making drinks. It's the perfect combination of pleasing more customers while being more capital efficient.
I first wrote about Starbucks in my Strategy Lab column last year when the shares traded for about $40 (U.S.). I formally added the stock to the portfolio in June at $52.22 and it's done well by rising above $61 as of this writing. I also own the stock personally and I see no reason to sell any time in the next decade.
Food companies may not be tech companies, but Starbucks is a growth company that is making brilliant use of technology to innovate and lead the competition rather than try to keep up with the Joneses. That's the kind of long-term execution I will drink to. Espresso, of course.