Starbucks' payment company has integral for years to boost customer loyalty and reduce customer acquisition costs. And payments will likely remain a focus for the retailer when new CEO Brian Niccol takes over in September, with payments experts saying there’s room for innovation at the coffee giant.
Starbucks announced Tuesday that Niccol Laxman will replace Narasimhan, who is leaving the coffee chain's top job. Niccol will assume the role on Sept. 9, with Starbucks current CFO Rachel Ruggeri serving as interim CEO.
Niccol's responsibilities include boosting digital payments and mobile commerce, which has become more competitive than in the early days of mobile apps when Starbucks quickly took advantage of the technology. The Seattle-based coffee retailer has reaped numerous benefits from customers using its app to deposit money and place orderssaid Richard Crone, CEO and founder of Crone Consulting LLC, an independent consulting firm for the payments industry.
“Starbucks was indeed one of the first movers in mobile payments, but it wasn’t so much about payments as it was about building a customer relationship management model,” Crone said. “They were the first to use payment capture with their own app to make their customers known, reachable and deep.”
That has given Starbucks a big advantage in terms of its customers' large prepaid balances, which are on par with or better than those of about 80% of all local banks and credit unions, according to research by Crone's consulting firm.
“Once the money goes from Apple Pay or Google Pay or PayPal or Venmo to [Starbucks’] app, it can only be spent in their store,” Crone said.
Crone Consulting estimates that two-thirds of Starbucks prepaid funds come from digital wallets. So if a bank or credit union doesn’t support these wallets, they won’t receive interchange fees on the initial funding or subsequent purchases at Starbucks.
“Plus, [Starbucks] “They benefited from the cash management value of holding those funds on their own balance sheet, rather than on the consumer's account or the bank's balance sheet,” Crone said.
Still, the growth of digital wallets still leaves plenty of room for innovation in Starbucks’ payments business, said Aaron McPherson, principal at AMF Consulting. He noted that Starbucks was one of the first retailers to widely adopt mobile payments, but that new developments like mainstream digital wallets have gained traction. Some merchants, such as Walgreens and CVS, are already integrating with digital wallets so consumers can see rewards balances in their wallets, he said.
“You don’t get extra points for paying at Starbucks with Apple Pay or Google Pay, and their offers are pretty much all in the app,” McPherson said. “I think this is an opportunity for [Starbucks] to reach people who just want to pay, or people who prefer a personalized experience.”
Niccol is well positioned to continue to benefit from Starbucks' success in payments, said Sankar Krishnan, executive vice president for banking and capital markets at Capgemini.
“I would say [Starbucks] is one of the best examples in the world of a digital wallet that is doing exceptionally well. And I think that will only continue to grow with the new CEO, because he did such a great job at Chipotle in driving the retail revolution,” Krishnan said.
For example, under Niccol's leadership, Chipotle launched an in-app chatbot and built tracking for individual consumer preferences. “Chipotle has knocked every metric out of the park in food and fast-moving food,” Kirshnan said.
Starbucks Mobile Order and Pay (MOP) revenue for the quarter ended June 30 rose 10% year-over-year and the number of MOP transactions increased 7% year-over-year, former CEO Narasimhan said during the company's latest earnings presentation.
As Starbucks opens more stores in high-traffic locations, the ability to integrate mobile payments with marketing and other functions will improve, Kirshnan said.[Starbucks’ payments] will become significantly stronger.”
