Starbucks' Future: Is Technology More Important Than Coffee?

By Daniel B. Kline Markets Fool.com

Outgoing Starbucks (NASDAQ: SBUX) CEO Howard Schultz loves coffee and his leadership changed how Americans consume it.

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He took what was once just a coffee roaster and turned it into his own vision of an Italian coffee bar. Schultz, who has said he drinks about five cups of his company's signature beverage each day, changed the coffee house to a "third place" between work and home, while introducing many Americans to espresso-based beverages.

The coffee chain's longtime CEO has been accused of numerous crimes against coffee with many enthusiasts decrying that he created the "half caf, light foam, soy milk, vanilla latte" crowd. Schultz, who has also been castigated by purists for inventing the Frappuccino, sees things differently: Instead of diluting the coffee-drinking experience, he has brought it to the masses.

The man who starts his day by making a French press of coffee for himself and his wife, who then follows that up with a double-shot espresso macchiato from a Starbucks store, according to People.com, has displayed a clear love for coffee simplicity. But he also understands that for many, coffee's simple pleasures are an acquired taste.

Schultz has done many things as CEO of Starbucks to make it the premier coffee company in the world, and now that he has, he recognizes that he's no longer the man to lead the brand forward. Last week, the company announced that Schultz would be stepping down as CEO in April, though still remain involved in the company. And that makes sense, because Starbucks' next steps are not about coffee, they are about execution, operational efficiency, and technology.

Starbucks' Mobile Order & Pay app will drive growth for the company going forward. Image source: Starbucks.

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Today's Starbucks needs a different type of leader

While it's reasonable to think that Schultz, who has led Starbucks as it has become a pioneer in integrating technology into its customer experience, could have continued to do a good job, his hand-picked replacement, Kevin Johnson (the company's president and chief operating officer), has three decades of technology-industry experience. In fact, it could be argued that as COO Johnson deserves much of the credit for making the chain a first mover in mobile order and pay, integrating gift cards and payments into its app, and digitizing its rewards program.

Kevin Johnson. Image source: Starbucks.

Johnson, who held leadership positions at Microsoft (NASDAQ: MSFT) and served as CEO of Juniper Networks, may not have Schultz's ingrained love of coffee, but changing how people drink coffee and winning global acceptance is no longer the job of Starbucks' CEO. That mission has already been accomplished, and now the chain's leader has to find ways to continue same-store-sales growth while bringing its products to new places.

Those are technology problems. Johnson, who as COO "drives Starbucks global growth agenda ... with a focus on partner (employee) and customer-facing innovations,"has already shown a strong ability to do that. Mobile Order & Pay, Johnson explained during the company's most-recent earnings call, now accounts for 6% of transactions. In about 3,300 of its stores, he added, 10% of peak transactions are handled that way while in 600 stores, Mobile Order & Pay represents over 20% of orders at peak, triple the number from last year.

"The data shows that Mobile Order & Pay is making a difference for both our partners and our customers," he said during the call, which was transcribed by Seeking Alpha (registration required). "For customers, Mobile Order & Pay provides a simple, elegant ordering experience, enabling convenience when they want it and rewards them with stars along the way. For partners [employees], Mobile Order & Pay reduces line congestion; enables a more efficient in-store operation."

Basically, Mobile Order & Pay makes stores more efficient because it lets the limited amount of people who can fit behind the counter focus more on production and less on order-taking. That's a big win for customers that drives sales by shortening how long it takes to get your order both for the technology users and those who choose to wait in a now-shorter line.

It's a brilliant strategy impressively executed, but it has nothing to do with coffee.

The right man for the job

While it's possible that part of Schultz's stepping aside has to do with his at least considering broader ambitions, his immediate task remains focusing on coffee. In his new role he will be leading the company's efforts to expand its high-end Roastery business -- a very coffee-focused task. The outgoing leader, however, acknowledged that the company's focus has changed.

"Our record performance does not yet reflect what may be the most important strategic developments since Starbucks first changed how the world consumes coffee," he said during the earnings call. "The initiatives we have underway that are elevating the Starbucks brand, transforming the customer experience and setting the foundation for the next wave of growth in our business."

Schultz is right. Coffee is not Starbucks' driving force going forward. Technology is. That makes Johnson the leader it needs right now.

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Daniel Kline owns shares of Microsoft. He drinks at least one cup of coffee each day. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.