The New Starbucks Rewards Program Confused a Lot of People

By Adam Levy Markets Fool.com

Starbucks (NASDAQ: SBUX) completely overhauled its rewards program last April. While trying to make My Starbucks Rewards fairer, it inadvertently made the program more complicated. Instead of receiving a free snack or drink after every 12 purchases, customers now receive a reward when they reach 125 stars. Customers earn two stars per dollar spent at the register.

Continue Reading Below

Management expected the new program to increase sales per member as the new program incentivizes them to spend more. That didn't happen. Looking back on the new program almost a year later, CFO Scott Maw said, "It was a lot of change for customers: so we changed how they earn, how they redeem, what the app looks like, how they interact with us in every way digitally."

Ultimately, the change has worked. "We got a quarter or two in it, and that spend per member growth, which didn't pop after the launch like we thought, has now come all the way back up into the business case. And by the time we get one year after it'll be ahead," Maw told the audience at a recent UBS conference. The new program gives Starbucks a lot more flexibility to increase sales and keep customers engaged.

Image source: Starbucks.

Focusing on the long term

In Starbucks' first quarter of the new My Starbucks Rewards program last year, it posted a disappointing 4% growth in same-store sales. It was the first time in 25 quarters Starbucks posted a same store-sales growth number below 5%. On the earnings call, management said the switch to the new rewards program was partially to blame for the shortfall.

Continue Reading Below

Indeed, the changes didn't initially go over well with many Starbucks customers. Customers (like myself) that regularly order a small coffee saw a significant decline in their rewards. Management, however, claims those customers represent a small minority of its My Starbucks Rewards members.

Some customers may have had less motivation to go to Starbucks following the changes, others may simply not have been fully aware of the changes. Either way, spend per member didn't increase as initially anticipated.

But investors that focused on the long term are starting to see the rewards. Shares of Starbucks bounced back off their lows last autumn, although its most recent earnings report sent shares back down again. Overall, shares are down about 7% since the company announced the changes to the program.

More ways to drive customer behavior

The new rewards program gives Starbucks more ways to incentivize customers' behavior. It rolled out a new feature called Star Dash last Fall, which rewards a number of stars to customers that make certain purchases within a given time frame. Customers that go less frequently are offered more stars.

"When we've been using big data and one-to-one personalization and we've seen a real acceleration in spend per member," Maw said at the conference. Star Dashes capitalize on that. Starbucks can use big data to provide drink and food recommendations to customers in the app while incentivizing them to try them with a Star Dash. It also just completed the roll out of real-time suggested selling in the app.

Starbucks is also making it easier to order. Mobile order and pay now accounts for 8% of total sales, and it accounts for 20% of sales at peak hours in 1,200 stores. In fact, the feature has grown so popular it's become something of a problem for Starbucks. It's making mobile orders even easier by allowing customers to save their favorite orders to the app.

While the changes to the new program caused some short-term hiccups and customer confusion, Starbucks is popular enough that its consumers were able to work with the program to figure out how to make it work for them. In the long run, management still expects to see the increased sales per member it initially anticipated, and it should result in a return to more robust same-store sales growth when management figures out how to handle all the volume.

10 stocks we like better than Starbucks
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Starbucks wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.