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Suzy Davidkhanian (00:00):

The most valuable moment in e-commerce isn't before checkout, it's the transaction itself. Rokt turns the transaction moment into a high performance revenue engine for the world's leading e-commerce brands. Visit rokt.com. That's R-O-K-T.com. Hi everyone. Today is Wednesday, March 11. Welcome to EMARKETER’s weekly retail show, Reimagining Retail, an EMARKETER podcast made possible by Rokt. This is the show where we talk about how retail collides with every part of our lives. I'm your host, Suzy Davidkhanian. And on today's episode, we're breaking down Starbucks' loyalty overhaul. Not to debate the changes, but to really pressure test what a modern loyalty program should actually look like. Joining me today we have two podcast regulars, senior analyst Arielle Feger, who's a few boroughs away from me. Hi.

Arielle Feger (00:54):

Hi. Happy to be here.

Suzy Davidkhanian (00:57):

Thanks for joining us, and we have principal analyst Sky Canaves joining us from Texas. Hey, Sky.

Sky Canaves (01:02):

Hi, great to be back.

Suzy Davidkhanian (01:04):

Well, thanks again for joining us. This week, we're talking about Starbucks revamping its loyalty program. Loyalty isn't just a marketing tool anymore. It's really an infrastructure for retailers, and quick service restaurants, and airlines, and the list goes on. And as Starbucks, that roughly means around 60% of its sales are tied to its loyalty program. So really it isn't a side project. It's what's building habit and hopefully brand love. And in a crowded marketplace with tight consumer budgets, that matters more than ever. But here's the rub, 65% of marketers think that consumers return because of brand love. Yet fewer than one in four consumers say emotional connection drives them back to the retailer or store. Add to the fact that consumers enroll in multiple programs, but actively only engage with a handful, and you can see the pressure that brands are on.

(01:53):

So as Starbucks moves from one tier to multicourt model, the real question isn't just what changed. It's, will that actually matter, and will loyalty be better? Before we dig in, I want to know from each of you very quickly, what is the last thing you bought at Starbucks, and did you buy it using the app? Was that an automatic moment? Sky, I already know your answer, so I'm going to Arielle first.

Arielle Feger (02:27):

I believe the last thing I bought at Starbucks was an iced vanilla latte, which is usual if there's not pumpkin spice on the table. If there's pumpkin spice, I'm getting a pumpkin spice. And I did use the app.

Suzy Davidkhanian (02:43):

You did?

Arielle Feger (02:44):

Yes, I did. I ordered it as I was coming in. I was on the bus commuting to work. I ordered it as we were about maybe 10 minutes away, and then I picked it up and it was pretty seamless. Yeah, it was pretty great.

Suzy Davidkhanian (03:00):

So you're part of the top tier, I guess. I don't know why. I didn't peg you for that. I know Sky has many stories. What's the latest thing you purchased?

Sky Canaves (03:09):

So I actually can't remember because it's been a minute since I've been to Starbucks-

Suzy Davidkhanian (03:12):

Stop.

Sky Canaves (03:13):

... because I just haven't made a stop. And I meant to go last week because I had a compelling loyalty offer that I wanted to use. There were bonus stars on the table, and all I had to do was order a latte, which is my usual drink, a lunch item, and a frappuccino. And those latter two would be for my daughter because she likes that protein lunchbox and the strawberry cream frappuccino. So I meant to go and stop in, but I got caught up in other stuff over the weekend, so I didn't make it, and I didn't get my points. And I don't have an offer this week, so probably because they're getting ready for the revamp.

Suzy Davidkhanian (03:51):

The new. Yeah. And figuring out what tier everyone is in. And I don't think it's a surprise to anybody that I have not purchased anything at Starbucks in a very long time. I don't have the app downloaded. I have gone in the last month, but I did not purchase anything. I sat with a friend who did use her app to buy something that was because she had $5 off. So it is really interesting how the app is really helping move people into the store more frequently. But let's zoom out for a minute before we go further into the app. Starbucks is revamping its loyalty program. They announced it a while ago. This week, it's going live. The question really isn't how it's changed, but it's more about why now.

(04:31):

Is it a defensive move to try and help as traffic is softening, or is this really what happens when you need to revamp your loyalty program and make it part of the infrastructure even more? So I thought maybe what we could do is I've assigned sides to the debate so that we can really talk through both angles. I think both of them are realistic reasons why it's happening now. So let's hear more. Sky, we'll start with you. Why does this feel more defensive than innovative?

Sky Canaves (05:00):

I think there are two levels on which it's defensive, and they're kind of at odds with each other. One is overall this loyalty program introduces tiers. It also massively devalues points and makes it harder to get rewards because it's now the baseline is $1 per point. Whereas before, if you were using the Starbucks app or card with your preloaded money, you would get two points per dollar. So for a lot of people, it's going to look like 50% fewer points, or you need twice as many points to get anything. But on the other hand, they're also trying to spur greater engagement among the rewards members because one of the things that was noted in the recent earnings call was that traffic overall has been growing. They're seeing more transactions, but the non-rewards member transactions are growing at a faster pace than the reward member transactions. So they want to increase the engagement from reward members.

(06:09):

Can they do it by introducing a tiered loyalty program that creates incentives to get to that higher tier or those higher tiers with more rewards, but also makes it harder to achieve those tiers? So that's where I see the tension, and I'm not sure how this is ultimately going to play out if it's going to get Starbucks where they want to be with driving more traffic and more repeat transactions from their loyalty members.

Suzy Davidkhanian (06:35):

Well, it's interesting because it is defensive in terms of protecting their margin, right? So that was your first point.

Sky Canaves (06:42):

Yeah.

Suzy Davidkhanian (06:42):

So it's helping them from a business perspective, but is it defensive in terms of driving more traffic? The tier model is not new. It's definitely there's a nudge factor, right? And then there's this whole perceived value of moving from one tier or the other that might get some of those casual shopper [inaudible 00:07:01], but everybody who drinks coffee drinks at least once a day. So there's a lot of room to get people to come more often to a Starbucks if you love them.

Sky Canaves (07:10):

A ton of Starbucks, I think innovation or new traffic is coming from the non-coffee side, the drinks like the matcha, the refreshers, the energy drinks. My daughter loves Starbucks. She obviously doesn't drink coffee. Even the refreshers, I was shocked when I found out those had caffeine in them. So we stick to the creamy frappuccinos now but I think because they are trying to drive a lot more engagement among younger consumers, and that may be where a lot of this non-reward member traffic is coming from, maybe from teens who aren't reward members, even though they can be, they have to get their guardian to sign onto the terms and conditions, but they might not know that. So maybe that's where they can pull people into the rewards program who are not currently members.

Suzy Davidkhanian (07:59):

Right. And you start them off with the creamy drinks and those... My nieces and nephew love those pops, those cake pop things.

Sky Canaves (08:07):

Oh, yeah.

Suzy Davidkhanian (08:08):

So then Arielle, what's the reverse of that? This is just a moment in time where they're innovating. Tell us more about that piece.

Arielle Feger (08:15):

Yeah. So I mean, I think that Starbucks, we've talked it up about it on this podcast. We've talked about it at EMARKETER. It's known as one of the best in class loyalty programs, but obviously to keep that status, they have to fine tune things. They have to keep not reinventing per se, but again, kind of honing in on what are the things that are going to really ramp this up. And I think that's just what's happening here. It's rather, this is all designed to really reward the users who are heavy users and entice more casual users to become heavier users. And I think it's just, again, kind of fine-tuning their strategy, which makes sense when you have a loyalty program that's been around for such a long time. In terms of timing, I think it also makes sense.

(09:05):

We've seen a lot of other brands revamping their loyalty programs, including United Airlines, Michaels, and Hilton. So I think that there's extra pressure on brands these days to really make sure that their loyalty program is rewarding the right people and rewarding them with the right types of things. So I think this is just one of those times where they're like, "Okay, let's step it up. Let's really focus in on what we're trying to do."

Sky Canaves (09:35):

I think that's a really interesting way of framing it in terms of the fine-tuning because over the last couple of years, we've seen a lot of loyalty program revamps and relaunches, and they're often presented with a lot of fanfare and an implication that it's going to be one and done. But I think the reality of loyalty programs is more that they have to be fine-tuned continually and maybe become more experimental. You try things, and if they don't work, you change it. And sometimes you have to prepare for maybe some bad PR around that. I know Subway had this four three-foot-long program and franchisees started calling it something like financial suicide for them. They just couldn't afford to give away 25% of their sandwiches. So they had to walk that back, but maybe there are other ways of fine-tuning or having limited-time offers or promotions within a loyalty program that can meet consumer needs and keep them fresh and innovative.

Arielle Feger (10:37):

Exactly. Like any part of a business, you need to continually experiment, innovate, and try to figure out what the best option for you and your customers is, and I think that's what's happening here.

Suzy Davidkhanian (10:50):

And they're doing it in a very surgical way, right? Between the tiers and the points expiring, and modeling what was once thought of as a best-in-class program against what the airlines are doing, or against what retailers are doing. So I definitely think that it is the right thing to do, and there's always room to change and to make better. So then, with that, I'm going to ask you guys, as you think about the ideal loyalty program, let's make a pie. I'm going to give you the different pie slices, and then I want you to build out your ideal loyalty program using... Tell us the percentage that each slice would be in your ideal program. And the slices are, and you don't have to use them all, value perks like points, discount, freebies, ease, and seamless app integration is slice number two.

(11:43):

Slice number three is exclusivity, which includes things like early access, special drops, premium experiences. Slice four is this idea around tiering, which is what they're doing, and maybe even potentially adding a paid layer. Slice five is personalization, how smart the program feels to you, and how does it feel like it's actually talking to you specifically. And I added a sixth slice because if I was doing this, I would have wanted to include my own. So I'm calling it the wild card. If there's something that I did not name but you think is important to the pie slices, then put it in here now. So, your turn, give me, Arielle, the percentage and the slices, and a very quick explanation of why.

Arielle Feger (12:27):

Yeah, absolutely. So I'm going to go... This is actually kind of hard. I really struggled to divide it up in the way that I felt was true and appropriate. So I'm going value perks 60%. I think number one, you have to have good value in your loyalty program. If you don't have that, all of the rest doesn't matter. Then we've got ease and seamless app integration. I put that at 15%. It's pretty important, but I think that knowing myself, I will overcome some hurdles if I can still get a good value out of something. So while ease and seamless app integration is important, it's not necessarily going to stop people from using it. Exclusivity perks, 5%. Yeah, it's nice, especially when we're... I thought specifically about Starbucks and what that would mean when we're talking about a Starbucks app. And for this specific instance, I don't really feel like they're that exciting or special, but if you're thinking about a sneaker brand or something else where there is a little bit more excitement around drops and stuff, that could be a higher percentage depending on it.

(13:45):

I gave tiering, including a paid later, 0%. I don't think that's important. I just don't think people care as much about that. I think tiering is more for the brand than for the customer. Personalization, 10%. I think you've got to make sure that your offers are what people want and that you're continually giving them and adjusting based on what they're buying and their past purchases. My wild card is partnership. And I think specifically talking about Starbucks, they're linked to Delta and Marriott loyalty programs and customers can earn points when they travel and have hospitality experiences. So I think the more versatile your program is, the more you're able to use those points or purchases across different partners and experiences. I think that's going to create a really sticky loyalty program.

Suzy Davidkhanian (14:50):

Great. So that takes us to 100, 60% value, most important piece, and then dribs and drabs of other slices. What about you, Sky?

Sky Canaves (14:59):

Okay. I might have to check my math here as I go along and as I assign the values. I'm going to split my pie a little more. I do think the value perks are really important, so I'm going to give them that a 40% of my pie, and I'll note that down because I think that is a big driver. And if you devalue, it becomes really tricky, and you take a big risk with a loyalty program. I think there's also relevance of the perks. One thing that Starbucks is doing it's giving a big window for those top-tier members to redeem their birthday rewards a month. And those may be the members who least need a month to redeem their birthday rewards because they're going to Starbucks all the time if they're going to spend thousands of dollars a year on coffee. So maybe they only need a day.

(15:54):

Maybe it's that lower-tier member who would really appreciate having the full week or 30 days and so on. So you really have to think about how relevant is the perk to the member, and that would also tie into personalization. So I'll bring that up here. I think I gave that 40%. I'll give personalization 25% of the pie. I think it's increasingly important. It's what younger consumers and members in particular will come to expect. They want rewards and offers that are relevant to them. They want options that are relevant to them. It doesn't have to necessarily be hyper-personalization, but it has to feel that way. And then I'll give another 25% to the ease and integration. I think that's really important. There has to be ease of redemption, accessibility. It has to feel attainable, and if there are hurdles or if it's too complicated to redeem, I don't think you're going to get that kind of engagement.

(17:01):

So that brings me to 90%. I'm also going to give tiering a 0%. We're in such an age of status, and especially when you see what the airlines are doing, they're making it very hard to feel special if you're not elite. And elite feels more and more unattainable because now it's like, oh, do you have to pay full price for your seats? If you've got a discounted seat, you can't get it. And hotels, if you book through a third party, you might not get your points. So I think people, consumers, ordinary consumers, maybe won't find that as appealing. My wildcard, I'm going to give my last 10% to points sharing and gifting flexibility, where I think there will be some demand, especially among younger consumers, to be able to share with friends and families or gift their points.

(17:59):

If I have my 500 points, maybe I want to give them to my best friend so she can enjoy a free coffee. Starbucks used to do something where they had special days where encouraging people to share, but not with the points. It was like, if you're an awards member, you buy one coffee, you get one free, or you get a 50% off your second coffee. And they kind of promoted it as sharing. So if they could do that with their loyalty as well, I think that would be kind of compelling for younger consumers, especially.

Suzy Davidkhanian (18:30):

It's so interesting because you both have the value perks, whether it's discounts or coupons, or other sort of freebies as the number one thing. And it's clearly motivation, right? But there is this small piece that you still have to think about, I think, as a brand or a QSR or any sort of airline around being able to differentiate what your offering is and why are they coming to a Starbucks versus a Dunkin' Donuts in this example. And that's where I think you both hit it in terms of the personalized offers are really important, so that people feel known. So that's why they're going to that brand versus a different brand.

(19:10):

And I love this idea around the partnerships, too. In Canada, they tried the coalition. It worked in Canada. Not Starbucks, just in general. They've tried coalition point sharing and different loyalty programs in that sort of third-party tier. Here, it hasn't worked that much as a third party tier, but it certainly seems to be working when you partner with brands in a very specific way to try and get extra points. I'm surprised you guys didn't talk about gamification.

Arielle Feger (19:39):

I know. I thought Sky might talk about it. Maybe it's just me, but I'm not really that into gamification in terms of my own personal experience. I mean, I do recognize that increasingly we are seeing more loyalty programs have gamification elements. And I think those can be really fun, especially for younger users. But I guess I was thinking very personally here. It was not something I was concerned about.

Sky Canaves (20:10):

Yeah. Maybe if I could have split my wild card into two, I would've added that as maybe a 5%, taken some percentage off one of the others, but I think it has been a little bit, maybe over-hyped over the last couple of years. And ultimately, I think the most important part from a consumer perspective is just the value that they're getting from the rewards, the perceived value, because we're very much in a value first consumer era where that's the critical factor. And it doesn't necessarily always mean the best price or the lowest price or the biggest discount, but having something that's of perceived value. And that can also be the exclusivity, or the offers, or drops, or access to experiences that non-members don't get.

Suzy Davidkhanian (20:59):

I don't know. For me, gamification also includes the streaks and making sure that you sort of help build momentum and create a habit with our... Well, maybe it's just my surroundings are very competitive. And so it's like you don't want to break a streak, and you want to make sure that you get on LinkedIn. That you're smarter than I don't know how many people doing the puzzle. So gamification isn't always just about a game game like the Wordle and how Ulta tried the Wordle to drive traffic, but also about sort of building some sort of momentum and reason to keep going back, which I think is an interesting way, but definitely better for the brand than it might be for the consumer. The perceived value is maybe a little bit less. So I don't know, on Snap, everybody is doing those streaks, and it's very... You can even revive the streak. I don't know how you revive it. I think you have to sort of pay the price of reviving the streak.

Arielle Feger (21:52):

I'm too old for that. I don't know anything about Snap.

Suzy Davidkhanian (21:55):

That's how I talked to my nieces and nephew.

Sky Canaves (21:58):

Oh, my daughter does Duolingo streaks for chess, and yeah, she has to use up some of her saved points if she misses a day by mistake.

Suzy Davidkhanian (22:07):

And it's the end of the world if you miss a day for some, not for everybody.

Sky Canaves (22:11):

Oh, yeah, it's terrible. Well, Duo gets upset. He gets sad.

Suzy Davidkhanian (22:16):

Okay. So we've built the perfect loyalty program, at least how we think it should look to help drive traffic. So my third question to you both is, if you are CEO of Starbucks for the day, how do you tie this revamp to the broader strategy of getting people back into the store and more importantly, driving more frequency of purchase, whether it's the coffees or other products?

Sky Canaves (22:38):

Well, this is what I haven't heard from Starbucks. So they've revamped their loyalty program. That's a big deal, and they also have this long-term emphasis on reviving the stores. And that's also been a defensive move because there are all these rivals that are really app first drive-through coffee places like Dutch Bros and 7-Brew are ones I see cropping up around here. And so they're trying to stand out with experience, getting back to being that third place. So what I haven't heard is a connection of the loyalty program and its revamp to driving traffic in stores. And there are ways that they could do that. I think one is around if you share points, then you can bring a friend. Getting back to those bring a friend because if you're with a friend, you're probably more likely to be going into the store rather than grab and go.

(23:28):

And other things that they could do to encourage more store traffic and the dwell time that they're seeking. If they gave their highest tier of members or even those mid-tier members, the opportunity to come to in-store events, maybe they could have Starbucks after hours or some kind of popups in stores that would be exclusive member access or bring back sampling or introduce sampling, I should say. There's, I think, one time I've seen a barista have some samples of a drink, but especially as they're rolling out more new products and a lot of new flavor innovation, trying to capitalize on a lot of the trends in new flavors and ingredients that consumers are interested in, they could use the stores to market those products more widely.

Suzy Davidkhanian (24:20):

It's true. I was thinking about a book club, like they could do a book club to draw people in. And if you're part of the higher tier, you get the book for free or some sort of something that gets people back into the store and staying longer. Arielle, what did you have?

Arielle Feger (24:33):

You guys were really good. Mine is, I feel less inventive. And I really, again, still also focused on kind of the getting people in store. I was just thinking maybe you go into the store, you place an order, you're ordering in line, maybe you get incentivized to order in line versus order from your app and you're still paying with your app so you're still getting the points or you're incentivized to stay like you get an order for here instead of to-go and you get more points for that. It's definitely not the most inventive or exciting thing, but I think just, again, rewarding people for staying in the store but I love the idea of a Starbucks book club. Yeah.

Sky Canaves (25:22):

Yeah, for the Starbucks after hours.

Suzy Davidkhanian (25:24):

Right. I love that. The other thing I was thinking about is maybe if they could do some sort of surprise and delight. So to your point, like get people using the app in different ways and doing a surprise and delight at point of sale, where they already know exactly who you are and you're always getting those cake pops, and this time you didn't buy one, and so now they're giving you one for free. Not every time, obviously, but just little things that you're like, "Oh, I have a choice of where to go. I'm going to go to the Starbucks. They know me, and I want to go there."

Sky Canaves (25:51):

Maybe like a bonus birthday reward.

Suzy Davidkhanian (25:54):

Right? Yeah.

Arielle Feger (25:56):

I was going to say, surprise and delight goes a really long way. I remember every time a brand has done something like that for me, and I tell everyone, and I'm excited about it, and I write good reviews. So I think that that can really be... Yeah, go a long way.

Sky Canaves (26:14):

Yeah, that's why I think sampling could be very powerful. You might not be able to do it all the time or regularly or open publicly because it might create a mad rush into stores, but for members, I think it could really help. And if non-members see members getting a little sample or treat, maybe it incentivizes them to become members too.

Suzy Davidkhanian (26:39):

Or even that, it just made me think of that rush for that mug, the bear mug at the holiday season, if they had that as a surprise and delight moment for folks coming into the store. I think at the end of the day, we can all agree that loyalty really is about ensuring that you're creating momentum and a habit so that people keep coming to your brand or your store or your restaurant instead of a different one. And we didn't talk so much about this, but it's the underpinning of a data engine, and we spend a lot of time talking about this, and we could probably do another episode on just that, because that's all the time we have for today. Thank you so much, Arielle.

Arielle Feger (27:14):

Thank you. It was really fun.

Suzy Davidkhanian (27:16):

And thank you, Sky.

Sky Canaves (27:18):

Thanks so much.

Suzy Davidkhanian (27:19):

And thanks to our listeners and to our team that edits the podcast, please leave a rating or review, and remember to subscribe. I'll see you for more Reimagining Retail next Wednesday. And on Friday, join Marcus for another episode of Behind the Numbers, an EMARKETER podcast made possible by Rokt.