Starbucks is rewarded for opening up about rewards

Starbucks showed declining customer traffic has been due to a quirk of the new loyalty system, which rewards customers for total spending, not individual transactions


On Thursday, Starbucks said that, in the third quarter, adjusting for the loyalty programme changes shifted traffic from negative 1% to positive 1% growth from a year earlier. Photo: Bloomberg
On Thursday, Starbucks said that, in the third quarter, adjusting for the loyalty programme changes shifted traffic from negative 1% to positive 1% growth from a year earlier. Photo: Bloomberg

New York: Here’s a lesson to all companies: More disclosure is better than less.

Investors have soured on Starbucks Corp. in recent months as the coffee chain’s sales have slowed and its earnings performance has failed to match lofty expectations. Shares have dropped nearly 18% in the past year.

But on Thursday, Starbucks rose as high as 5% in late trading. Why the change of heart?

It certainly helped that Starbucks offered a sturdy 2017 outlook as it reported third-quarter earnings that beat analyst estimates. But the company also revealed numbers that bolstered confidence in its ability to withstand a terrible time for restaurant chains.

Namely, for the first time since it changed the programme, Starbucks explained and quantified—pretty high up in its press release—the impact its loyalty and rewards programmem had on financial results.

Declining customer traffic has been a worry for investors in the past year. But Thursday’s release showed that much of the decline has been due to a quirk of the new loyalty system.

Previously, Starbucks gave customers points for each transaction. You’d go to the register to buy, say, a muffin and a cappuccino and ask the cashier to ring each item up separately, to get extra points. The new loyalty program, however, rewards for total spending, not individual transactions. That change made it difficult to compare traffic and ticket amounts from one year to the next—the changes have inflated average ticket totals and deflated traffic numbers.

On Thursday, Starbucks said that, in the third quarter, adjusting for the loyalty programme changes shifted traffic from negative 1% to positive 1% growth from a year earlier.

Cutting register transactions by 10% from a year earlier, helped by eliminating those duplicate orders along with mobile ordering, also helped boost employee productivity and cut costs.

The disclosure doesn’t change the fact that sales are slowing, but same-store sales stabilized from the quarter before. And while the comparisons will continue to be murky over the next two quarters, they will get easier once Starbucks laps the loyalty programme changes.

Starbucks certainly has some more work to do, particularly in terms of getting its new loyalty programme right, ramping up its food offerings and dealing with rising labour costs. It’s not immune to falling food prices and other sector-wide problems afflicting the industry. But the latest quarter shows Starbucks has found its footing again.

And, as I’ve argued here and here, its rewards change could ultimately boost growth, as will its plans to offer more food and build more than 2,000 stores next year across China and other parts of the world.

Plus, the stock’s valuation has come down to more appetizing levels: Shares now trade at 24 times forward earnings, versus an average multiple over the past two years of 28 times forward earnings. Maybe Starbucks will be more palatable to investors now. Bloomberg

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