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Starbucks and a failure to execute properly usually don’t walk hand-in-hand when it comes to talking about its loyalty program. Since the iconic brand announced major changes to its loyalty program on Feb. 22−the My Starbucks Rewards loyalty program will now be based on how much money customers spend rather than number of visits−most of the prominent social media comments have been from unhappy patrons.
Fast forward to July 21 when, during the company’s third-quarter earnings call, Starbucks CEO Howard S. Schultz admitted that a failure to execute properly on the new loyalty program changes led to a lower-than-expected positive same-store sales comp of 4% for the three-month period. Before the third quarter, Starbucks had recorded historic levels of comp growth, at or above 5% for the previous 25 consecutive quarters.
Schultz summarized the situation during the conference call.
“With candor and humility, we acknowledge that in certain areas, we did not execute as well as we could have in the U.S. in Q3,” he explained. “Had we done so, we certainly would have reported stronger U.S. comps. Very early in the quarter, and after months of planning, we began executing against what I am convinced will prove to be among our boldest and most strategic moves ever, the strategic shift of our tremendously successful loyalty program from a frequency-based to a spend-based model. The shift was a one-time event, a once-in-a-decade change built on carefully vetted analysis that showed that a spend-based program would best reward our most loyal customers and encourage all of our customers to visit us more often and spend more on each visit, and it would be more fair for all of our customers as well.”
What’s more, Schultz added: “The shift would instantly eliminate a vexing in-store operating issue, order splitting, that was and has resulted in shorter lines, increased speed of service, and reduced line attrition. Now, given the sheer size, scale, and complexity of our Starbucks Rewards program and the mobile and digital technologies that support it, we knew there could be some hurdles to navigate at launch, particularly since the launch would coincide with the kickoff of our annual Frappuccino Happy Hour promotion, a nationwide event that typically ushers in the busiest time of year in our stores and consistently drives significant traffic and incremental revenue.”
The 2015 Frappuccino promotion drove a 30% increase in revenue over the prior year.
“You may recall that on last quarter’s call, we cautioned that the launch of the new Rewards program could result in some noise in our comp figures as customers and partners adapted to the program changes,” Schultz said. “What we underestimated was the interdependence of Starbucks Rewards and Happy Hour, and that two powerful initiatives competing for partner and customer mind share during a discrete period of time would disrupt what should have been strong, positive interdependence and leverage. In hindsight, what we should have done was build customer awareness anticipation for the Frappuccino Happy Hour promotion as we have done so successfully in the past and given the promotion the breathing room it needed. At the same time, the Happy Hour promotion interfered with the results we were expecting from the Starbucks Rewards program launch.”
In an interview with CNBC, Schultz said: “Unfortunately, after months and months of planning this, we made an error executing it exactly at the same time where we have our annual Frappuccino promotion, which in the past has been so successful. We did not execute it well. We own that. It’s an anomaly.”
Was the third quarter an anomaly for Starbucks, or a change in behavior among disgruntled customers, many of whom have taken to social media to voice their displeasure over the changes to the loyalty program?
Robert Passikoff, president of brand consultancy Brand Keys, weighed in on the Starbucks situation.
“I was surprised at the change,” Passikoff told Loyalty360, referring to Starbucks’ initial decision to change its loyalty program. “It had the appearance of pulling back on the rewards. When you count on people who feel like they’re being rewarded for being loyal, they react badly when they’re not being rewarded for being loyal. I felt like it was cutting back. It wasn’t even nuanced. It seemed like something was being taken away. People felt cheated.”
Instead of loyalty programs, Passikoff calls them continuity programs.
“They’re continuity programs, to the extent they work really well,” he said. “When they don’t work well, you see the effect on the bottom line.
Passikoff believes the revised loyalty program can hurt Starbucks in the short term.
“They messed up on their program,” he said. “People don’t entirely walk away from the brand. But, it’s the type of thing that makes you think twice about the brand. Behavior it the biggest test. Consumers are smart about this stuff. You have a generation now that is marketing and brand literate. They talk to each other before they talk to the brand. If they want to show their disapproval, behavior is a good measure.”
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