Starbucks: From Stars to Bucks
By: Sebastian Raman & Kareena Arya
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The Quaker Chief Mate and the Seafaring Tradition of Early Coffee Traders
Since 1982, Starbucks has operated with the mission to deliver a premium customer experience through its Italian-style coffeehouses. Over the years, Starbucks has cultivated a reputation for the quality and consistency of its products and services, becoming a global brand with over 40,199 stores in 80 countries. Starbucks markets to men and women aged 22 to 60, focusing on affluent urban and suburban areas.
Starbucks has seen success by creating an inviting atmosphere in its coffee houses, developing a strong culture, and maintaining an industry-leading and differentiated customer buying experience. Additionally, the company has continually innovated its offerings, introducing products like the “Frappuccino” and developing the Starbucks Rewards Program to enhance customer loyalty5.
Heavy is the Mermaid’s Head that Wears the Crown
Starbucks has built both its business and brand primarily as a coffee house. However, over the years, it has expanded its menu to include other beverages, food, and merchandise. Over the past three years, a customer's typical shopping basket (i.e. what a customer purchases during a visit to Starbucks) has typically comprised 74 percent in beverages, 23 percent in food, and three percent in other categories. Over the past year, Starbucks has attempted to increase revenue by expanding its repertoire of food offerings to stimulate customer demand for this segment, which tends to produce more significant margins than beverages. However, these changes proved ineffective, with customers purchasing the same drinks, food, and merchandise distribution over the past three years.
After a strong performance and innovation history, Starbucks’ 2024 global sales declined by seven percent in Q4 and two percent over the entire year. Internationally, Starbucks’ Chinese performance has fallen as Luckin Coffee has captured mainland market share. Domestically, however, the problem appears more dire. Starbucks has long benefited from being perceived as a luxury or semi-luxury good, bordering on Veblen's good dynamics. In the last year, this advantage has eroded, with increased customer sensitivity to prices.
Figure 1&2: Starbucks Ticket Size to Customer and Ticket Size to Transactions.
Source: Bloomberg Alt Data. N.B. Customers QoQ Growth % is shifted 3 weeks for alignment. This is due to a customer discovery-reaction lag.
This is a domestic-only issue, likely due to Starbucks' full concentration in its targeted domestic segments. Without new segments to grow into, same-store growth becomes demand-elasticity-constrained.
Starbucks’ customer demand elasticity stems from two sources. First, economic uncertainty has increased frugality and financial responsibility in the market. Consumers have shifted their preferences towards saving and investing rather than spending. The second is “corporate fatigue”. Through 2024, changes in service quality and perceived corporate missteps eroded Starbucks’ brand quality, resulting in a marked decrease in goodwill among customers. Today, many customers opt to make coffee and breakfast at home or make alternative purchases at cheaper coffee shops. The fundamental value proposition has shifted towards consistency and efficiency.
Mr. Fix It
On August 13, 2024, the board appointed Brian Niccol as Chairman and CEO. This appointment made it clear that the board shared our view of the problem. Nicknamed “Mr. Fix it,” Niccol is a fast-food turnaround wiz. At Pizza Hut, he architected one of the first digital ordering systems. Niccol joined Taco Bell during a consumer perception slump centred on a quality of beef lawsuit; within a year Taco Bell was back to growth. Most impressively, during Niccol’s tenure at Chipotle, the top line doubled, and the bottom line increased sevenfold.
It is clear that change is needed and that Niccol is mandated to experiment. In an address to shareholders, Niccols vocalized, “We need to change our recent strategy fundamentally.” Moving forward, Starbucks’ strategy should be guided by the following:
i. Make the in-store experience efficient, consistent, and customer-centric
ii. Restore brand value and increase customer loyalty
iii. Decrease customer concentration domestically by increasing targeted segments
iv. Adapt to the financial responsibility of the customer base
v. Leverage the strength of the existing digital infrastructure and Niccol’s expertise in digital
We suggest one solution for the portfolio of experiments to be rolled out. Our solution is to attack ii-v directly and indirectly ameliorate i.
The Digital Infrastructure Advantage
The Starbucks Reward Program, including the mobile app, was initiated in 2009 to enhance and personalize customers’ experiences while incentivizing habitual purchasing patterns7. Customers can create an account through the Starbucks Mobile App and scan their unique barcode with every purchase. With each purchase, Rewards Members can collect “stars” on the Starbucks Mobile App (1 star = $1 of cash spent, two stars = $1 spent using money uploaded to the App). After accumulating non-transferrable stars, customers can unlock rewards of increasing value, such as free drinks and store merchandise, that expire within seven months.
The Rewards program has been a key driver of growth and high retention for Starbucks, helping to maintain a retention rate of 44 percent — double the industry average of 22 percent. Starbucks Rewards members are consistently more loyal than non-members, being 5.6 times more likely to visit Starbucks on any given day and driving higher sales volumes while providing a consistent revenue stream. On average, Rewards members also spend 2.5 times more than non-members. These increases in customer retention, loyalty, and spending figures stem from three main factors: (i) Starbucks’ tiered rewards structure, (ii) personalized offers and recommendations, and (iii) the convenience of mobile ordering.
The rewards program functions through a tiered system: customers' value per star in exchange for their stars increases as they accumulate more stars (i.e., the 400th star is more valuable than the 100th star). This system incentivizes Rewards Members to continue purchasing until they reach a higher star threshold, as each reward is more useful at these higher commitment levels.
Starbucks uses data collected from purchases and the Rewards App to identify trends and develop new products that align with customer preferences. For example, enhanced customer behaviour data enables it to optimize its menu based on regional and seasonal demand. Starbucks also creates highly targeted marketing campaigns through its app, increasing the amount of revenue generated through advertising spend.
Starbucks should strengthen its Rewards Program with more incentives to increase customer acquisition, improve its brand value, and diminish the guilt of purchasing coffee or food from Starbucks in an age of increasingly frugal consumer spending habits.
The What: Using Incentives and Consumer Trends to Increase Sales
Starbucks should implement a Stock Purchase Reward Program (SPRP), allowing Rewards Members to purchase Starbucks stock (SBUX) on public markets with stars earned through the rewards program. This program would attract new customers, as self-directed investing is a growing trend. Of course, alongside attracting new customers, this program will also strengthen and increase sales among their current customers and reward members.
Consumers continue to place increasing value on saving and financial responsibility, decreasing discretionary spending on high-priced coffee and breakfast items. The SPRP relieves some of the guilt of buying coffee and breakfast in the morning. Along with the enjoyment of purchasing food and drink from Starbucks, customers also have the opportunity to save and invest, aligning responsibility and enjoyment.
In addition to increasing customer acquisition and associating Starbucks purchases with financial responsibility, the SPRP would also help restore goodwill among Starbucks customers. Encouraging customers to take ownership of the company, and providing them with a simple pathway to do so will increase trust and loyalty as customers transition from mere stakeholders to shareholders.
The Who: Wealthsimple’s Digital Expertise
Starbucks should partner with Wealthsimple to facilitate public market trades for Rewards Members. All Starbucks Rewards Members would have the choice to link their Wealthsimple accounts with their Starbucks Rewards accounts through the Starbucks App. Wealthsimple’s brokerage function would then fill all Rewards Members' trades. Starbucks would fulfill the capital requirements on customers' behalf in exchange for stars.
Wealthsimple is a strong fit for this program as it will initially launch in Canada to evaluate its potential success before expanding into the U.S. Many companies tend to test products in Canada due to lower operational costs and market similarities before implementing them in the U.S. Wealthsimple's well-established presence in Canada provides a reliable platform for this trial. Additionally, Wealthsimple offers fractional stock purchases, enabling customers to buy portions of Starbucks shares, making engagement in this program more accessible and appealing. Further, Wealthsimple has already rolled out fractional shares as a reward (SaaR) for its suite of cash cards, making it an ideal candidate for the program.
This partnership is also valuable to Wealthsimple as it would increase its customer base (account holders), helping grow its market share and revenue through future commissions. For Wealthsimple, growth through account enrollment is currently a primary focus. As digital and television advertising has been core tenants of Wealthsimple’s success thus far, they could leverage this new partnership with Starbucks in a future ad campaign to help further this growth. Additionally, it is speculated that Wealthsimple is gearing up to go public. The increased brand recognition resulting from a partnership with a globally recognized company like Starbucks would help increase buzz around this potential IPO.
Case Study - Starbucks & Aeroplan Partnership
In November 2020, Starbucks Canada and Aeroplan (Air Canada’s loyalty program) formed a strategic partnership to enhance customer engagement and loyalty for both companies. This partnership allowed Aeroplan members to earn points through Starbucks purchases, while Starbucks Rewards Members gained access to Aeroplan perks.
The key objectives of this partnership included increasing customer loyalty, expanding cross-brand spending, and attracting new users to both programs. By offering Aeroplan points for Starbucks purchases, the initiative sought to encourage frequent visits to Starbucks while integrating the airline loyalty program into everyday consumer behaviour.
The Starbucks-Aeroplan partnership led to significant engagement, with members actively linking accounts and maximizing spending to maximize their rewards. Reports indicated higher Starbucks transaction volumes among Aeroplan members, contributing to overall revenue growth (which is also the intent of SPRP). Additionally, consumers benefited from personalized offers, increasing their perception of value from both brands. Ultimately, integrating Starbucks Rewards and Aeroplan was a successful strategy in driving consumer retention and long-term engagement.
The How: Mechanics of the first Stock as a Reward program
To add Starbucks stock (SBUX) as a reward option, the value and cost of a redeemed star to Starbucks must be determined. Given its current rewards system, the more stars customers collect, the more value they obtain. This is because the redeemable rewards increase in value disproportionately to the stars required to redeem the award (i.e. a Rewards Member’s 400th star is worth more to them than their 100th star). One star costs anywhere from 3-6 cents to Starbucks. For the SPRP, redeemed stars would be valued at 6 cents. This way, the SPRP is still within the ambit of reasonable costs for Starbucks, and the incentive for Rewards Members to enroll and participate in the program long-term is maximized.
The current Rewards Program has five thresholds ranging from 25 to 400 stars. For the SPRP, an additional threshold of 500 stars will be added. When members accumulate 500 stars, they can exchange them for SBUX. Starbucks will then transfer $30 (500 x 6 cents) to Wealthsimple, who will facilitate the trades on the Rewards Members’ behalf at the maximum fraction of SBUX that can be purchased. An estimate of the proportion of stock that 500 stars can be exchanged for will be accessible to all app members and updated at the market open daily. The actual proportion of stock purchased will vary based on real-time market fluctuations, and a section on this should be included in an updated terms of service for the rewards program.
The 500-star threshold is approximately 30 percent of one SBUX share, valued at $97.07 USD as of March 7, 2025. Starbucks will need to manage how often it reassesses this threshold, as in our view, consistency of rewards is more important than matching market value. Consumers should be incentivized to save up for the share option, which relies on a relatively steady star goal.
The Hard: A Vast Heterogenous Regulatory Landscape
Securities law surrounding stock options is extensive and complex. The SPRP only includes share purchasing on secondary markets to avoid this hurdle. Given that Rewards Members are not actively confirming trades based on real-time market information (i.e., they exchange stars at an estimated value), a comprehensive section should be added to Starbucks Rewards’ terms of service, which clearly indicates members’ acknowledgement of this fact, and also has them authorize Starbucks and Wealthsimple to facilitate public market trades on their behalf.
The Other Side: What lies ahead for Starbucks and the industry it’s poised to shake up?
The idea of aligning the interests of employees with those of the company to drive growth is tried and true across almost every industry through stock options. However, a major player has yet to create a simple method for customers to become shareholders. Starbucks needs a new strategy to grow revenue, and its current Rewards Program positions it perfectly to roll out the SPRP—making it the first large-cap company to leverage this type of strategy.
Should this program prove effective for Starbucks, it could quickly be adopted by other companies and industries. Other food service companies, airlines, retailers, and fashion companies are a few that immediately come to mind. Every company with a structured rewards/loyalty program could expand said program to include an incentive that encourages and allows Rewards Members to purchase shares of the respective company on the secondary market.
The SPRP is not only a promising strategy for Starbucks to adopt in re-igniting sales and growth, but it could also be the first program of many that seeks to directly align customers' interests with those of the companies from which they purchase to drive revenue growth.
