Few loyalty programs in the restaurant business can match the success of Starbucks Rewards.
Active members of the program, which currently number about 34 million, drive much of the coffee shop giant’s business, about 60% of it at company locations. Combined with the Starbucks mobile app, it has an established ability to make a visit to the chain habitual.
And yet the program has revealed some of its flaws of late. While the initial analysis of Starbucks’ sales slide was that non-Rewards customers were coming in less often, and that Rewards customers were still coming in, that is no longer the case.
Last quarter, Starbucks’ fiscal third, occasional customers returned to the brand. Transactions declined 4% in the period, implying a decline in loyalty traffic.
Some of that difference is rooted in changes the company has been making in its use of the loyalty program. When Starbucks’ sales stumbled in late 2023 and into 2024, one of the company’s initial strategies was to push more discounts through that app, while encouraging customers to join the program.
Starbucks put up signs urging customers to join the Rewards program while touting that the best discounts were there. That drove traffic through the app, but it certainly didn’t help sales. Same-store sales actually worsened, as did overall traffic. The company’s board replaced its CEO and overhauled management.
And thus a problem that began with non-loyalty customers also became a problem with the loyalty program.
“I’d say the Rewards program became too much of a one-size-fits-all and a discounting mechanism, as opposed to a program that really recognizes people for their loyalty and builds more engagement,” CEO Brian Niccol told analysts this week.
Starbucks has shifted away from those discounts, which appears to be a big reason for the decline in loyalty traffic. Non-discounted Rewards traffic increased last quarter, so much of Starbucks’ traffic decline is rooted in that discounted business.
That’s risky for Starbucks, which has had value perception issues for years. Consumers have been visiting restaurants less often amid economic concerns and frustration over prices. Shifting away from its app discounts might be costing the company sales.’
But Niccol clearly believes Starbucks needs to be a more premium experience, which is why the chain is doing things like adding comfy seats in its shops while ditching seatless locations.
Companies use discounts on their app because they get something in return besides just a visit: They get the customers’ information and an opportunity to lure them back. But loyalty programs that use frequent discounts can train customers to only use those discounts.
That might be one thing for a brand like McDonald’s that has long portrayed itself as a budget dining destination, though franchisees of such brands often aren’t thrilled with the level of discounts available on the app.
Discounting a premium experience is generally a bad idea. Loyalty customers want recognition for their loyalty, such as the way frequent-flyer programs let customers use points to gain access to special lounges or upgrade to better seats.
As such, Starbucks is planning changes to its Rewards program next year that are designed to give them that. The features, Niccol said, will be “designed to grow loyalty, brand love and engagement.”
“The feedback we’ve gotten from customers that are part of it is, if I’m really a big, loyal customer, there should be more recognition of that,” Niccol said. “If I’m a less-frequent customer, we should set up the program so it fits for them.
“So, you’re going to see us really tailoring the system to become more about recognizing the loyalty, recognizing the engagement, and then building the brand through this rewards program.”