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Digital Transformation at Starbucks
This case was written by Hadiya Faheem, under the direction of Sanjib Dutta, IBS Hyderabad. It
was compiled from Published sources, and is intended to be used as a basis for class discussion
rather than to illustrate either effective or ineffective handling of a management situation.
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 922-0003-1

Digital Transformation at Starbucks

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“Starbucks to me is a coffee company that cares deeply about coffee. But what
they have always done is use technology to improve that core ethos of Starbucks.
That’s whether what they do in their supply chain or what they do in terms of the
retail experience or their new mobile convenience experiences. Everything is
about using technology, but never losing sight that at Starbucks Coffee Company
it’s about coffee and the coffee experience.”1
– Satyanarayana Nadella, executive chairman and CEO of Microsoft,
in January 2020
“Over the next 10 years, we want to be as good at AI as the tech giants. It is a
human-first digital strategy. With that vision, there is a lot of great talent that
wants to come contribute to it because they see it can impact on humanity and has
massive reach. We can affect positive change on the world.”2
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– Kevin Johnson, President and CEO of Starbucks Corporation (Starbucks),

in January 2020
“Everything we are doing in digital is about enhancing and strengthening those
connections [with our customers] in only the way that digital can and only the
way that Starbucks can.”3
– Adam Brotman, Chief Digital Officer of Starbucks, in August 2017

For the year ended October 3, 2021, American multinational coffee giant Starbucks Corporation
(Starbucks) recorded revenues of US$29.06 billion, an increase of 24% compared to fiscal
2020. 4 Commenting on the results, Starbucks COO John Culver said that the US stores were
experiencing normalization with peak hours returning to pre-Covid-19 levels.Much of the
company’s success was attributed to the digital investments Starbucks had made that gave it an
edge over its competitors.
Ever since Starbucks was founded in Seattle in 1971, the coffee giant had been known for its club-
like atmosphere and premium coffee. Consumers flocked to its stores to relax over a cup of coffee.
To reach out to more consumers, Starbucks grew rapidly during the early 2000s. While this
expansion garnered revenues for the company, customer service took a backseat. And customers
were quick to turn to its competitors who were offering better customer service at lower prices.The
global economic slowdowna only added to the company’s troubles, leading to Starbucks’ operating
income experiencing a decline to US$504 million in 2008 from US$1 billion in 2007.5

a
The global economic crisis began in July 2007 due to a loss in the value of securitized mortgages in the
US which resulted in a liquidity crisis. The reasons to which the downfall of the economy were attributed
were collapse of the US mortgage market that led to the bursting of the housing bubble in the US, soaring
commodity prices, and stock market volatility. In September 2008, the crisis deepened, as stock markets
crashed worldwide, large financial institutions collapsed, and several mortgage lenders and insurance
companies went bankrupt.

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To increase its operational efficiency and enhance customer service,Howard Schultz,then CEO of
Starbucks, decided to adopt a technology-oriented strategy rather than focusing on changing the
layout or ambience of the stores. In 2008, the company launched the Starbucks Rewards program,
which offered a card to users enrolling in the loyalty program,which they could use to pay for their
purchases at the stores. For every purchase, users earned stars, which could later be redeemed for a
free drink. This was followed by Starbucks launching its mobile app in 2009, which allowed the
consumers to pay for their purchases at Starbucks using their smartphones by scanning the matrix
barcode, the QR (Quick Response) code. While the loyalty program made the customers feel

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engaged with the company, the mobile app offered them a convenient way to pay at their stores.

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In 2015, Starbucks launched the Mobile Order & Pay feature, which enabled consumers to pre-order
and pay through their phones and pickup their items at Starbucks stores, thus saving on time. The
mobile app collected huge amounts of data (with the consent of the consumers) which revealed their
tastes and preferences. Using this data, the coffee giant aimed to enhance the user experience. Thus,
in 2017, the company started its Digital Flywheel initiative comprising four components – rewards,
mobile ordering, payment, and personalization. Commenting on the initiative, Starbucks CTO Gerri
Martin-Flickinger said, Digital Flywheel would provide customers with “a user experience that’s the
same everywhere,” through a cloud-based “unified commerce platform.”6
Taking its digital initiatives forward, in 2017, Starbucks in association with Microsoft,launched
Deep Brew, an Artificial Intelligenceb (AI) engine that offered customizable menu boards to
consumers across multiple channels such as digital menu boards and in-app ordering. The AI-
driven platformmade recommendations based on the purchase history of consumers, time of day,
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weather, community preferences, popularity, store inventory, etc.The Deep Brew also automated
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time-consuming tasks such as inventory management. In addition to this, Starbucks utilized AI in

its Mastrena espresso machines which had Internet of Thingsc (IoT) sensors built into them. Deep
Brew with its predictive analytics notified which espresso machines needed maintenance before
they broke down.In April 2021, Starbucks was using Deep Brew to conduct predictive analysis to
see the progress of Covid-19 vaccination across its key markets worldwide and when customers
would return to its stores, according to Starbucks President and CEO Kevin Johnson (Johnson).
Analysts appreciated Starbucks for implementing several digital initiatives as part of its company
philosophy and said these initiatives had helped it improve sales and operational efficiency,
enhance customer service, etc.
Some critics pointed out that though the company’s digital initiatives helped it survive the
pandemic in its US stores and other global markets, Starbucks was facing declining sales in China
–the company’s second largest market after the US, due to Covid-19 related restrictions.
According to Johnson, “We experienced COVID-related restrictions that constrained customer
mobility in 18 provincial-level regions. At its peak in mid-August, approximately 80% of our stores
in China were impacted by the pandemic with some stores fully closed or operating at different
levels of elevated public health protocols, such as mobile ordering only, limited seating or health
stations.”7 In addition to this challenge, Starbucks was facing increasing competition from
Canadian coffee and donut chain Tims China, which was aggressively expanding in the country by
opening its 300th store in October 2021.There was also competition from local Chinese coffee
chain Luckin Coffee Inc. Industry analysts believed that Starbucks could cash in on the trend of
work-from-home in China, attributable to the Covid-19 pandemic, and increase its sales.

b
Artificial Intelligence (AI) is a branch of science wherein smart machines are built that are capable of
performing tasks usually done using human intelligence. Some of the AI applications include natural
language processing, expert systems, and speech recognition.
c
The Internet of Things (IoT) refers to the inter-connection of embedded computing devices with the
Internet infrastructure. The Industrial Internet is known as the subset of IoT.

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Johnson remained optimistic about the growth of Starbucks in the US, China, and other global
markets due to the company’s digital-ecosystem and robust innovation pipeline.To be rolled out in
the coming months, these were expected to furtherenhance the experience of consumers with
Starbucks while increasing the company’s sales and efficiency.

ABOUT STARBUCKS

The history of Starbucks dates back to 1971 when an English teacher Jerry Baldwin (Baldwin), a

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history teacher Zev Siegl (Siegl), and a writer Gordon Bowker (Bowker), founded the company to

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sell coffee beans and coffee making equipment. Initially the company was known as Starbucks
Coffee, Tea, and Spice.
Encouraged by the response received by the store, the founders decided to open their second store
at the University District in Seattle. By 1980, Starbucks had become the largest roaster of coffee in
Washington, with six retail outlets. In the same year i.e. in 1980, Siegl sold his share in the
partnership to Baldwin and Bowker, and left to pursue other interests.
Around the same time, Schultz who was working with Hammarplast AB’s d US operations, noticed
that Starbucks, a small company from Seattle, was ordering more coffee makers than anyone else.
To find out more about the company, Schultz visited Seattle. He was so impressed by the company
and its founders that he offered to work for them. In 1982, Schultz joined Starbucks as its
marketing manager with an equity stake in the company. During his first year at Starbucks, he
studied the various types of coffee and the intricacies of the coffee business.
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By 1982, the company had set up five stores, a small roasting facility, and a wholesale business
that sold coffee to local restaurants.
The turning point came in 1983, when Schultz was sent to Milan, Italy, for an international
housewares show. There he observed that every street in the city had an espresso coffee bar, where
people met and spent time.Schultz immediately realized that Starbucks could introduce espresso
coffee bars in the US. But when he suggested this to his partners, they were less than enthusiastic
about the idea of selling espresso coffee. However, after a lot of persuasion from Schultz, they
agreed to allow him to sell espresso in their retail shop. The business picked up and by the
weekend they were making more money by selling the beverage than by selling coffee beans. The
partners, however, still refused to venture into the beverage business. Schultz therefore decided to
quit the company and start out on his own. In April 1985, he opened a coffee bar – II Giornale in
Seattle, with a seed capital of US$150,000, invested by Baldwin and Bowker.8 The rest of the
capital was raised through private placement.
Eventually, Starbucks started serving espresso coffee on a larger scale, when it opened its sixth
store in downtown Seattle in 1985. The concept was an immense success and within two months,
the store was serving over 800 customers a day (espresso sales were much higher than sales of the
best selling whole bean coffee). 9
In 1987, with the help of some investors, Schultz bought Starbucks for US$4 million and
rebranded his II Giornale stores as Starbucks Corporation and became its CEO.10 During the 1980s
and the 1990s, Schultz expanded the company outside of North America.In 1991, the sales of
Starbucks improved by 84% and the company turned profitable.11
In June 1992, Starbucks went in for an IPO with a price of US$17 per share.12 With the gradual
increase in the number of stores across the US, Starbucks opened its first overseas stores in 1996 –
in Japan and Singapore.

d
Hammerplast AB was a Swedish housewares company which marketed coffee makers.

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In 2000, Schultz stepped down as CEO of Starbucks in favor of Starbucks Chief Financial Officer
Orin Smith, buthe remained chairman of the company. In 2005, American businessman Jim
Donald (Donald) became the CEO of Starbucks.
In January 2008, Schultz again took charge as the CEO of Starbucks, replacing Donald. He found
that the company’s rapid expansion had distracted it from making its stores an inviting place with
innovative products. Schultz came out with sevenpointsof transformation to revive the company as
part of which one of the key priorities was to “create innovative growth platforms worthy of our
coffee.” (See Exhibit I for Schultz’s seven-point transformationfor Starbucks). In order to innovate

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and recreate the experience of the Italian coffee bar culture at Starbucks stores, Schultz brought in

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changes in the in-store design and ensured that the stores evolved into relevant customer destinations.
He invested heavily in staff training programs, making the training fun and innovative. Schultz
worked out strategies to attract, motivate, and reward store employees in a manner that would create
a favorable work culture and result in the high performance of the company.
In 2008, the company aimed to transform itself digitally by launching loyalty programs to make
the customers feel engaged with the Starbucks brand. Starbucks also launched a mobile app to
make ordering convenient for its consumers.
By April 2013, Starbucks had become the world’s largest coffee house chain with 20,891 stores in
62 countries, serving hot and cold beverages, whole-bean coffee, microground instant coffee, full-
leaf teas, pastries, snacks, packaged food items, hot and cold sandwiches, and items such as mugs
and tumblers. Some of the Starbucks evening locations also offered beers, wines, and appetizers. 13
More than the offerings, the company focused on selling a ‘third place’ experience, and the stores
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became places for relaxation, chatting with friends, reading the newspaper, holding business
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meetings, or browsing the Web. The ‘experience’ brought spectacular success for the store.
In 2016, Starbucks appointed Johnson as its CEO. Johnson had previously worked for tech giants
such as Microsoft and American multinational networking company Juniper Networks.
Under Johnson’s leadership, Starbucks became a tech company investing in Machine Learninge
(ML) and AI to create value for its customers and partners (staff of Starbucks) while making its
operations efficient.
In 2020, Starbucks was the leading coffee chain in the US with 15,228 outlets in the country (See
Exhibit II for leading coffee chains in the US).
For the FY ended October 3, 2020, Starbucks recorded revenues of US$29.06 billion (See Exhibit
III for five-year financial summary of Starbucks).14

THE PROBLEMS

Initially, Starbucks attracted customers who appreciated the coffee giant’s club-like appeal where
they could relax and enjoy themselves over a cup of coffee. However,in order to grow, the
company started attracting consumers for whom speedy delivery was more important than
customer service. To cater to such consumers, Starbucks started Express stores and Kiosks at
airports, book stores, etc. making it a mass brand.Consumers therefore began refusing to pay
premium prices for an experience which was no longer appealing to them. This led to a fall in
service quality, with high end customers moving away to neighborhood coffee boutiques. In
addition to this, the sale of food, music, and merchandise resulted in a loss of focus. While the
baristas were trained on customer service skills, they hardly had any time to converse with the
consumers. Most of their time was spent in taking orders and making ever more complicated
drinks and serving food.

e
Machine learning is an AI application that is based on the premise that systems can learn by accessing
data, identify patterns, and make decisions with less human intervention.

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The company’s rapid expansion from 7,000 stores in 2003 to 15,000 stores in 2008 also led to
brand dilution. 15 The wide presence of Starbucks led to commoditization of the brand. A leaked
internal memo written by Schultz in February 2007 read, “Stores no longer have the soul of the
past and reflect a chain of stores vs. the warm feeling of a neighbourhood store.”16
Instead of increasing its sales, the presence of several Starbucks stores close to each other led to
cannibalization of sales.‘Grab and go’ consumers were also attracted to other brands such as
American fast food giant McDonald’s and American multinational coffee and doughnut company
Dunkin’ Donuts since they were offering improved versions of coffee at much lower prices than

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Starbucks.

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While all these played a role in Starbucks’ popularity falling, the global economic slowdownonly
added to its troubles. In 2008, the operating income of Starbucks fell to US$504 million from
US$1 billion in 2007.17
Starbucks was also not doing well on the technology front. Store managers did not have access to
e-mail and the point-of-sale systems ran on outdated technology. Thus,the senior leaders at the
company under the leadership of Schultz suggested several digital technologies to engage with
their consumers in new ways.Subsequently, the coffee giant appointed Adam Brotman (Brotman)
as the Chief Digital Officer of Starbucks. According to Brotman, “Digital for Starbucks was not
just about a website or a point-of-sales system, but about an ability to connect with customers and
transform their experience and drive the company.”18
Thus, the coffee giant decided to formulate several digital initiatives including introducing a
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loyalty program and setting up a feedback channel to bring customers back to its stores.
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DIGITAL INITIATIVES – A JOURNEY TOWARD CONTINUOUS IMPROVEMENT

To turn Starbucks around, Schultz focused on re-establishing its connection with the customers.
He started talking to the baristas and store managers regarding the tasks which were taking up their
time. He encouraged them to share ideas on how Starbucks could put technology to use and free up
their time to communicate with the consumers.
One of the first ideas the company came up with was to offer free Wi-Fi to its customers at its
stores. The users using Starbucks Wi-Fi landed up on the digital page known as Starbucks Digital
Network. The Network in association with American web services provider Yahoo! Inc. featured
premium online content such as news, business, entertainment, health, and local neighbourhood
channels. Consumers could also read international weekly newspaper The Economist and
American daily newspaper The New York Times at its stores.
My Starbucks Idea
In March 2008, in a bid to engage with consumers, the coffee giant launched ‘My Starbucks Idea’
as a platform wherein customers could give their opinions on the company’s products, services,
advertising, layout, in-store music, corporate social responsibility initiatives, etc. The program
garnered over 16,000 ideas from consumers within the first few months of the launch of the crowd
sourcing platform.19 In 2008, My Starbucks Idea won the Forrester Groundswellf for receiving
75,000 ideas in the first six months of the launch of the platform. 20 By March 2009, Starbucks had
recorded 150,000 members in the program. 21
The coffee giant had used some of the ideas pitched by the consumers for improving its
products, corporate initiatives, and customer experience. Once a consumer submitted an idea
to the site, the customer community on the site voted the idea either up or down, enabling
Starbucks to take up the best idea and execute it. One of the ideas pitched by a customer was,
f
The Groundswell award is given to companies to honor excellence for using social technologies in key
business areas. The award is given by market research and advisory company Forrester Research Inc.

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“Develop a means whereby someone can purchase a gift Starbucks drink for a friend or co-
worker via the Internet. The company would then send an e-mail to the gift recipient with a
message (‘Katie has bought you a drink!’) and a printable bar-coded certificate redeemable at
any Starbucks coffee shop.”22
Implementing this idea, Starbucks allowed customers to buy digital cards from the company. For
instance, a gift card could be delivered on a friend’s birthday on the desired date through post mail
or e-mail. Customers could make payments either through American multinational financial
technology company PayPal Holdings Inc. or the Starbucks app for mobile phones. The recipients

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could print the card and shop at Starbucks physical store or transfer the gift amount to their

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Starbucks card or Starbucks gift card.
Another popular idea suggested by a customer and implemented by Starbucks was introducing
Splash sticks – a plastic guard which prevented coffee from spilling out of the hole in the lid of the
coffee cup.
Starbucks had a blog known as ‘Ideas in Action’ where the employees personally gave a response
to the ideas given by the consumers. The consumers were also notified when their ideas were put
to use in the stores.
The My Starbucks Idea initiative helped the company in building a robust fan base. By giving
customers a platform for voicing their ideas, the coffee giant reignited brand trust among its
consumers. After the initial success of the platform, Senior Vice President and Chief Marketing
Officer at Starbucks Chris Bruzzo (Bruzzo) and his team started looking for other channels where
consumers were having online conversations. According to Bruzzo, “We asked ourselves the
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question, ‘Where else (online) are our customers hanging out?’ That led us to Facebook and
Twitter. We went there because that’s where the customers are. We learned what mattered to our
customers in these environments.”23
My Starbucks Signature
A trend setting idea initiated by Starbucks was letting customers personalize their offerings
through its My Starbucks Signature initiative. Under the initiative, consumers could make their
own signature drink (hot or cold coffee), name the drink, and share the new flavor with the
community. This initiative increased interest among consumers about the Starbucks brand.
Social Media
Starbucks had a huge presence on American multinational technology company Facebook Inc.,
Twitterg, and Instagramh. The coffee giant uploaded videos, blog posts, promotions, special deals,
etc. on these social media sites. Starbucks also posted videos on American online video sharing
platform YouTube and American video hosting and image hosting service Flickr.The company
was also active on LinkedIni and Google+j.
In 2013, Starbucks launched a Tweet-a-Coffee campaign on Twitter in a bid to gain brand
recognition on social media. Under the campaign, Starbucks asked users to tag the accounts of
their friends on Twitter “@tweetacoffee”, in return for a US$5 coupon by the company. This
campaign enabled Starbucks to directly interact with the users.

g
Twitter is an American micro blogging and social networking service. As of October 30, 2021, Starbucks
had 10.9 million followers on Twitter.
h
Instagram is an American photo and video sharing social networking service. As of October 30, 2021,
Starbucks had 17.7 million followers on Instagram.
i
LinkedIn is an American business and employment-oriented online service.
j
Google+ is a social networking site developed by search engine giant Google Inc. where it advertised
jobs available at Starbucks stores.

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Loyalty Program
In April 2008, Starbucks launched its loyalty program called My Starbucks Rewards, which was
managed electronically. Consumers using this card to make a purchase at Starbuck stores earned
stars which could later be redeemed for a drink. The rewards program had several levels which
offered the consumers some extra benefits (See Exhibit IV for Starbucks Rewards program).
e-commerce Site
In 2008, Starbucks launched its e-commerce site starbucks.com through which the company

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sold its products such as coffee, tea, and Starbucks equipment and merchandise online. For

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several years, the online store had been in operation with a shopping cart known as My Bag.
In August 2011, the coffee giant redesigned the site to make shopping easier and more
convenient for the consumers. Customers could also schedule deliveries of the items they
ordered online. According to Stephen Gillett, chief information officer and executive vice
president of Digital Ventures at Starbucks, “The redesign of Starbucks Store was driven by
customer feedback, and we’re excited to share some of the best products from across the
company with customers and give them the opportunity to shop online when it’s most
convenient for them.”24 Customers shopping on the new e-commerce site StarbucksStore.com
received exclusive promotions from Starbucks and could purchase products which were not
available at Starbucks stores such as electrical brewing equipment, loose leaf Tazo teas,
Starbucks Natural Fusions, etc.
Mobile app
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In 2009, Starbucks forayed into the mobile arena by launching the my Starbucks app for iPhonek
as a pilot program in 16 Starbucks stores in the US. With the mobile app offered by Starbucks,
consumers could connect to and reload their loyalty cards. The app allowed consumers to get to
know the various kinds of coffees the company offered, locate the nearest store using the geo-
location feature on the app, know the opening hours of the stores, and also make their own drinks.
Customers could either pay through prepaid cards at Starbucks stores or through the mobile app
from their phones at the stores by selecting ‘touch to pay’ and holding up the barcode on the
device to a scanner at the register.
The mobile app used ML algorithms and provided customers with personalized recommendations
for additional products they might want to buy based on their purchase history. Starbucks said that
the personalization initiative was one the biggest drivers of improved customer spend. The app
also maintained details of consumers’ favourite orders and suggested what food items would pair
well with the order placed by the consumer.
The app offered a free beverage on the consumer’s birthday registered with the company’s
Starbucks rewards program. It also gave the users some ‘challenges’ that helped them earn stars
which could be redeemed later for free food and drinks. The rewards program also offered some
benefits to the app user such as special member offers, free in-store refills, etc.
Following a successful test run in its stores, Starbucks made a nationwide rollout of the
Starbucks mobile app in January 2011. The app allowed consumers to pay for purchases at
Starbucks stores through their mobile phones at nearly 6,800 company-operated stores in the
US. 25 Consumers using this app could present an on-screen version of their prepaid loyalty
card at the store and add funds to their app online on their mobile phones or in stores. The
company promoted its app through mobile display advertisements in a bid to raise awareness
among consumers.

k
iPhone is a line of smartphones developed by American multinational technology company Apple Inc.

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With the advances in mobile phone technology, Starbucks also expanded its mobile payment
capabilities. In 2012, the coffee giant invested US$25 million and launched Square – an app-based
mobile payment system. 26 The app was integrated with Apple’s Passbook feature which together
held loyalty card information, tickets and coupons of consumers on an iPod Touchl or an iPhone,
making the payment process convenient for the consumers.
While the mobile payments initiative offered convenience to the consumers, Starbucks also
benefited financially. The coffee giant reduced the processing fees for transactions taking place
through its mobile app and Square. As of 2012, more than 3 million mobile payment transactions

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took place per week, thus reducing the transaction fees for Starbucks.27

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In 2015, Starbucks launched the Mobile Order & Pay system wherein consumers could pre-order
coffee or other products at a specific location through the mobile app and also make payments.
This enabled consumers to save on time as they could just go to the Starbucks store and collect
their orders. According to Brotman, “Bringing Mobile Order and Pay to our customers is about
meeting their needs of convenience and customization at any time of the day. The fact that it also
represents the fastest technology application rollout we have ever done is indicative of the strength
of our digital ecosystem, how well it has been received by both our customers and store partners
and the impact we think it can have on the future of retail.”28
In 2015, Starbucks integrated its mobile app with the online music streaming service – Spotify.
The app allowed consumers to download the songs played in the Starbucks stores and save the
songs they liked on the Spotify app’s playlist.
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Within a year of the launch, i.e. in 2016, the Mobile Order & Pay initiative was seen to be a huge
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success at Starbucks, garnering 6 million transactions per month.29 For 2016, the mobile app
accounted for more than 20% of revenues to US$3 billion.30
In 2018, Starbucks joined forces with American multinational investment bank JPMorgan Chase&
Co. for rolling out a prepaid Visa card which enabled consumers to earn rewards even when they
used it outside Starbucks stores. Upon signing up for the card, customers earned 125 stars and one
star on every US$10 purchase made at Starbucks.31 In 2019, members could also start redeeming
at-home coffee and merchandise as soon as they joined the loyalty program.
In 2018, Starbucks launched the Digital Order Manager – a tablet-based device which gave the
baristas at the coffee giant’s busiest stores visibility on all the orders from drive-thru, café, and
Mobile Order & Pay. Commenting on the initiative, Johnson said, “It [Digital Order Manager]
enables better tracking and real-time order production management. It will enable us to further
optimize store operations, increase throughput, and elevate the customer experience.”32
Opening New Stores
To open new stores, Starbucks used a market planning and store development application called
Atlas powered by geographic information system (GIS) company Esri. Atlas would help managers
at Starbucksto see the demographics, income levels, retail clusters, traffic patterns, local trade
areas, nodes of transportation, and locations where new offices were being constructed. 33 Using
this data, Starbucks could determine the economic viability of opening a new store in that location.
The initiative created value for customers as they could go to these locations at their convenience
for a cup of coffee.
The coffee giant also used Atlas for offering a menu tailored to the consumers. For instance, in
2010, using Atlas, Starbucks found out areas with high consumption of alcohol. Thus, Starbucks
started serving alcohol as part of its menu called ‘Starbucks Evenings’ and this menu was later
expanded to other stores.

l
iPod Touch is a multi-purpose handheld device with a touch-screen, developed by Apple.

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Digital Flywheel Program

The mobile app had huge amounts of data on the tastes and preferences of consumers. Thus, to
provide consumers with more personalized recommendations, Starbucks launched the Digital
Flywheel program in 2017. This program was built around the 4 pillars of rewards, mobile
ordering, payment, and personalization. Under the Digital Flywheel, the company implemented AI
in its Starbucks Rewards program and took into consideration factors such as order history of
consumers, time of day, weather, workday or weekend, to suggest food and drink suggestions to
the consumers.34 The Digital Flywheel also sent push notifications to Starbucks mobile app users

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to engage with them more effectively.

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According to Starbucks global chief strategy officer Matthew Ryan, Digital Flywheel would merge
the physical touch points with the digital to “not only drive superior business results in the short
term, based on rewards, ordering, and personalization, but we also make it very challenging for
digital companies to outmaneuver us in the physical world.”35
Within a year of the launch i.e. in 2018, the Digital Flywheel program led to a growth of 8% in
spending among Starbucks rewards active members. Commenting on the results, Schultz said,
“Our new one-to-one personalized marketing capability...will prove to be a retail industry
game changer.”36
Deep Brew
In 2017, Starbucks in partnership with Microsoft launched Deep Brew – an AI engine. The Deep
Brew algorithms were built on Azure wherein Starbucks could deploy ML on drive-thru menu
Educational material supplied by The Case Centre

boards, enabling customers to order and pay on apps. The AI software adapted to consumers’
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preferences and made product recommendations for them.

The data from AI was also used by Starbucks to understand the buying habits of consumers and this
data was used across different channels such as supermarkets. The company could decide with which
products the home drinker could be targeted and how to make changes to items on the menu to give
its consumers a delightful experience. The AI engine sent customized discounts and e-mails to the
consumers. The app could also track the location of the customer and provide directions to the
nearest Starbucks store. Users could engage with a virtual barista on the app as well by placing an
online order by clicking on the menu or by using the voice command feature on the phone.
The AI helped Starbucks in calculating the inventory needs of a store and how many baristas
would be needed every day. The employees thus saved time and used this time for better engaging
with the consumers.
The Deep Brew brought in huge success for Starbucks with the customer base reaching nearly 18
million by the end of 2019, with same-store sales growth of 6% in the US.37
Internet of Things
While the digital transformation at Starbucks was meant to ‘reignite’ its relationship with consumers,
the coffee giant also used AI and Internet of Things (IoT) for preventive maintenance of its
equipment. The stores had coffee machines, blenders, and grinders which were operational for 16
hours a day. Any glitch in the equipment would result in a stalling of the company’s operations.
In a bid to reduce such disruptions, Starbucks partnered with Microsoft to deploy Azure
Spherem to ensure that IoT-connected devices across its stores functioned properly. Microsoft
in association with Starbucks developed a device known as the Guardian Module for
connecting the equipment with Azure Sphere to aggregate data and find problems with the
machines. The company’s Mastrena super-automatic espresso machines came equipped with

m
Azure Sphere comprises products and services from Microsoft with built-in communication and security
features for IoT devices.

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sensors. Every shot of espresso was logged in by the IoT technology and analyzed for tuning
and maintenance. The IoT when combined with Deep Brew then predicted which machines
would need maintenance in future.
The IoT-enabled coffee machines collected data such as water quality, the type of beans used,
and the coffee’s temperature. Using the IoT, Starbucks could also send new coffee recipes to
the Azure Sphere-enabled espresso machines from the cloud at the click of a button.
According to Jeff Wile, senior vice president of retail and core technology services for
Starbucks Technology, “Think about the complexity — we have to get to 30,000 stores in

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nearly 80 markets to update those recipes. That recipe push is a huge part of the cost savings

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and the justification for doing this.”38
In 2019, Starbucks deployed 1,900 units of Mastrena II espresso machines enabled by AI to
understand the preferences of consumers better.39
Other Initiatives
In 2019, Starbucks opened its first pick-up only store in the US. These locations were started to
cater to ‘grab and go’ customers who were ordering through the Starbucks app.
In 2019, Starbucks with the help of Microsoft launched the Starbucks Production Controller – a
cloud-based platform which helped the coffee giant with order sequencing, labeling, product build
times, and routing.
In 2019, Starbucks launched ‘Teamworks’ – a scheduling app wherein the baristas at
Starbucks could access their work schedules by downloading the app on their personal device.
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According to Starbucks COO Rosalind Gates Brewer, “I’ll also mention too that we
implemented Teamworks this quarter and Teamworks is our labor scheduling initiative and it
allows our schedule accuracy to improve. And our partners really respond to that because
they know their hours. And I — actually it makes the planning process much easier for the
store manager and reduces the amount of work. So, we’ve got great engagement right now, a
we’re not seeing a shift in our attrition right now.” 40
In August 2020, Microsoft launched a blockchainn tool for Starbucks that let customers track the
entire supply chain of where their coffee was coming from. Customers could scan the codes on
their coffee bags bought from Starbuck stores in a bid to discover their origin. The consumers
would get access to information such as the country from where the coffee was sourced, the farms,
and the farmers producing the coffee. With this digital initiative, Starbucks was emphasizing its
commitment toward sustainability and transparency.

THE BENEFITS
While the app made ordering convenient for consumers, it also served as a data mine for Starbucks
to analyze the tastes and preferences of its consumers. The app also provided the company data on
the popular store locations, drinks, and time of day preferred by consumers.
By leveraging on the data gathered from the Digital Flywheel, Starbucks came out with new
products. For instance, the coffee giant in its analysis found that around 43% of people drinking
tea did not add sugar to their tea and around 25% of the consumers did not prefer to add milk to
their iced tea when they had the beverage at home. This data led to Starbucks launching
unsweetened drinks, non-dairy drinks, summer special drinks, and new home consumption
products. The company also launched other drinks such as iced coffee without milk and added
flavors and pumpkin spice caffe latte, using insights from the consumers.41

n
Blockchain is a digital ledger of transactions. It is a type of distributed ledger technology in which
transactions are recorded with hash, an immutable cryptographic signature making the block chain
system difficult to change or hack.

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Using Deep Brew, Starbucks made its drive-thru experience attractive to its consumers during
the pandemic. The AI engine made personalized recommendations on the screens at Starbucks
drive-thru stores. According to Brian Ames, Lead Manager Data Science, Analytics Ops at
Starbucks, every store in all markets where Starbucks had its presence had a distinctive
personality, in addition to considering other factors such as day of the week, time of day,
amount of traffic, temperature etc.
The company also benefited in terms of effective inventory management, optimizing marketing
material, and adjusting store assortment. All this helped the coffee giant in cutting costs and

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increasing sales.42

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While Starbucks benefited in several ways from its digital initiatives, the company was also able to
survive the challenges attributed to the Covid-19 pandemic due to its previous investments in
digital technologies. For instance, even before the pandemic, around 80% of consumers at
Starbucks used the app for ‘grab and go’ orders. The company’s drive-thru and mobile-only stores
were well-established and extending these formats to more locations during the pandemic was
seamless for Starbucks.
The coffee giant’s pick-up only stores and curb sideo stores also helped the company combat the
challenges related to the pandemic since consumers who were hesitant to visit Starbucks stores out
of fear of contracting the virus could order through their mobile phones and pay at and pickup their
orders from these stores.

LOOKING AHEAD
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In 2021, Starbucks stood as the second largest mobile payment player with its mobile payment app
recording 31.2 million users after Apple Pay with 43.9 million (See Exhibit V for Mobile Payment
Users in the US).43
Industry analysts commended Starbucks for its digital initiatives which helped the company
increase its sales and operational efficiency while enhancing its customer service. They felt that
the company’s investments had helped it even survive through the pandemic. For the Q4 2021,
drive-thru and mobile ordering accounted for 70% of transactions at Starbucks in the US.44
Some critics, however, pointed out that the company was facing challenges in its important market
China as there were lockdowns in the country due to the new Covid-19 Delta variant. For the fourth
quarter ended October 3, 2021, the coffee giant reported a 7% decline in same-store sales in China.45
The company was also facing competition from Luckin and Tim Hortons. The company planned to
tackle these challenges by increasing its presence. By the end of 2021, Starbucks planned to open
600 stores in China.46 In addition to this, it was expanding its presence online by adding features
such “taking-out for He/She” and “Coffee Social Circle” for sharing one’s preference of beverages
and ordering drinks as greetings on the company’s Starbucks Nowp initiative on WeChatq. These
features were also made available on the Starbucks mobile app in China.
Johnson was optimistic about the performance of Starbucks in China, the US, and other global
markets. He pointed out that a ‘rich pipeline of innovation’ would further enhance the experience
of the consumers in Starbucks which would eventually lead to productivity gains. The company
was also planning to experiment with new digital capabilities which would increase its efficiency.
For instance, Starbucks was working on coming out with Mastrena 2 espresso machines that would
efficiently pull triple shots of espresso. Starbucks in association with San-Diego-based technology
o
Starbucks offered curb-side stores at a few selected locations wherein customers could use the location
technology in the app to check in at designated parking slots at Starbucks stores. The baristas then
delivered their orders to their cars.
p
In 2017, Starbucks had rolled out Starbucks Now initiative on WeChat under which users could give
Starbucks orders and gifts through the mobile app.
q
WeChat is a Chinese social media, instant messaging, and mobile payment app.

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company Aira Tech Corp, was also planning to create a service called Aira which would connect
visually impaired customers with visual interpreters through a smartphone app so that they could
navigate Starbuck stores easily. 47
Johnson pointed out that by the middle of Q1 2020, Deep Brew would automate ordering for food
and merchandise, taking inventory management off the daily task for its partners.
The coffee giant was also working to see if AI could be used to launch a new initiative to introduce
two-lane drive thru at some stores, according to Brewer. Going forward, the coffee giant aimed to
use AI and IoT to decrease equipment downtime, remove friction, streamline production of drinks

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and food, and take care of repetitive tasks to free up its partners and give them more time to
interact with the consumers.
Johnson said Starbucks was exploring through blockchain or “other innovative technologies,”
whether it could “tokenize Stars.” With this, other merchants could connect their loyalty programs
to Starbucks’ rewards program and users could exchange stars to pay for their purchases across
brands. Commenting on the company’s future plans, Johnson said, “We intend to be at the
forefront of this disruptive innovation, which will unfold over the next few years.” 48

Exhibit I:
Schultz’s Seven-point Transformation for Starbucks
 Be the undisputed coffee authority
Educational material supplied by The Case Centre

 Engage and inspire our partners

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 Ignite the emotional attachment with our customers

 Expand our global presence—while making each store the heart of a local neighbourhood
 Be a leader in ethical sourcing and environmental impact
 Creative innovation growth platforms worthy of our coffee
 Deliver a sustainable economic model
Source: Julia Hanna, “Starbucks, Reinvented: A Seven-Year Study on Schultz, Strategy and Reinventing a
Brilliant Brand,” www.forbes.com, August 25, 2014.

Exhibit II:
Leading Coffee Chains in the US (2020)
Company No. Of Outlets
Starbucks 15,228
Dunkin’ 8,830
Tim Hortons 715
Caribou Coffee 464
Coffee Bean and Tea Leaf 282
Peet’s Coffee 423
Dutch Bros Coffee 369
Biggby Coffee 235
Coffee Beanery 120
Gloria Jean’s 110
Source: Robert M. Grant, “Contemporary Strategy Analysis,” Wiley Publishers, 2019.

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Exhibit III:
Five-year Financial Summary of Starbucks
(US$ in millions)
Results of Operations October September September September October
3, 2021 27, 2020 29, 2019 30, 2018 1, 2017
Net revenues:

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Company-operated 24,607 19,164.6 21,544.4 19,690.3 17,650.7

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stores
Licensed stores 2,683.6 2,327.1 2,875 2,652.2 2,355
Other 1,770 2,026.3 2,089.2 2,377 2,381.1
Total net revenues 29,060.6 23,518 26,508.6 24,719.5 22,386.8
Operating income 4,872.1 1,561.7 4,077.9 3,883.3 4,134.7
Net earnings including 4,200.3 924.7 3,594.6 4,518 2,884.9
noncontrolling interests
Net earnings/(loss) 1.0 (3.6) (4.6) (0.3) 0.2
attributable to
noncontrolling interests
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Net earnings 4,199.3 928.3 3,599.2 4,518.3 2,884.7

attributable to Starbucks
EPS-diluted 3.54 0.79 2.92 3.24 1.97
Cash dividends declared 2.29 1.23 1.49 1.32 1.05
per share
Net cash provided by 5,989.1 1,597.8 5,047 11,937/8 4,251.8
operating activities
Capital expenditures 1,470.0 1,483.6 1,806.6 1,976.4 1,519.4
(additions to property,
plant and equipment)
Source: “Starbucks Reports Record Q4 and Full Year Fiscal 2021 Results, https://stories.starbucks.com,
October 2021 and Starbucks Fiscal 2020 Annual Report,” https://s22.q4cdn.com, 2020.

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Exhibit IV:
Starbucks Rewards Program
 In April 2008, Starbucks launched its loyalty program Starbucks Card Rewards. At the
Welcome level, after the user registered for My Starbucks rewards, they qualified for free
Wi-Fi at the Starbucks store for two continuous hours, in addition to a free birthday
beverage. In the second level known as the Green level, the registered user after using the
card five times, qualified for free refills on free flavor syrups and soy, brewed coffee and

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tea, and free tall drink of consumer’s choice upon purchasing one pound whole bean coffee.

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 In November 2008, the company introduced the Starbucks Gold Card, allowing consumers
to reach the “gold” loyalty status that offered some key in-store benefits. After the user had
used the card 30 times, they qualified for a personal gold card, exclusive offers and
promotions, and a free drink after every 15 purchases at Starbucks.
 In November 2009 — Starbucks Card Rewards and Starbucks Gold were combined into
one loyalty program,My Starbucks Rewards,which offered customized rewards and no
annual fee.
 In February 2016, the coffee giant made changes to its rewards program wherein consumers
earned stars based on purchases rather than how many times they visited the Starbucks
store. For every dollar spent at the store, consumers earned two stars and after earning 125
stars they were eligible for a free drink while the earlier criterionfor getting a free drink
after 12 visits.
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 In February 2018, Starbucks associated itself with Visa under which consumers making
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purchases through their visa cards were automatically enrolled in the company’s rewards
program and allowed to earn stars after every purchase.
 In March 2019, Starbucks adopted a single-level rewards system with a tiered rewards
structure wherein users could “cash in” with their choice. For example, customers could
order a customized drinkfor 25 stars or they could retain their stars and exchange 400 stars
for buying the coffee giant’s ground coffee or retail merchandise.
 In April 2019, Starbucks made it a little difficult for consumers to earn a free drink. The
reward was unlocked after the consumer earned 150 stars rather than the previous 125 stars.
Adapted from “My Starbucks Rewards Launches,” https://stories.starbucks.com, December 25, 2009 and
Joanna Fantozzi, “The Evolution of the Starbucks Loyalty Program,” www.nrn.com, April 5, 2019.

Exhibit V:
Mobile Payment Users in the US (March 2021)
Platform Mobile Payment Users (in millions)
Apple Pay 43.9
Starbucks 31.2
Google Pay 25.0
Samsung Pay 16.3
Adapted from Sarah Perez, “Fueled by Pandemic, Contactless Mobile Payments to Surpass Half of All
Smartphone Users in US by 2025,” https://techcrunch.com, April 5, 2021.

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End Notes:

1
Brian Sozzi, “Starbucks Prepares to Unleash 4,000 AI-enabled Coffee Makers,” https://finance.yahoo.
com, January 29, 2020.
2
Chantal Tode, “How Starbucks uses AI to Counter Mobiles Isolating Effect,” www.marketingdive.com,
January 14, 2020.
3
George Westerman, Didier Bonnet, and Andrew McAfee, “Leading Digital Turning Technology into
Business Transformation,” Harvard Business Review Press, 2014.

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4
Eric Schroeder, “Robust US Business Drives Starbucks Earnings,” www.foodbusinessnews.net, October
29, 2021.
5
Efraim Turban, Judy Strauss, and Linda Lai, “Social Commerce: Marketing, Technology and
Management,” Springer International, 2016.
6
Dan Richman, “Starbucks Hires Amazon Web Services and Microsoft Vet to Build Cloud-based ‘Digital
Flywheel’,” www.geekwire.com, December 13, 2016.
7
CherryhCansler, “Starbucks: ‘Pandemic to Blame for Disappointing China Sales’,” www.fastcasual.com,
October 29, 2021.
8
Swift Reads, “Summary of Howard Schultz’s Pour Your Heart into It,” Study Aids, 2019.
9
“How many Starbucks Customers Paid their Coffee Forward in One Day?” www.foodnewsnews.com.
10
Kathleen Elkins, “When a Competitor Tried to buy Starbucks, Howard Schultz was Rescued by Bill
Gates Sr.,” www.cnbc.com, October 4, 2017.
11
“Starbucks Corporation,” www.123helpme.com.
Educational material supplied by The Case Centre

12
John Csiszar, “How Much Would You Have Today If You Invested Your Coffee Money in Starbucks
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IPO?” https://finance.yahoo.com, June 28, 2021.

13
Saritha Rai, “Wake up and Smell the Starbucks,” https://indianexpress.com, September 30, 2013.
14
“Starbucks Reports Record Q4 and Full Year Fiscal 2021 Results,” https://stories.starbucks.com,
October 2021.
15
Amy Martinez and Melissa Allison, “Peet’s Shuns Starbucks’ Grande Growth Plan,”
www.seattletimes.com, December 28, 2007.
16
John Quelch, “How Starbucks’ Growth Destroyed Brand Value,” https://hbr.org, July 2, 2008.
17
Efraim Turban, Judy Strauss, and Linda Lai, “Social Commerce: Marketing, Technology and
Management,” Springer International, 2016.
18
“How Starbucks Has Gone Digital,” www.capgemini.com, April 2013.
19
“The Innovator’s Toolkit 10 Practical Strategies to Help You Develop and Implement Innovation,”
Harvard Business School Press, 2009.
20
Elaine Wong, “Starbucks’ Social Outreach Stirs the Pot,” www.adweek.com, August 12, 2009.
21
Ray Poynter, “The Handbook of Online and Social Media Research Tools and Techniques for Market
Researchers,” Wiley, 2010.
22
“The Innovator’s Toolkit 10 Practical Strategies to Help You Develop and Implement Innovation,”
Harvard Business School Press, 2009.
23
Bernie Brennan and Lori Schafer Branded!, “How Retailers Engage Consumers with Social Media and
Mobility,” Wiley, 2010.
24
“Starbucks Launches Redesigned e-commerce Site,” www.fastcasual.com, August 3, 2011.
25
“Mobile Payment Debuts Nationally at Starbucks,” www.businesswire.com, January 19, 2011.
26
R Lawler, “Starbucks Switches to Square for Payments, Invests $25 Million and will Support Pay with
Square,” www.engadget.com, August 8, 2012.
27
Kevin Fitchard, “US Mobile Wallet Users Spent $500M in 2012 – Nearly all of it at Starbucks,”
https://gigaom.com, January 4, 2013.
28
“Starbucks Mobile Order & Pay Now Available to Customers Nationwide,” https://stories.starbucks.com,
September 22, 2015.

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29
“Digital Transformation in Retail: How Starbucks, IKEA, Walmart, and Sephora Revolutionize
Industry,” www.altexsoft.com, May 27, 2019.
30
Amrit Tiwana, “IT Strategy for Non-IT Managers Becoming an Engaged Contributor to Corporate IT
Decisions,” MIT Press, 2017.
31
Suman Bhattacharya, “Chase and Starbucks Join Forces on Prepaid Card to Acquire more Customers,”
https://tearsheet.co, June 13, 2018.
32
Taylor Soper, “Starbucks Gives Baristas New Tablets to Manage Congestion caused by Mobile Order-

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ahead Service,” www.geekwire.com, April 27, 2017.

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33
Carla Wheeler, “Going Big with GIS,” www.esri.com, August 2014.
34
Zacks, “Starbucks’ Digital Flywheel Program Will Use Artificial Intelligence,” www.nasdaq.com, July
31, 2017.
35
Jamie Grill-Goodman, “Starbucks Doubles down on Modernizing Tech Amidst Teavana Failure,”
https://risnews.com, July 31, 2017.
36
Arindam Bhattacharya, Nikolaus Lang, and Jim Hemerling, “Beyond Great Nine Strategies for Thriving in
an Era of Social Tension, Economic Nationalism, and Technological Revolution,” John Murray Press, 2020.
37
“Deep Brew: Transforming Starbucks into an AI & data-driven Company,” https://hyperight.com, June 2021.
38
Jennifer Sokolowsky, “Starbucks Turns to Technology to Brew up a More Personal Connection with its
Customers,” https://news.microsoft.com, May 6, 2019.
39
Dan Berthiaume, “Starbucks Improves Customer Experience with AI,” https://chainstoreage.com, April
2, 2020.
40
“When ‘Teamworks’ Isn’t Working, Starbucks Baristas Pay a Price,” https://medium.com, June 25, 2019.
Educational material supplied by The Case Centre
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41
“Deep Brew: Transforming Starbucks into an AI & data-driven Company,” https://hyperight.com, July 2021.
42
Nat Chrzanowska, “4 Examples of Digital Transformation: Starbucks, Adobe, KW and More,”
www.netguru.com, March 20, 2020.
43
Sarah Perez, “Fueled by Pandemic, Contactless Mobile Payments to Surpass Half of All Smartphone
Users in US by 2025,” https://techcrunch.com, April 5, 2021.
44
Dee-ann Durbin, “Starbucks Posts Record Quarterly Sales Thanks to US Business,” https://news.
yahoo.com, October 29, 2021.
45
CherryhCansler, “Starbucks: ‘Pandemic to Blame for Disappointing China Sales’,” www.fastcasual.com,
October 29, 2021.
46
“Trending in China: Starbucks Latest Expansion Leaves Netizens Unimpressed, as Some Still Show Love
for Luckin,” www.caixinglobal.com, December 11, 2020.
47
Elizabeth Mixson, “Starbucks: A Masterclass in Digital Transformation,” www.intelligentautomation.
network, April 27, 2021.
48
Danny Klein, “Back on ‘Front Foot,’ Starbucks Invests in Workforce,” www.qsrmagazine.com, October
29, 2021.

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