Latte reward: Cards add up at Starbucks

With single b-to-b order of 100,000 cards, effort fills bottom line to brim

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When it comes to prepaid gift cards, Starbucks has learned giving is often better than receiving. During the first quarter that included holiday sales, the card set a record as customers activated $221 million on Starbucks cards, up 35% over the same period a year ago, of which $165 million worth of activations took place in December. In card loading, customers added $293 million, more than $100 million above the same period last year. In January, consumers redeemed a lifetime record of $93 million, comprising 22% of company operated store revenue in North America.

Executives at the coffeehouse chain continue to be surprised at the growth of its Starbucks card, especially as it grew to 12% of Starbucks North American retail revenue in fiscal year 2005. To date, consumers have activated more than 77 million prepaid cards and loaded more than $1 billion on the cards since their launch in November 2001.

"It's one of our fastest growing channels," says Sandra Stark, director of Starbucks global card services.

"We've been pleasantly surprised by the card business, by how fast it's grown in percentage of tender, and how people use the card. It offers so many opportunities to grow from there. I find it exciting. I find it fun. It's a great business to run."

Ms. Stark directs a team of 17 dedicated to marketing the card. Of that team, six people handle the 7,000 business-to-business customers, another area of rapid growth that has opened doors to additional sales. The largest Starbucks card order was for more than 100,000 cards, according to the company. Clearly, Starbucks has benefited from being an early adopter in offering gift cards, but it also has shown strength as it drives reloading. Most customers activate the card with an average of $14, but reloaded with nearly double that amount during the first quarter of 2006. Peak periods naturally are during the holiday and back-to-school seasons. The top reasons for buying the card include gifting, convenience, affinity and collecting. The top gifting occasions are holiday, birthday, thank you, business gifting and college students.

Gifting and collecting may draw card activations, but convenience drives card reloading, contends Michael Silverstein, senior VP at Boston Consulting Group and co-author of "Trading Up: The New American Luxury."

"Consumers who go to Starbucks have very predictable consumption patterns," he says. "Many buy the same drink every day. The core Starbucks customer looks at the prepaid card as a convenient way to get through the morning line."


Part of Starbucks' success is in its dual use for gifting and loyalty, two widely different transactions with separate data demands, say industry executives. One transaction captures consumers' name and address and ties to individual purchasing patterns while the other has a reward system. Industry executives said most marketers have single-use cards, providing a distinct advantage for the coffee chain. In August 2004, the chain launched a subscription card to set a minimum balance and provide automatic reloading at set time increments.

Over the years, the company has added functionality like the reload function, gift subscriptions and distribution channels.

"They are the rock stars of gift cards," says Bob Skiba, exec VP-general manager of Stored Value Systems Retailers. "The average is between 1% to 2% or 2.5% of market, and Wal-Mart is only 1%." Mr. Skiba calls Starbucks a "bleeding edge" company in gift-card innovation, particularly in using non-traditional distribution methods like parent-student cards, gift-card malls and business gifts and incentives to get cards into potential customers' hands. "Nobody is giving way Thanksgiving turkeys anymore," says Mr. Skiba.

Similar to the chain's aversion to advertising, Starbucks uses very little traditional media to promote the cards. In-store promotion remains the primary marketing vehicle for the ever-changing array of limited time card designs. The company uses some print and email marketing to promote the cards to its business-to-business customers. "We don't have the loyalty program as frequency based but we do use the card to surprise and delight our customers," says Ms. Stark, noting that card-carrying customers get added benefits like advance notice on promotions or local offers such as tickets to local attractions. "When we do make an offer the uptake is quick," she says. "We try to make it fresh and exciting for customers and make it locally relevant." The marketer plans to include themed cards and advance screenings when it promotes the release of its first film, a co-production with Lions Gate Entertainment Corp., "Akeelah and the Bee." With the expansion of its Hear Music Media Bar in December, the company added technology to store music lists on Starbucks Cards to be stored and burned onto media during subsequent store visits.

Starbucks conducts annual customer research for its card business but frequently looks outside of the category for innovation ideas. "If we want to be leading edge are there other technologies we can apply to the card by talking to people outside of the industry," asks Ms. Stark, claiming that the Duetto credit card was a huge innovation. "We looked at the credit card industry and said nothing out there fits for what we want for our customer," she says. " By creating two cards in one, we created a new category for that."

Executives close to Starbucks have said the Duetto cards have been slow to build sales. Industry executives see the card as a value-added product for core customers but argue Duetto has too much competition to attract customers outside of the core. Ms. Stark would only say the company was pleased with the card.
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