Customers Reload and Starbucks Takes Off

Discussion
Dec 04, 2006

By George Anderson


The Starbucks card isn’t your typical loyalty card. For one thing, the people who use it appear to be genuinely loyal customers of the coffee chain as evidenced by the fact that they keep using it without the promise of any privileged savings.


According to an Associated Press report, almost 100 million Starbucks cards have been activated since first being rolled out in Nov. 2001. Since then, cardholders have reloaded their accounts 38.6 million times. The top line on this: Starbucks has brought in $2.17 billion in revenue.


With the holiday selling season in full swing, Starbucks is looking to surpass its impressive performance from last year. In 2005, the chain activated 15 million cards and, in the process, generated $170 million in revenue. In percentage terms, the card business brought in 12 percent of the entire company’s revenue for the fourth quarter.


“The card has exceeded our expectations, absolutely,” said Sandra Stark, Starbucks’ director of marketing program management. “We knew it would be a great program. We had no idea that we would reach 12 percent of tender.”


Starbucks is not the only one that has found gift cards to be a boon to its business.


Wendy’s spokesperson Bob Bertini, said, “Cards have become so commonplace in the retail sector that you really need to have one to be able to compete effectively.”


According to the National Retail Federation, U.S. gift card sales will grow by $6 billion this holiday season to nearly $25 billion.


Many consumers, in fact, now prefer to receive gift cards so they can go shopping for themselves at their favorite stores. That’s quite alright with many shoppers who simply can not decide what to buy.


“It’s just such a home run not to have to pick out something for someone, which they’re going to end up returning in 40 percent of the cases,” said Howard Davidowitz, chairman of Davidowitz & Associates.


From a business standpoint, there is one major advantage in gift card sales: retailers can earn interest on unredeemed cards. The downside for retailers is that revenues cannot be booked until cards are redeemed.


Discussion Question: How have gift cards changed the retailing business in the lead up to the Christmas holiday and after?

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13 Comments on "Customers Reload and Starbucks Takes Off"


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Ryan Mathews
Guest
15 years 5 months ago

There is a significant difference between the Starbucks card and “gift” cards. The Starbucks card is intended (and used) to leverage what appears to be convenience to establish an ongoing relationship between the customer and the company. Most other “gift” (by definition, event focused) cards are used to facilitate transactions.

Charles P. Walsh
Guest
Charles P. Walsh
15 years 5 months ago

I agree with Ryan Matthews. Starbucks cards are purchased for convenience and, more often, personal use, while a customer purchasing one at Lowe’s is likely making a gift of the card.

While that is just a matter of nomenclature, it does seem to point to convenience cards offering the benefits of cash (no bank drafts to balance) with those of credit cards (speed and no paper bills to sort out).

Purchases for coffee and fast food might average $5.00 and using a debit card increases the number of bank drafts and time to balance.

Bernice Hurst
Guest
15 years 5 months ago

Phillip Straniero referred to the checks his grandparents used to write in the discussion about speed. Gift cards have possibly changed this as much as anything. Instead of just giving money, the giver tells the recipient where to shop. A bit restricting, no? Even accepting that lots of people return gifts for whatever reason and therefore know how much is being spent, at least there is some element of thought involved in the initial selection. Without being too scathing about the impersonality of checks and gift cards, they have always struck me — and still do — as somewhat insulting in the very obvious way they say how little the giver actually thinks or cares about the recipient. Giving free choice is not the same as giving thought, care and consideration (even if it does come out somewhere off-target).

Dan Nelson
Guest
Dan Nelson
15 years 5 months ago

Ryan is right on here. The Starbucks “gift card” is in reality a Starbucks “convenience card” and they have attained the loyalty of their customers through the combination of consistent product quality, differentiation in offering customers unique assortments tailored to their specific tastes, and an atmosphere that customers gravitate to; where there is consistency in the look and feel, but unique location by location based on the connection the associates make with their store customers.

Now, why can’t other retailers make these same customer connections?

Ben Ball
Guest
15 years 5 months ago

To George’s question of how gift cards have changed holiday shopping habits…one perhaps unexpected impact has been to keep consumers OUT of stores. If my personal experiences with extended family and friends are representative, many are choosing to order the cards online, via mail, or to simply “have someone pick them up for me” in order to meet holiday gifting needs without ever having to venture into the stores.

Now one of the major benefits of gift cards, locking in store-specific credits, may be in danger as well. Again, if my family is representative, the kids who are used to getting those A&F gift cards from the grandparents are asking for the “VISA” version this year so they can spend them anywhere they want.

Mark Lilien
Guest
15 years 5 months ago

Smarter retailers use gift cards to build loyalty and attract new traffic using convenience. The IQ test: does the retailer charge fees (for inactive cards, for example)? Retailers who charge fees don’t seem to value a fair-dealing image.

Barry Wise
Guest
Barry Wise
15 years 5 months ago

The use of gift cards has had a tremendous impact on the retailers that have learned to use them properly. Overall impact of when the sale is made, and the implications on whether the purchase is made after holiday markdowns are taken will ultimately be determined by smart retailers that “train” their customers to expect value, but not wholesale discounting after Christmas. Possibly holding back inventory of some popular items, or creating a new selling season after Christmas with new and exciting merchandise will provide the balance necessary to impact sales without impacting profit.

Jeremy Sacker
Guest
Jeremy Sacker
15 years 5 months ago

One benefit, and even possibly an issue, that everyone overlooked is that the Gift Cards have also done a wonderful job of bolstering January sales. The issue in this is that retailers sometimes have issues forecasting January now, BUT, now they don’t have to be as aggressive in their after Christmas sales.

I really think that forecasting is going to become a bigger issue with these cards. Not only sales forecasting, but also card forecasting. Additionally, the popularity of the VISA, Mastercard and American Express gift cards is going to do several things: first, erode the loyalty benefit of branded cards, and second, make that January sales number harder to predict.

Steven Roelofs
Guest
Steven Roelofs
15 years 5 months ago

There are two advantages to a Starbucks card aside from convenience. First, where available, a consumer may use a Coinstar machine to convert a jar of dimes, nickels and pennies into a $50 Starbucks card for no fee. Second, paying with a Starbucks card leaves the consumer with no change to put into the ubiquitous tip jar, keeping the true price of the product to the posted price. These two advantages together are unique to Starbucks’ industry and aren’t really useful for any other retailers aside from Starbucks’ obvious competitors, Caribou Coffee, etc.

Michael David
Guest
Michael David
15 years 5 months ago

I often use retail debit cards, such as the one made available by Starbucks, as gift cards. They are a tremendously effective way to treat your staff on a whim.

In Canada our largest national shopping mall landlord, Cadillac Fairview, offers gift cards that can be presented at any retail outlet within their Canada-Wide malls. This is a fabulous way for a mall to build loyalty while the customer has a full range of choices. The very unfortunate part however is that the mall charges a percentage of the purchase in the way of a fee, when you buy the card. This seems like a preposterous rip-off to me.

I am curious to know if anybody else is aware of a retailer or organization that imposes a fee for the privilege to buy their gift card!

Camille P. Schuster, Ph.D.
Guest
15 years 5 months ago
I’ve never thought of the Starbucks gift cards I have received as loyalty cards. I have used each card once and have not added more money to it. Since they were gift cards, no one solicited any information from me and they have never collected any information and have no idea who I am. Obviously I do not fit the typical Starbucks loyal customer but I have not seen any indication of any recognition of me by Starbucks employees when I’ve used the card and have not received any special price break or any benefit by using the card except that I did not have to dig money out of my wallet. In this way gift cards are significantly different than loyalty cards. The company has no record of any personal information so can not track customer purchases. Giving gift cards is a wonderful option when you can not find that “perfect” gift for an individual. They can choose what they like rather than being excited about the “tie” or “scarf” that was in the… Read more »
Kai Clarke
Guest
15 years 5 months ago

Gift cards are the cards which keep on giving. They offer immediate revenue (without any logistics concerns), guaranteed future pull (as well as incremental sales) and secure their future audience. This is a great way to tether your customer, insure your sales and increase returns. What could be better? This is why everyone is jumping into this game any way they can.

Stephan Kouzomis
Guest
Stephan Kouzomis
15 years 5 months ago

Ryan is right on. Keep in mind, the person who uses a
Starbucks card is of the mindset that he/she desires it,
and at times may be extravagant.

Starbucks, truly, represents a loyalty shoppers’ card. Is there a message to retailers in Starbucks’ successful card program? Hmmmmmmmmm

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