The strategy that led Starbucks's stock price to jump 50 percent

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Starbucks Up Nearly 50% This Year


Recent strategic moves from the uber-successful coffeehouse have paid off in a major way.

Love it or hate it, Starbucks is doing something right.

The company turned its primary product--a basic commodity and one of the most ubiquitous beverages in the world--into a multi-billion dollar empire. But that was just the beginning.

In 2015, shares of Starbucks's stock have surged more than 50 percent. Last month, the coffee juggernaut reported its best quarter ever, with revenue of $4.9 billion and earnings of just under $1 billion.

So what led to their record-breaking performance? And how can you apply the lessons to your business?

Here are four takeaways:

1. Mobile + a good reward program = brand loyalty.

Starbucks unveiled its mobile phone app just two years ago. Today, there are some 16 million users. In fact, 20 percent of all money exchanged in U.S. Starbucks stores is done through the mobile app.

How did they do it?

For one thing, the company read the market well. Mobile apps have been gaining popularity for years...but unlike Starbucks, many retailers were slow to jump on the bandwagon. (McDonald's just released its app this past summer.)

Secondly, Starbucks's rewards program is insanely popular. (I know because I joined only after hearing friends rave about it. You just can't pay for that type of marketing.) The more you buy, the more free coffee, tea, baked goods, and discounts you get. So customers spend more to get more. (Everybody loves freebies, right?)

Takeaway: It's not just about creating an app. Focus on creating value for the customer. Then, use technology to make retrieving that value as easy as possible.

2. Adapt as necessary.

Starbucks built its empire by providing that third place--the comfortable location between home and the office--where you can meet friends, enjoy your favorite book, or surf the internet.

But as brand popularity increased, many customers just wanted the coffee they had become accustomed to. No need to linger: Get it and go.

Starbucks noticed this trend, especially in certain high-traffic areas. COO Kevin Johnson spoke recently about Starbucks new "express stores" in an interview with famed Mad Money host Jim Cramer:

"For customers who are looking for convenience and a quick turnaround to get their food and beverage...we're providing that in [the express] store. And there's another store just around the corner [and] we are not seeing any cannibalization. So that's telling us that there's latent demand."

Johnson states that express stores, which are typically sized at about 500 square feet, are doing the type of volume Starbucks would normally expect in a store three times its size.

Takeaway: High demand is good--but don't shoot yourself in the foot. Look for bottlenecks and other areas to improve customer experience.

3. You scratch my back and....

In the past year, Starbucks has announced some potentially lucrative partnerships.

Here are just a few:

  • The New York Times: Starbucks loyalty members are able to read daily and weekend articles from The New York Times through the coffee company's mobile app. Customers who purchase digital or print subscriptions to the famed newspaper will also earn Starbucks reward points.
  • Spotify: The music-streaming giant entered a multi-year relationship with Starbucks to offer loyalty members unique access to music, the ability to influence in-store playlists...and more opportunities for free Starbucks food and beverages.
  • Lyft: This partnership allows Lyft drivers and passengers to earn Starbucks rewards leading to--you guessed it--more free food and drinks at Starbucks. Additionally, Lyft is testing a program where the company provides qualifying Starbucks baristas free rides to and from work.

These are just three recent examples of Starbucks's large--and constantly evolving--pool of partners. Through them all, the coffeehouse extends its reach and adds value to its core product.

Takeaway: Once you've clearly defined your brand strategy, seek to establish mutually valuable partnerships that align with that strategy.

4. Happy employees mean happy customers.

Starbucks has a history of offering unique benefits to employees. Even part-time employees have traditionally enjoyed such perks as health insurance, free drinks, a pound of coffee per week, stock options, and a competitive 401(k). Earlier this year, Starbucks made news again when the company began offering college tuition assistance.

All of this has led to low employee turnover and relatively happy employees. (According to review site Glassdoor, Starbucks currently retains an employer rating of 3.8 out of 5 stars, 79 percent of employees are willing to recommend working there to a friend, and Howard Schultz enjoys a 91 percent CEO approval rating.)

As Schultz himself puts it: "Our brand equity is built on our customers' experience, and that depends on the quality of our people."

Johnson broke it down further in that Mad Money interview:

"People get confused sometimes. The cost of coffee typically is about 5 percent of our total cost base. We invest more in benefits for our employee partners than we spend on coffee."

If you were wondering why that latte costs $4 to $5 per cup, now you know. It's the cost to keep those baristas smiling.

Takeaway: Look for ways to give your employees the best experience possible. In turn, they'll do the same for your customers.

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