Starbucks' growth still hot; gift card jolts chain's sales

Nation's Restaurant News, Feb 11, 2002 by James Peters

SEATTLE -- Starbucks Corp., continuing to assert its segment dominance while brewing planned growth to 10,000 worldwide stores by 2005, is seeing the recent launch of its prepaid Starbucks Cards perk up sales at the chain's existing coffee shops.

"I'm truly energized by our current momentum and believe we are in our most exciting stages of growth," said Orin Smith, Starbucks' president and chief executive, in the company s first-quarter conference call with analysts and investors. "I believe we have found a new rhythm, and I look forward to the continued strategic execution of our rapid growth."

Smith categorized the Starbucks Card as one of the most important initiatives in the recent history of the 5,175-unit chain, which continues to widen the already-vast gulf between it and other segment competitors by holding steadfast to its 2002 growth plan to add at least 1,200 stores worldwide.

"As a result of our successful launch, we believe that we have established a new platform for delivering an enhanced Starbucks experience to our customers while strengthening our competitive advantage," Smith said.

The cards were launched last November and currently can be used in nearly all of the approximately 3,200 company-operated Starbucks stores in North America. The debit cards accounted for a sizable portion of the chain's 7-percent same-store sales increase in January and 3-percent rise in December at company-operated stores open at least 13 months, said Michael Casey, Starbucks' chief financial officer.

The cards, which can hold anywhere from $5 to $500 of account credit, have been the primary driver of traffic at existing and new stores by expediting movement of customer lines as well as attracting new patrons, Starbucks officials said. "As validated by sales this holiday season, the card also has strong and universal appeal as a gift, which we believe is introducing new customers to the Starbucks brand," Smith said.

During the latter half of the first quarter, 2.3 million Starbucks Cards were activated for a total value of $32 million. The average activation amount was about $14, with most of the card amounts falling in the range of $10 to $25, Casey said.

Customers also are placing more money on the cards when they reload them. In the first quarter the average reload transaction was about $19 more, or 35 percent higher, than the average initial transaction, Casey said.

"I think it's going to be huge for the company going forward because not only is [the card] attracting some customers, but ( it does draw repeat traffic, and consumers are reloading... at a higher denomination, which is pretty impressive," said Kristine Koerber, an analyst with W.R. Hambrecht & Co. The company said the card presents opportunities to drive transactions, increase average tickets and grow cross-channel sales through customer appreciation programs.

"We believe ... there's a significant component to the strategy in ways that would not in any way create discounting on Starbucks coffee or Starbucks products," said Howard Schultz, Starbucks' chairman and chief global strategist.

However, company officials also pointed out that the card was not the singular driver of same-store-sales growth, citing improved execution at the store level and more focused promotional efforts.

The Starbucks Card is "probably driving a good portion of the momentum, but I don't think we should underestimate how strong consumer behavior is toward their coffee habit and routine, and the economy has started to improve," said Scott Waltmann, an analyst with Merrill Lynch.

Still, the company said its financial results for the most recent quarter did not reflect the full benefit from the card sales.

Since the company does not record revenue from the cards until they are redeemed, a potential boon for second-quarter revenue is the fact that card activations and account replenishments exceeded redemptions by $25 million in the first quarter.

During the quarter 2.2 million card-redemption transactions occurred, generating net sales of $9 million at an average of more than $4 a transaction, generally consistent with the average company transaction, Casey said.

The company has projected modest same-store-sales growth in the low single digits in 2002. Last November Starbucks ratcheted down its 2002 revenue growth outlook to about 20 percent, from 25 percent, as a cautionary measure in the current economy.

However, Salomon Smith Barney analyst Mark Kalinowski, who is projecting that Starbucks will notch 3-percent to 4-percent same-store growth in sales over the next several months, wrote in a report that those figures "could eventually prove conservative."

Starbucks in its most recent first quarter reported a 2-percent increase in same-store sales, which was driven by a 4-percent increase in transactions. The rise in traffic partially was offset by a 2-percent decline in average value per transaction mainly owing to last year's focus on coffee-making equipment, which had higher price points.