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TheStreet Open House

Starbucks Beats Competition in Building Customer Loyalty

Stocks in this article: SBUX

By Nate Matherson of Circa Alpha

NEW YORK ( TheStreet) -- Companies have long embraced customer loyalty in an effort to drive revenues and sustain earnings throughout all economic conditions. Over the last decade we have witnessed a number of companies in a variety of sectors place an increasing level of importance on creating customer loyalty in more creative ways. For a number of years I have followed one of my favorite companies, Starbucks (SBUX - Get Report), with great attention. The atmosphere, product portfolio and rapid growth rate are unparalleled in the sector. The company has created what is arguably the most loyal customer base on the planet with revenue inelasticity challenging tobacco.

Year to date, shares of the company have performed especially well alongside the broad market averages. Shares are higher by nearly 50% on impeccable store count and same-store growth across all geographical segments. The company's successes and most recent earnings data have been heavily covered within the financial media space, so I'd like to focus greater attention on the drivers of company loyalty. I want to highlight three keys steps the company has taken to ensure its customer loyalty into the distant future.

Loyalty Rewards

Membership rewards have been commonplace for sometime, but Starbucks has mastered the system. The company created a loyalty rewards system where its customers gain rewards on all their purchases within the family of Starbucks products. Members earn "stars" on everything from coffee drinks to accessories, from grocery store purchases to purchases at Teavana.

When customers initially sign up, they are placed at the welcome level with no real perks except a free drink on their birthday. At only five stars, or five purchases, consumers will gain access to a green membership. With a green membership, customers will receive free refills on their coffee, iced coffee and tea purchases when they visit stores. Then at 30 stars, or 30 purchases, consumers will receive the prized gold membership, along with a gold card in 4-6 weeks. Every 12 purchases the member earns a free drink as well as other special offers from time to time. Starbucks has begun to roll out its rewards system in the majority of its markets, including China. In two years the company has built a base of more than 3 million members in the U.S., and they now account for 35% of transactions in its stores.

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