Starbucks' Digital Tip Jar Turns Loyalty Into Money

NEW YORK (TheStreet) -- The big news out of Starbucks (SBUX) was hardly mentioned in its analyst Webcast Wednesday.

Elvis has left the building, again.

Founder Howard Schultz, who returned as CEO when the economy was collapsing in 2008, has handed over daily operations to COO Troy Alstead, who handled Wednesday's update, and hardly anyone noticed.

Instead, everyone was talking about the company's iPhone app, which will add support for digital tips when its next version rolls out Wednesday, March 19.

This too, is a great piece of sleight of hand, because just two months ago the press was beating down Starbucks' doors, complaining that the app was storing users' information -- including their locations -- in the clear, without encryption. That flaw was quickly fixed. 

The tipping and payment features are both based on Starbucks' mobile loyalty cards. And for now, tipping only applies to Apple phones; an Android version is due out later this year. Still, the company said 11% of its U.S. sales are coming through its apps, which means 11% of sales are coming through its loyalty program. That should be the headline.

The tipping option is also available, initially, only in company-owned stores, which represent about two-thirds of its total. Some of the company's highest-trafficked stores, in airports, office buildings, and at other retailers, are franchised.

Starbucks has been getting its mobile apps from mFoundry since 2009. That company was acquired by FIS Global (FIS) last year.

The apps are subject to a lawsuit by Maxim Integrated, filed in 2012, relating to patents granted around the turn of the century. 

The technology itself is not bleeding edge.

Starbucks' mobile payments are based on two-dimensional bar codes, rather than the three-dimensional QC codes. Its collection of credit card payments are based on Square, a start-up it has invested in and that has yet to offer a chip card reader in the U.S.

It's a neat trick to get headlines for innovation when you're using older and soon-to-be-obsolete technology, but that's part of Starbucks' magic under "chief digital officer" Adam Brotman, who reports directly to Schultz.

Still, Starbucks is managing to turn a loyalty program into its own version of money, and to get that currency used by a key demographic: young workers in a hurry. Loyalty program members can start with something that looks like an ordinary credit card, loading it with cash from their own credit cards, and use the cards in Teavana stores as well as Starbucks locations.

From there it's a short trip to getting the app, which offers more convenience. But the whole program ties Starbucks directly to users' actual wallets, and lets it do market research tied to individuals' buying habits, which it can use in planning new stores or expanding its product lineup.

The expansion this year will be focused on food, a network of bakeries being built by La Boulange, acquired in 2012, and on tea, through the Teavana chain acquired last year, a deal which our Rocco Pendola said made Starbucks a "screaming buy."

Without using bleeding-edge technology, Starbucks has thus turned its loyalty program into both a virtual currency and a market research tool, distracting from what might otherwise be a high-profile management succession.

No wonder Starbucks was recently ranked as the fifth most-admired company in the world by Fortune, trailing only Apple (AAPL), Amazon.com (AMZN), Google (GOOG), and Berkshire-Hathaway (BRK.A).

At the time of publication the author owned shares in AAPL, AMZN and GOOG.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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