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VERSACE: Starbucks’ mobile payment nifty idea
In early December, I introduced one of my newer investment themes — the New Cashless Consumer. The knee-jerk reaction by some was to assume that I was thinking of credit cards, but that would simply have been the Cashless Consumer.
I was referring to how mobile devices, particularly smart phones, have become the Swiss army knives for our increasingly technological lives. In that column "The era of the new cashless consumer?" I mentioned trials by several companies, including Well Fargo & Co., Nokia Corp., MasterCard Inc. and a few others. While there have been some interesting headlines this week — better than expected existing-home sales, the drop in weekly unemployment claims, New York Gov. Andrew Cuomo weighing more than 10,000 layoffs and Chinese President Hu Jintao's U.S. visit — the one that grabbed me was from Starbucks Corp.
No, not the one about a new 31-ounce beverage size, which the company has dubbed "the Trenta" that will debut in May.
I'm talking about Starbucks' mobile payment initiative that will allow customers to pay for in-store purchases with select smart phones in all U.S. company-operated stores. The company started off with a pilot program in 2009 in a limited number of cities before spreading to its Target Corp. locations.
This week, however, the initiative is being expanded to include the 6,800 company-owned Starbucks locations in the U.S. At the heart of it is the company's pay-by-phone smart-phone application, which acts as a virtual Starbucks Card that you can reload using your credit card. To pay with your device, you hold your handset up to a scanner at the Starbucks register that reads a bar code displayed on your screen. The app also lets you check your card balance, monitor your Starbucks reward points, see nearby Starbucks locations on a map and add new gift cards to your account as you get them.
Currently, the program is compatible with only Apple iOS devices, which means iPhones, iPod Touches and iPads, as well as Research in Motion's BlackBerry devices. Starbucks has yet to announce when such an app will be available for Android-powered devices. Starbucks said nearly one-third of its U.S. customers use a smart phone, and nearly 75 percent of those people are using a BlackBerry or iOS device. With Google Inc.'s Android mobile operating system taking share as more vendors such as Motorola Mobility Holdings, Samsung, HTC and LG bring more smart-phone models to market, odds are there will be an app for that platform before too long.
For those wondering why Starbucks did this, said Brady Brewer, vice president for Starbucks Card and brand loyalty, "Today, one in five Starbucks transactions is made using a Starbucks Card, and mobile payment will extend the way our customers experience and use their Starbucks Card."
What's interesting to me as an investor and as one who is looking for proof points for my New Cashless Consumer theme is that the solution is elegant in its simplicity, maintains the link between a person's Starbucks Card and his or her credit card, and is in the market place before near-field communication (NFC) chips are in the market place.
Also, a number of banks have been angling to figure out mobile payments and while some are flirting with different solutions, a non-bank company has delivered the goods before them without the need for a massive infrastructure update. For NFC-powered transactions to be made, solutions need not only be in the consumer's device of choice, but also in the store where he or she is transacting. That means that some company or group of companies has to figure out a way to upgrade existing swipe terminals. Such an upgrade would crimp margins at terminal suppliers or may result in higher processing fees for merchants that offer the transaction capability.
Very slick Starbucks!
As an investor, what does this mean to us? This mobile payment app will more than likely help Starbucks, but it uses existing two-dimensional bar code technology and does not require additional hardware. That pretty much means there is no direct or indirect beneficiary other than Starbucks.
While the national deployment serves as a confirming data point for the New Cashless Consumer theme, we'll need to see what the uptake rate is over the next several months to see how confirming it truly is. We'll also need to keep an eye on competitor responses — while anecdotal evidence shows a number of people have its card, Starbucks is not the only company with a swipeable reward card. There are a number of them including the McDonald's Corp. and its 32,000 global locations. In the marathon of the consumer retail and dining kind, an early lead for this kind of mobile payment app does not necessarily mean it will be the long-term winner.
• Chris Versace, the thematic investor, is the director of research at Think 20/20, an independent equity-research and corporate access firm in the Washington, D.C., area. He can be reached at firstname.lastname@example.org. At the time of publication, Mr. Versace had no positions in companies mentioned, however, positions can change.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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