Risky Innovation: Will Starbucks's Leap Of Faith Pay Off?

The world’s largest coffeehouse chain regularly launches products before they’re perfect. Why does such a risky approach to innovation work so well?

In late March, as Starbucks was preparing to introduce its first offer on Groupon, the daily-deal service, the coffee chain's chief digital officer, Adam Brotman, realized he had no clue whether the gambit would pay off. The discount wasn't for anything crazy like bungee jumps or skydiving lessons—it was for 50% off a $10 Starbucks Card eGift—but to Brotman, the deal was just as risky because of how the company would be offering it. His team had to integrate Starbucks's eGift platform with Groupon's system for the one-off promotion, and it was about to go live to the world. "They'd never done deals at the scale we were offering, and we had never put our [eGift] platform through that type of pressure test," Brotman says. "But we didn't have the luxury to say anything other than, 'We think we got this right, so let's see what happens.' There are times when we just completely don't know how things are going to work."

With 18,000 stores and 200,000 employees, rolling out any program at Starbucks—whether for a coffee flavor, an app, or a daily deal—is going to be risky, considering the employee training and consumer marketing involved. But the company seems almost to court risk in its willingness to move fast and push through innovation at scale, especially in the digital arena. The deal with Groupon, for example, brought in about $10 million overnight—despite traffic loads that crashed the site mere hours after it went public. In recent years, Starbucks has flipped the switch on a slew of high-profile digital initiatives, launching its own mobile app, integrating with Apple's Passbook wallet service, and partnering with Square, Jack Dorsey's mobile payments startup. The digital plays helped boost Starbucks's shareholder return 38% last year, as revenue grew 14% to a record $13.3 billion. "We do not want to sit on our hands," Brotman says. "If we feel excited about something, we'll get it out there, learn our lessons, and correct the mistakes. It's not always the most stress-free way to launch, but it's the fastest."

It's an approach more typical of startups than corporate giants, with their paranoia about earnings calls and PR disasters. Starbucks accepts that innovation is messy, and it is willing to suffer setbacks here and there to be a disruptive force. In early 2011, when the company unveiled its mobile payments app, which lets customers buy lattes by scanning their iPhones or Android devices, the launch was marred by glitches. "For the first four to six months, we were solving one [problem] after another, and we probably had more misses than hits before we reached a tipping point," says Ryan Records, Starbucks's VP of payments. "But then it became seamless and flawless and an elegant way to pay." Now Starbucks generates more than 3 million mobile transactions per week—accounting for roughly 10% of its total U.S. tender.

Starbucks CEO Howard Schultz would rather be first than perfect.

Starbucks's integration with Square, in late 2012, also got off to a bumpy start, as Fast Company learned through tests and interviews with dozens of baristas. Though the company discussed the rollout at a leadership retreat for thousands of retail managers and followed up with in-store training, many baristas were confused by the system or unaware of the Square payment option. And despite the fact that the Square Wallet app was similar to Starbucks's—both let customers pay for items by swiping their smartphones at the register—a lot of stores had scanner calibration issues. The snags aren't surprising, given that Starbucks chose to roll out Square at 7,000 stores at once rather than seeding the system gradually. "We don't think it's okay if things aren't perfect," Brotman says, "but we're willing to innovate and have speed to market trump a 100% guarantee that it'll be perfect."

Forrester Research senior analyst Denee Carrington lauds Starbucks's approach. "[Starbucks] can move much more quickly toward perfecting the product while it's in the market gaining exposure," she says. And since not many customers use digital wallets—according to a comScore survey, only 8% of U.S. consumers were even aware of Square Wallet, and only 2% had used it—Starbucks can get credit for a bold rollout as it refines the system with early adopters, who are likely more risk tolerant. "[It's] not an industry where these types of mistakes cause large issues, like somebody not being able to access money for financial transactions," Carrington says. "[Customers] are buying coffee; they're buying scones. In this context, kudos to Starbucks for driving innovation forward."

Not all experts are fans of Starbucks's quick-draw bravado. "It's a bad strategy and a bad philosophy, and I think when customers are exposed to this behavior, they're just ripped," says Mark A. Cohen, a former CEO of Sears Canada who is now a Columbia Business School professor. "It diminishes your brand equity. You should do everything possible to get it right on day one. Starbucks is not a startup. To behave as a startup is completely irresponsible. Innovation is good, but unwarranted testing at the customer's expense, even at a rather small scale, is unacceptable."

Others in the hospitality business also question the strategy. Jeff Semenchuk, Hyatt's chief innovation officer, is drawing up plans to introduce self-service kiosks and iPad check-ins at the company's nearly 500 hotels, but will wait to perfect the infrastructure before letting customers near the technology. "If you try to launch something too soon, then you really can frustrate guests," he says. "With Starbucks, they had this very cool initial app, but as they launched it I think they realized, Wow, there's a lot of stuff under the covers that we didn't fully sort out."

Considering Starbucks's results, though, it's hard to argue with the approach. "You can't move forward and be a leader and an innovator if you're only worried about the downside," Brotman says, "but please don't mistake that for being cavalier." With 35 million monthly visitors to its websites and mobile apps, the company's digital scale rivals its physical presence. Those visitors are using Starbucks's tools to find nearby stores, gain loyalty rewards, and load money on their Starbucks cards, which now account for 30% of in-store sales. It's a spectacular feat in such a short time and one worth a few quick stumbles.

[Photo Illustration by Thomas Hannich; Melissa Golden]

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