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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32 Comments

  • Anna Duran,PhD

    Anna Duran,, President Avatar Research Institute

    One of the models to give more attention to is "Blue Ocean"concepts and the earlier work by Chen & Mauborgne on discontinuous innovation as a key element of new profits. Tech solutions require going beyond standard growth models and this has been demonstrated time and time again. While risk management is important Kim & Mauborgne argue that one of the most important aspects of senior executive responsibilities related to promoting financial growth is to identify and articulate a company's strategic logic FOLLOWED by challenging the assumptions of that focus. Brotman did this. Innovation and agility go hand in hand. Old models promote homeostasis and thus low levels of agility.

  • Glen Loock

    As a Loyal Starbucks customer and App user, and someone who has not darkened a Sears store in over 30 years, it is easy to see why Starbucks is growing and Sears is not.

    It is a classic example of the largeness of a company getting in the way of its goal to grow and be profitable. Starbucks understand that shift Sears does not. If you want a recent example of not understanding the new market landscape and what that means just ask Kodak. 

  • Linda Bernardi

    Great read! Without crazy/risky ideas great innovation and reward is not possible. Without disrupting the norm impossible never becomes possible. Similar to Starbucks, Amazon did an experiment one day: ‘what if we take our excess servers and start a business’…? What if? Today, that is worth billions in business and that disruption alone became one of the major innovations (disruptions) of the computing history… without risk there is never a reward!

  • Vocabulary

    Gambit: noun
    1. an opening in which a player seeks to obtain some advantage by sacrificing a pawn or piece.
    2. any maneuver by which one seeks to gain an advantage.

  • Rodolphe Even

    Starbucks vs Hyatt's: 2€ coffee vs 300€-700€ per night. The stakes are not the same, neither customers' expectations

  • sandyw

    Everything Starbucks attempts to do usually turns out well.  I wouldn't let a couple of mishaps hold me back.  I don't think Starbucks will either!!  They have made it this far.  I think they will be successful after all the kinks are worked out.  It's Starbucks!!!  I love Starbucks.  I am a huge fan!!

  • Sushant Bharti

    Innovation is good, but unwarranted testing at the customer's expense, even at a rather small scale, is unacceptable. Really?? Don't confuse Innovation with Market Testing or any other kind of testing. They aren't innovating (Read-Changing) the taste of the coffee they serve, but promotion around the same. The coffee still tastes as good as it ever was. To behave like a Startup and keep innovating definitely looks a good approach to innovation, much in-line with #Jugaad philosophy, without investing too much capital and time on R&D, especially when the market is changing so fast, becoming flat, and has just one time zone i.e. Social Media.

  • O C

    This is not really innovative.  Did Starbucks create Square?  What happens when all the other coffee chains offer Square (or Google, Apple, PayPal, whatever).  What makes Starbucks standout?

    By the way, Starbucks revenue and stock grew SLOWER than the market, so what are the "results"?

  • Mcubrich

    Oh the nay sayers!! They sit back and add detailed commentary on why this concept is not acceptable... Meanwhile, Starbucks laughs all the way to the bank!! This "crack" giant will continue to get innovations to the market before the competition and the customers will not mind a glitch here and there! Have you ever waited in line for a Starbucks? Need I say more??

  • Howardlea

    Amusing that the for CEO of Sears is slinging mud at Starbucks, when his former company is now most likely one of the next big retailers to fold in in north America. He fulfills the idem "those who can't, teach".

  • Marc Witz

    I think there's a mistake made in this article - the CEO of Dunkin Donuts should have been interviewed NOT a retailer of - oh -- refrigerators and not a hotel chain.  A Starbucks screwup is nothing compared to someone trying to buy a $400+ appliance and having that screwed up -- or, while loaded with baggage, trying to check in or out of a hotel.

  • Keith Smith

    What a perfect juxtaposition.  Go fast and act like a startup and become Starbucks, or go slow and get everything 'perfect' and become Sears.  Cohen clearly made the best argument in the entire article for why Brotman's strategy is so brilliant.

  • Joel Marc

    Hah, I was thinking the same thing. Sears has been absolutely horrible at innovation and completely lost their way. The philosophy of "Get it right on day one" is an era gone by. Today successful businesses from Starbucks to Lululemon have a focus of iterate, iterate, iterate... because the experience/product is never 100% right.

  • Clive

    I think part of the reason why Starbucks gets away with live testing is for two reasons. Firstly, as one commenter has already said their core product is the coffee and that is not what is being tested. Secondly, the nature of their product, a relatively small instant consumable purchase, allows customers to be more flexible and less concerned if their payment methods fail. I think it's erroneous to compare Hyatt to Starbucks given the differences in purchase size and length of 'product' consumption. As for the other comment that Apple survived the antenna issue, it may not be discernable in the sales figures as yet but there is no doubt it hurt their brand - definitely contributed to them losing a little of their invincible aura and opened the door for Android.

  • Vince Regan

    Actually, they rolled out the Blond Coffee with little testing - my understanding was it was created out of feedback but not tested widely. all of a sudden it is in 7000 stores last year.

  • appvance

    This is a great post! Sounds like Starbuck's could've used some testing before the release!