Starbucks, Amazon on a collision course in retail innovation

Neither Amazon nor Starbucks could be described as a traditional retailer. But they both use their shared headquarters city as a playground for developing digital and in-store innovations that all merchants and payment companies will have to respond to the years ahead.

Starbucks’ virtual store, which just launched in China in partnership with Alibaba, contains most of the elements needed to embed shopping, ordering, payments and marketing into the digital lives of hundreds of millions of people, as well as linking mobile ordering and payment to the in-store experience without requiring a cashier.

Where Starbucks potentially collides with the cashierless Amazon Go store is Amazon's determination that the ideal size for one of its automated stores may be no bigger than a coffee shop.

Michelle Gustafson/Bloomberg

Both companies concepts address similar needs. Starbucks' virtual store builds off of an existing collaboration with Alibaba, which launched in August. The virtual store offers what Starbucks calls one-touch “Starbucks Experience” using the Starbucks app, and Alibaba’s customer facing apps such as Taobao, Tmall and Alipay. Tmall is part of of Alibaba’s increasing international focus, particularly around special e-commerce events such as Singles Day, and Alipay has made inroads over the past few years as a way for Chinese travelers to make out of market payments in their own currency.

“What happens if Starbucks is able to do something with Amazon?” said Richard Crone, a payments consultant, adding the preparation and delivery infrastructure required for an expanded menu is best served using a smaller footprint store for food prep as the launch for delivery “We project a potential collision between Amazon Go and Starbucks as a platform for fulfilling the demand for prepared foods/meals and click & collect drop points for grocery staples, as sold in Amazon Go.”

Starbucks has been building its delivery business in China with Ele.me, another Alibaba-affiliated company, tracking the results in anticipation of expanding mobile order, delivery and payment in other markets such as the U.S. The delivery service is now active in about 2,000 Starbucks stores in China. Starbucks, Amazon and Alibaba did not return requests for comment.

At the virtual store, consumers can use a single interface that includes all of these apps for a variety of purposes, such as earning the coffee chain's loyalty currency, Stars, with an addressable market of nearly 700 million consumers in China. It’s also a huge digital market, considering nearly 80 percent of Starbucks transactions in China are non-cash, with room for growth since there’s about 7 million My Starbucks Rewards members in China, compared to about 14 million in the U.S.

“Starbucks can launch instantly by dropping its API into someone else’s app, in this case Alibaba and Alipay, and it is off and running,” Crone said, adding his firm's research estimates order ahead generates two to three times the order value compared to in-store ordering.

The virtual store is the latest of several moves Starbucks has made in Asia to boost its mobile momentum, which was stalling in early 2018 after years of growth that outpaced most other retailers. Starbucks added voice ordering in South Korea and mobile order and pay in Japan. In the U.S. Starbucks is expanding its delivery program with Uber Eats and has expanded its menu.

"China is Starbucks' fastest growing market so it needs partnerships there to increase its penetration,” said Raymond Pucci, director of the merchant services practice at Mercator Advisory Group, adding Starbucks’ strategy in the U.S. has been to upsell consumers with hand-crafted beverages, such as cold brew coffee and foot items. “Starbucks' mobile app is already among the best in class, so it continues to leverage it to drive higher tickets.”