Starbucks' controversial rewards program is key to the future of the coffee giant's business

Starbucks

While customers may have protested Starbucks' changes to its loyalty program earlier this year, now, membership numbers are skyrocketing. 

Membership in the coffee giant's loyalty program increased 18% year-over-year to 12.3 million active members in the US, the company reported on Thursday.

Growth of the loyalty program seems to be accelerating in the US. In April, the company reported 16% year-over-year growth from the same quarter last year, with 12 million active loyalty members.

While new members have been joining the program at an impressive rate, Starbucks paid a hefty price for its success. In the second quarter, global comparable store sales — at locations open for at least one year — rose 4%, missing the forecast of 5.4%. According to Starbucks executives, the new rewards program is partially to blame.

The launch of the revamped loyalty program took a significant amount of in-store training and marketing. As a result, Starbucks' summer Frappuccino happy hour promotion launched one week later than it had the prior summer and, with marketing campaigns around both the rewards program and the Frappuccino promotion, was less popular than in prior years. Comparable sales of blended drinks decreased 1% in the quarter. 

Starbucks' loyalty program has come under fire in 2016, due to a controversial revamp in early April. While many customers said the new program was more confusing and required members to spend more money to achieve rewards, the changes have ultimately succeeded in drawing new members to Starbucks Rewards. 

Starbucks provided some major incentives for customers to sign up for the revamped rewards program. The chain upgraded customers to Gold rewards status automatically if they made a purchase using their Starbucks card or app between April 12 and May 2. 

Starbucks

The revamped loyalty program has also received positive feedback from analysts. 

"The more money spent, the more stars earned… which is, all else equal, more incentive to spend more money," Nomura analyst Mark Kalinowski wrote of the revamped rewards program in a research note.

With more loyalty program members comes more mobile order and pay orders, as both initiatives are heavily linked to Starbucks' app. Starbucks reported that mobile order and pay usage now makes up 5% of US transactions, up from 4% in the second quarter. 

The new rewards program allows the chain to offer more personalized deals to customers. According to Starbucks executives, the company is now utilizing emails with personalized deals and plans to launch targeted offers that members will receive via app while making purchases. 

Further, the revamped rewards program is key to expanding Starbucks' rewards program far beyond coffee. In March, Starbucks announced it would be releasing a prepaid Visa card by the end of the year that allows customers to earn rewards points, or 'stars,' to be used at Starbucks every time they use the card.

While the new Starbuck Rewards has boosted new member counts, Starbucks fell short of analyst expectations for the quarter. The coffee giant reported on Thursday it earned $5.24 billion in fiscal-third-quarter revenue, missing the forecast for $5.34 billion, according to Bloomberg.

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