A Prepaid Latte, With a Shot Of Credit

  Once upon a time you could toss a quarter on the counter of the local diner and walk out with a cup of coffee.
  But times change. Many local diners have given way to the high-end gourmet coffee shop, a shop where some varieties of java can cost 10 quarters-or more.
  This new genre is epitomized by Seattle-based Starbucks Corp., which now has more than 7,500 locations worldwide. And for more than two years caffeine-craving consumers haven't had to hand over cash at Starbucks because they have
  been able to pay with the swipe of the company's prepaid card. The card can be reloaded at Starbucks or even on the Internet by tapping into a credit or debit card account.
  Delving further into the payments sphere, Starbucks last October introduced a cobranded Visa credit/stored-value card from Chicago-based Bank One Corp. called Duetto ("A New Addition to Cobranding's Menu," November, 2003). But this
  isn't a typical rewards card. The card combines the popularity of Starbucks' stored-value card with a loyalty program that comes almost as close to instant rewards as any other available in the United States.
  Starbucks first arrived in the card game by offering a reloadable stored-value card in November 2001. It didn't take long for the card to become popular. Just two months after the launch, the coffee chain reported 2.3 million
  cards had been activated.
  Soon after that, Starbucks allowed its customers to register their stored-value cards online and link them with credit cards to have them automatically reloaded. By registering the cards, consumers also could be reimbursed if they lost the cards.
  Today, more than 26 million cards have been activated. For the first fiscal 2004 quarter, Starbucks reported an average activation amount of $14, with an average reload of $25 (chart, page 24). During the same time period, there
  were approximately 24 million card redemption transactions that resulted in net sales of $92 million. Some 10% of all transactions at Starbucks were on the prepaid card during fiscal 2003.
  "Starbucks is probably the most successful in having consumers replant stored-value cards," says Pierce Sioussat, director at Westbury, N.Y.-based Auriemma Consulting Group.
  This popularity lead Starbucks to take the next step by announcing in February 2003 that it would offer a dual-purpose credit/stored-value Visa card with Bank One. "Starbucks started out showing the success of the stored-
  value program and that's why it became a successful fit for a cobranded card," says Sioussat.
  In the eight months prior to rolling out the card Starbucks performed research to find out what rewards would resonate best with consumers. "Starbucks never offered any type of loyalty or frequent-purchase program and they wanted
  to offer more value," says Hugh Bleemer, executive vice president of cobranding for Bank One Card Services. "We did extensive market research to find out what customers want."
  The research included an e-mail that gave respondents options for reward programs. Choices included a free half-pound of coffee, a complimentary birthday beverage, 10% off a coffee-machine purchase, or a free pastry with a beverage
  purchase.
  Each year cardholders also would receive a gift, according to the program's planned parameters. The survey asked which of the following gifts customers found most appealing: a $5 card reload and $5 donation to charity, a
  free pound of coffee, a complimentary $10 reload, or other free Starbucks merchandise valued at $15.
  The basics for the rewards program are now in place, says Colette Courtion director of Starbucks Global Card Services. Duetto cardholders receive a one-time $10 "preload" and 1% in so-called Duetto dollars that are automatically loaded on the stored-value side each month for every Visa purchase made. Starbucks also donates $5 to the Starbucks Foundation after every customer's first Starbucks Card Duetto Visa purchase. The "first generation" of
  cardholders received a half-pound of coffee as a reward for receiving the card. Cardholders also receive quarterly gifts that reflect spending behavior. "This coming month we will send them coffee," Courtion says.
  But the coffee purveyor is looking at further enhancement of the rewards. "One thing we're looking for is taking the rewards one step further and customizing so customers can tell us what they want," she says, adding that
  in the future Starbucks may look at delivering real-time rewards through the point of sale.
  The rewards program is different from most others currently offered. "We can, on a low-point threshold, have the consumers burn their points and feel like they're rewarded," says Bleemer. The companies would not discuss
  details of who funds the rewards or card marketing efforts.
  Whereas most cobranded credit cards aim for a cardholder's aspirational desire, Duetto takes a different tack. "The Starbucks card has a little more everyday meaning and value," says Auriemma's Sioussat. "If I ventured a guess
  I would say they're seeing a lot of low-spend activity. Nobody is racking up $10,000 a month on their Starbucks card."
  While the rewards program for Duetto is unique, so is the payment system behind the card. Bleemer says Duetto is the first stored-value/credit card on one piece of plastic. When researching the card Starbucks found that customers
  wanted to simplify. "People were carrying too much plastic," he says.
  When using the Duetto card at Starbucks, customers don't have to do anything different than if they were using the original stored-value card, Courtion says. "We set up our point-of-sales system to recognize the cards," she says.
  Bank One and Starbucks say they have been extremely pleased with the marketplace reaction since Duetto's launch last October. Neither would say how many cards have been issued, but 35,000 consumers applied for the card in the
  first week, says Bleemer. The preregistration site for the card had roughly 27,000 registrants. "At this point we are over forecasts for 2003 and we continue to trend positively," he says.
  Thus far the card has been marketed through direct mail, the Internet and in-store promotions. "We're trying to promote the program in a natural way," says Courtion. "If somebody uses a stored-value card, it gives employees a
  chance to promote Duetto."
  Starbucks also has done some event marketing around the card, promoting it at the Seattle Marathon and other events around the 2003 Thanksgiving holiday.
  Another promotion was with Jumpstart, a national non-profit organization that recruits and trains college students to serve in a year-long mentoring relationship with preschool children from low-income communities. From Oct. 13
  through Dec. 31, 2003 Jumpstart was the recipient of the Duetto donation to the Starbucks Foundation.
  As part of the commitment, Duetto sponsored kick-off events in cities where Jumpstart has a presence, and the organization promoted the card to its donor base. Duetto also helped Jumpstart with awareness building and recruiting
  efforts. "This is tied to the philanthropic portion of the card," says a Starbucks spokesperson. "This is an example of how we are looking for locally relevant events to promote the card in a way that resonates with our customers."
  Consultant Sioussat says marketing around the Duetto card can be a bit low-key because of the devotion Starbucks' customers have to the brand. "The Starbucks customer is a uniquely loyal customer and has an almost cultish loyalty to Starbucks," he says. "It's a lifestyle sort of loyalty."
  As to whether or not the Duetto model of adding credit to a prepaid payment vehicle can translate to other markets has yet to be seen. The company that made $3.50 cups of coffee popular did it by first paving the way with a straight prepaid card, and that's what followers may need to do too. "People won't do it unless there's already a successful stored-value program in place," says Sioussat.