Analysis of Companies Entering the Web3 Space: Starbucks 

Introduction

Many prominent companies are increasing their efforts to implement web3 technology, despite the bearish macro sentiment.

Some of the major consumer brands have already entered the NFT sector on the basis of digital productization, with mixed results. Others, such as Starbucks, have begun to show interest in the applicability of NFTs in loyalty programs with a seemingly more long term approach.

Starbucks continues to stay ahead within digital innovation, now pioneering the web3-powered loyalty program.

This article depicts the integration and progress of the program. It also presents related challenges as well as opportunities for Starbucks, but also the broader web3 space, to achieve mainstream adoption.

Article Outline

• Background

• “Odyssey Mechanics”

• Web3 Advantages and Challenges

• Web3 Integration Competitiveness

• Web3 Integration Benchmarks

• Web3 Opportunities: NFTs

• Closing Remarks

Background

Starbucks Odyssey is the web3 extension to the pre-existing Starbucks Rewards loyalty program that launched on December 9th, 2022.

It aims to strengthen Starbucks’ position as a “third place between home and work where you feel the warmth and connection over coffee, community and belonging” whilst also celebrating the heritage and future of Starbucks through the digital realm.

This first iteration (beta) gave access to a small group of waitlisted US members and employees. More beta testers are expected to gain access monthly as Starbucks continues to gather feedback which will help shape the future of the program.

It was launched as a collaboration with Forum3, Nifty Gateway, and Polygon:

• Forum3 is a digital transformation company where Adam Brotman, the former Chief Digital Officer at Starbucks, is building web3-powered loyalty platform, with basis in experiential loyalty, together with his co-ceo Andy Sacks among other team members. Starbucks is their first client.

• Nifty Gateway is a custodial platform, owned by Gemini LLC, on mission to make NFTs more accessible by providing credit card on- and off-ramps, less fees, and being more stringent with information on its users and creators.

• Polygon is realizing on-chain use cases (eg. data collection and payment processing), at scale, through its efficient infrastructure while also leveraging the security of the Ethereum Virtual Machine (“EVM”) computer.

“Odyssey” Mechanics

It consists of activities called “Journeys'', featuring interactive games and challenges of varying difficulty with the aim to engage customers with each other and the brand in new ways.

For example, by encouraging random acts of kindness, gift cards purchases, or answering  trivia that deepens customers’ knowledge of Starbucks’ history and coffee:

By following along and completing parts of the Starbucks Odyssey journey, participants earn collectible “Journey Stamps” (polygon-based NFTs) and Odyssey Points, which unlock access to exclusive benefits and experiences such as:

• Virtual beverage-making classes (at the lower end).

• Unique merchandise.

• Artist collaborations.

• Events at Starbucks Reserve® Roasters (at the higher end):

Each Stamp features iconic Starbucks’ artwork and adds bonus Points, depending on its rarity, that count towards the total 2023 Starbucks Odyssey Points for the holder.

Since Points are also earned separately, holders can still participate without keeping the collectibles:

The Odyssey experience, designed to suit the average user, has involved pre-existing retail infrastructure such as logging purchases in the original Starbucks Rewards app (then being accounted for in the separate Starbucks Odyssey beta app). It also contains intuitive in-app experiences and achievements as well as communication channels for information.

The collectibles can be traded through the Nifty Gateway marketplace, integrated into the  Starbucks Odyssey web app, which includes a custodial digital wallet experience with no prior crypto experience required for the participants.

It could be compared to an e-commerce site such as eBay with added functionality to accept both crypto and fiat. It allows transfers to other ERC-compatible wallets such as Metamask. So far, there have been four drops on the Nifty Gateway platform:

The reward system is based on three tiers with each tier corresponding to a certain range of 2023 Starbucks Odyssey Points:

• 1000 to 2999 Points

• 3000 to 5999 Points

• 6000+ Points

At this stage, the exact rewards for each tier are not confirmed, but it will require the holder to redeem its Points comparable to how Stars are used in the original Starbucks Rewards program.

Some Stamps will be limited-edition (coming later in 2023), likely to provide benefits similar to the pre-existing Journey Stamps but not yet confirmed. They will be released 4-6 times per year and be available for purchase directly with a credit card via the Nifty Gateway marketplace integrated into Starbucks’ web app. A portion of the proceeds will be donated to causes that matter to Starbucks members through Starbucks’ charitable organization, The Starbucks Foundation.

Previously, Starbucks has donated tens of millions to nonprofit organizations to support coffee and tea-origin communities, provide relief to communities worldwide impacted by disaster and strengthen neighboring local communities as well as global ones.

Web3 Advantages and Challenges

At first glance, it may not be apparent how web3 loyalty programs differentiate themselves from Web2.

One possible reason for this is that their full potential, as in aspects exclusive to web3, has not yet been realized.

Fundamentally, web3 proposes to increase the extractable value, and create new value, from a specific network. In this instance, the pre-existing bond between the brand and its customers can be strengthened through new ways of gamifying reward-systems and attaching secondary market values to corresponding tokens. Essentially, by leveraging aspects such as:

1) Transparency:

The data stored on decentralized and open-source protocols can, besides making rewards more tamper-proof, help companies detect and prevent fraud as well as identify and analyze customer interactions through improved traceability. A solution that benefits both stakeholders.

On one hand, it provides more readily available data verticals which can be translated into more precise customer feedback and lead to more optimized reward mechanisms in extension. For example, by providing the basis for more granular changes.

It could also imply higher iteration speeds for these mechanisms since the on-chain data presents a shorter time lag compared to the current way of collecting feedback through forms in order to include different, sometimes closed silos of data.

On the other hand, it provides the groundwork for Starbucks to reward its customers in a more personalized and immediate manner. For example, its most valued customers could be airdropped 1/1 iconic Starbucks’ artworks meanwhile participants of Starbucks’ experiences could be airdropped tokens of record, possibly soul-bound tokens (“SBT”), with potential future utility.

However, it introduces a challenge regarding privacy. Some may demand more confidentiality than others and it may also depend on the platform or blockchain being used. Zero-knowledge (“zk”) sync rollups could serve as one solution to this. It provides validity proof that multiple transactions have been processed off-chain, without revealing each individual transaction, and updates the layer 1 ledger accordingly.

Data privacy and protection is still an issue in the traditional corporate world, with cyber attacks breaching and compromizing many centralized databases. So what’s changed? The data still requires protection, but at least it’s now immutable.

2) Interoperability and Flexibility:

In its decentralized form, an interoperable network of blockchains promotes mobility between protocols and platforms through smart contracts and, more specifically, cross-chain dApps.

This could introduce more possibilities to trade and exchange rewards with other digital assets which, in extension, corresponds to higher financialization across the network. As the alternatives through which the rewards can be used grows, their perceived value follows.

But if rewards are fully interoperable, does it matter where users earn their rewards? To ensure competitiveness in an interoperable ecosystem, brands must ensure sufficient incentives to retain customer loyalty whilst offering flexible trade and exchange opportunities that potentially could come with a trade-off.

The programmability of smart contracts also implies the flexible nature of blockchains which could enable even more possibilities. It could, for example, introduce new ways of combining rewards between wallets chosen as “family and friends” and enable shared ownership of certain rewards, for example, through fractionalization:

Furthermore, a free-to-claim NFT-based membership could make the customer loyalty experience more compelling due to the secondary value attached to each token. By introducing on-chain interactions during certain Starbucks’ experiences and events, each NFT could be updated accordingly whereby its secondary value could follow.

In comparison to the existing in-app experiences built in a closed setting, this translates into a stronger incentive for members to level-up their membership beyond having access to the rewards and possibly unlocking new perks over time.

However, regardless of the theoretical value added by applications in conjunction with its widespreadness, security still remains a recurrent issue even for experienced users.

This pertains to the gap between the back-end and front-end verifiability and intuitively translating how wallets are affected by interactions for the average user, otherwise easily exploited through phishing attacks and scams.

Pocket Universe and Wallet Guard are two tools that have begun to gain traction recently, aiming to minimize these marginals of error.

This is closely associated with the urgency to provide efficient on- and off-ramps in order to minimize friction, as in gas fees, and increase the likelihood of mainstream adoption.

3) Ownership

The most obvious one is how it transforms customers into “shareholders”.

It enables customers to claim an ownership stake in their loyalty to Starbucks which ties into its business and culture. That which has been an intangible aspect of the business-to-customer (“B2C”) relationship can now be used to deepen the ties with its most loyal supporters, as it becomes “their” brand (see: Origins’ article on Digital Communities) through ownership in scarce assets.

This has been apparent in the Odyssey “Journeys” in two ways. For one, it enables ownership in unique collections of iconic Starbucks art with historic and cultural meaning. Secondly, Starbucks has used the gamified Odyssey experience to shine light on its history and culture, which in itself deepens the B2C relationship further since customers become more emotionally involved.

The collectibility also adds a layer of social status, like with all NFTs, as the publicly-verifiable assets to become part of members’ digital identities which, in turn, can increase the reach of the brand and generate more referrals.

However, making a collection scarce can drive a wedge between “holders” and “non-holders” which can create friction within communities. Especially in communities that have been previously open to everyone. The challenge here is scaling the program in a balanced way consistent with the community growth trajectory.

For instance, one could introduce more opportunities without the dilution of current collections. This is a challenge that many existing NFT collections face when expanding their ecosystem to a wider audience. A new set of stakeholder management challenges emerge and need to be managed carefully to prevent adverse reputational damage.

Web3 Integration Competitiveness

Considering the above, combined with the fact that the global loyalty management market size is expected to grow with an average CAGR of 23.5% until 2029, it could make sense for many consumer brands to extend their business models for loyalty programs into web3. Especially, if their revenue is mainly driven by a growing base of reward members as is the case with Starbucks.

For reference, Starbucks Rewards members were responsible for a record 53% of revenue from U.S stores in the third quarter while the year-over-year increase of active members ended at 16% (28,7 million) as per the last quarter of 2022. The company has yet to share how many customers have signed up for the Starbucks Odyssey Rewards program but, considering its early stage, it may not capture a useful direction for its continued endeavors within the space at this moment.

Starbucks also has 41% of all sales across the Starbucks platform attributed to gift card sales which implies a strong cultural significance for the brand, especially apparent during holiday seasons.

These were introduced in 2001, as Starbucks was one of the major retailers to offer reloadable cards, with 4 million accounts activated during the first 8 months. It has played an important role in spreading the word about Starbucks combined with the Starbucks Rewards program that launched in 2008.

In late 2022, gift card sales were at all-time highs with around 58 million copies sold and could present an interesting opportunity for on-chain collectability of Starbucks Cards going forward.

This notion is reinforced by the fact that Starbucks’ most loyal customers are aged between 25-40, corresponding o almost 50% of the consumer base, which closely resembles the age groups’ interest in crypto and NFTs as measured by crypto and NFT ownership respectively in the United States:

In addition, these customers are usually individuals of higher socioeconomic status which could be said similarly about the NFT space. This translates into high probabilities of successful penetration for Starbucks in its continued web3 ventures.

By extrapolating current trading volume and holders on the Nifty Gateway after two months to potential yearly volume made by 25% (7.175 million) of the total active Rewards members, corresponding to around half of the people in the target age group, volumes on the Nifty Gateway could land north of one billion.

It’s apparent that Starbucks has a long-term vision in mind. But some brands could use web3 integrations such as rewards programs solely as a marketing strategy as it potentially attracts an untapped audience in web3 or leads to more traction as a result of ticking the “innovation” box in web2. However, to retain users and ensure long-term viability, a deliberate strategy is required.

Web3 Integration Benchmarks

Since Starbucks is a first-mover within the loyalty program vertical, there is no suitable comparison to make at this stage. There are, however, some web3 native coffee shops expanding their reach.

For instance, CafeDAO which is the first DAO-run coffee shop where shared ownership and fair rewards for contributions serve as cornerstones:

Another example is the Bored Breakfast Club which leverages the BAYC IP to create a unique coffee brand, launched as a collaboration between LA-based digital design studio Kley and Yes Plz Coffee, with NFT based coffee subscription:

Other coffee shops are prioritizing separate innovations with automated preparation stations (eg. tokyo-gacha-gacha-coffee-unstaffed). While Starbucks may be capitalizing on their first-mover advantage by leveraging the NFTs as tokens for rewards, they are not alone and are unlikely to be the last.

One way to gauge the interest in the Starbucks Odyssey Rewards program (and its perceived value by customers) so far, is to measure the total volume traded so far on the Nifty Gateway secondary market where most of Starbucks’ collectibles have been traded.

Volume traded is currently tracking at $69k:

The floor price of each drop shows 100, $125, $205, and $1,664 for the ‘Doing Good Journey Stamps’, ‘Bean to Cup Journey’, ‘Coffee Heritage Journey’, and ‘Holiday Cheer’ edition, respectively as of February 5:

To then gauge the opportunities within the broader NFT space in relation, this could be compared against the total volume traded for major consumer brands that have entered so far such as Nike, Gucci, Adidas and Budweiser.

For most collections, there is a contributory correlation between secondary transactions and secondary volume to total NFT revenue.

Meanwhile, a successful primary sale is not a guarantee for secondary volume as in the case of Gucci nor NFT revenue as in the case of Adidas. NFT revenue, rather, is dependent on market penetration in relation to their nature as speculative assets involving aspects such as collection size and floor price:

Starbucks similarly has broad cultural significance as well as strong retail penetration within its niche but not as diverse as Nike or Adidas. Meanwhile, it seems to be warming up in its endeavors to embrace web3 further in its business which could involve more digital natives eventually.

It remains to be seen if Starbucks will lean more into the same approach as Budweiser to bring more web3-exclusive benefits to its community through partnerships. Now, which are the opportunities where Starbucks can drive revenue in this endeavor?

One way to indirectly drive in-store sales revenue could be to introduce membership tokens despite not driving any NFT revenue since a royalty fee on the secondary market is likely, not involved.

Partnership collections could, on the other hand, involve NFT revenue due to royalty fees and potential secondary sales volume. This, in itself, depends on the utility and depth of incorporation within each ecosystem. They also serve as a scaling mechanism by introducing new users to different ecosystems which is likely to have a positive impact on revenue for both parties overall.

Web3 Integration Opportunities: NFTs

Here are some additional ways Starbucks could drive revenue:

1) Customized or Limited-Edition Gift Cards

Against the fact that gift cards already constitute a large portion of Starbucks’ sales revenue, introducing limited-edition gift cards, similar to the limited-edition stamps, to be sold exclusively to loyalty program members of specific tiers could be one way to drive more primary sales revenue. It could compete with sales from other gift cards but could be monitored to increase revenue.

Each tier could also enable customizable gift cards against preset attributes, possibly for a small fee. Some of which could be exclusive to each tier and not accessible anywhere else in the ecosystem.

• This would drive sales revenue as people are incentivized to level up their membership.

• This in turn could give members the opportunity to make unique cards for different relationships, which could give it more relevance and meaning to the receiver and increase the emotional response to the message.

• This, in extension, strengthens the perception of Starbucks as a brand that could drive revenue further.

2) Exclusive and Experimental Menus

Similar to exclusive access and benefits, Starbucks could introduce variable exclusive menus only available to members of certain tiers, also including tryouts of new experimental beverages and toppings.

This could drive indirect sales revenue to Starbucks by incentivizing higher reward membership levels to access these and if the prices are slightly higher than the ordinary menu.

3) Becoming the Trend (eg. Open Editions)

With the recent interest for open editions surging, Starbucks could have launched a gamified collectability coffee game similar to  Des Lucrece’s open-edition project “Proceed w/ Caution” (see: Origins’ article on Proceed w/ Caution). Essentially, by airdropping a token to all loyalty members with a framework published on how the game with the end goal being tickets, art, free coffee for a year etc.

Generally, integrations such as the above share increasing chances of continued success if they are intuitive and bring value to both stakeholders. Without sustaining enough value, the demand will otherwise slowly but surely degrade for the experience and/or product derived from certain partnerships, for example.

Comparatively, without an intuitive experience with user-friendliness as a priority in the whole customer loyalty lifecycle, the technical threshold will itself become the barrier to success.

Closing Remarks

There are already many examples of companies that have entered the web3 space, where some have been more successful than others in their approach. It has become increasingly apparent that the applicability of NFTs in various businesses remains relatively unexplored. One such application pertains to loyalty programs, currently being pioneered by Starbucks.

The thesis of web3 includes many proponents that enable greater value creation. It encourages customer engagement in a more competitive way, which drives more value to the brand in extension. For Starbucks, this translates into participation, ownership, and community.

Through the web3 dimension, customers can be given more opportunities to participate in Starbucks experiences, primarily in person, but also online. It can also be incentivized in a more compelling way through different types of rewards and ways of exchanging them as well as on-chain gamification.

These experiences can then be designed in ways that ties deeper bonds within the Starbucks community as well as between Starbucks and its customers.

However, to unlock the full potential of the web3 loyalty program, its integration not only has to bring value to both stakeholders but also be as frictionless as intuitive to reach mainstream adoption. This includes all steps of the customer loyalty lifecycle, possibly involving a custodial wallet experience with efficient on- and off-ramps.

It also requires the brand to carefully balance this new vertical with the rest of the loyalty ecosystem to retain current customers while leaving room for this web3 extension to sustainably scale as the demand grows. Considering the Forum3 team’s previous experience, it seems fit for this challenge.

Lastly, the projected growth in the global loyalty market emphasizes the opportunity ahead for consumer brands. Especially for those with business models rooted in widespread cultural significance, i.e. many active loyalty rewards members, since the web3 thesis proposes an edge by doubling-down on what is uniquely theirs. Forum3’s intrinsic knowledge about Starbucks’ business verticals can also prove advantageous here.

With this potential and the web3 thesis in mind, it could make sense for similar brands to extend their loyalty programs. Some say it’s just a matter of time.

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