Member Brief: StarDAO

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Web3’s influence on retail is just beginning. Like Nike’s investments into digital goods and services, Starbucks is in position to become the consumer packaged goods leader in the next generation of the web.

Starbucks began as a coffee roaster, but today it’s just as much of a financial services company. Let’s look at Starbucks’ history of product innovation.

During the second wave of American coffee culture, Starbucks rose to prominence by borrowing the blueprint of its predecessor, Peet’s Coffee & Tea. Before Peet’s, espresso was purely an Italian product. Bolstering the availability of international beans, roasting styles, and drink preparations defined the second wave. To expand its product offerings and distribution, Starbucks acquired manufacturers, brands, and intellectual property (the Frappuccino trademark was acquired) over the course of 50 years and 32,660 stores. With the groundwork laid by Peet’s, the Starbucks supply chain and menu democratized the world’s coffee products, which were once exclusive to specific cultures. Today, coffee is on its third wave, which accounts for companies started after 2000. But there is no third wave without Starbucks and they just may make the biggest contribution to this latest wave yet.

The first wave of American coffee culture was probably the 19th-century surge that put Folgers on every table, and the second was the proliferation, starting in the 1960s at Peet’s and moving smartly through the Starbucks grande decaf latte, of espresso drinks and regionally labeled coffee. We are now in the third wave of coffee connoisseurship, where beans are sourced from farms instead of countries, roasting is about bringing out rather than incinerating the unique characteristics of each bean, and the flavor is clean and hard and pure.

Today, companies like Cometeer have stolen the spotlight. Former computer scientist Matt Roberts co-founded Cometeer in 2015 along with Doug Hoon and Karl Winkler, who each possess extensive backgrounds in engineering and product development. The brand went on to raise an initial $50 million and today, backed by a strong direct-to-consumer and subscription strategy, the brand is reported to be on track for high eight figures in annual revenue. The brand sells high quality, specialty coffees available in frozen pods. The genius of the company is its built-in loyalty: Cometeer is a monthly subscription product. But thanks to Web3 technologies, Starbucks’ notable loyalty strategy can improve in ways unforeseen just a few years ago.

Web3 and Loyalty

It’s no surprise that heritage companies like Nike and Starbucks are taking the leap into Web3. For now, Web3 conversations are concentrated on Web2 platforms. Much like Web2 platforms propel Web3 technologies (ConstitutionDAO / Twitter / Discord, anyone?), some analysts believe that Starbucks is the perfect candidate for a decentralized autonomous organization (DAO) to govern its robust loyalty program. The foundation already exists. In the last year, Starbucks’ 90-day active member count grew 28% totaling 24.8 million users. Additionally, Starbucks is currently ranked third in mobile order ahead. And spectacularly, Starbucks mobile users have prepaid balances that account for just over $1.4 billion in funds that amount to loans to Starbucks.

Consumers love Starbucks so much that they’re willing to make a deposit to redeem coffee at an unknown future date and time. Starbucks is essentially gaining access to an interest-free line of credit, one that equates to roughly 4% of the company’s total liabilities. [2]

Starbucks will be one of the first major retailers to tokenize its loyalty program. In a published thread on Web3, consumer investor Magdalena Kala explains as much:

Imagine earning Starbucks tokens as an early customer in Seattle and seeing their value appreciate over time as the brand expands nationally and internationally Or imagine getting actual equity allocation pre-IPO due to high token ownership. Those are all customer benefits, so why should brands care about tokenization? More governance, more ownership, and more value appreciation all shift the customer mindset from a regular rewarded customer to aligned shareholder, governor, and creator.

In a tokenized loyalty program, getting rewarded through company upside and having meaningful say in product direction is preferred over receiving free products or discounts. This encourages a more impactful customer behavior. [Original Thread]

What Kala is summarizing is the shift from traditional loyalty programs to ones that provide a “shareholder mentality enabled by tokenization.” We are likely to see this from a brand like Starbucks before a younger, more agile brand. Starbucks has an enormous, built-in community. There are few major retailers that could achieve what Starbucks can with its existing infrastructure. A loyalty DAO would mean new product ideas, governance over potential marketing tactics, and rewards based not only in short-term gain but long-term upside. The Starbucks loyalty program, with the help of the mobile app that totals 28.4 million quarterly users, could precede a fundamental shift in how Starbucks uses one of its most valuable assets. If Starbucks does tokenize its loyalty program, corporate governance would be tiered: traditional C-suite, stock-based premium shareholders, and the loyalty DAO.

The benefits

This week, a DAO attempted to raise $20 million to acquire one of the last remaining copies of the Constitution. The collection of internet friends, crypto enthusiasts, and history buffs surpassed $43 million in collected funds.

Like many viral crowdfunding campaigns over the previous decade, the trigger for oversubscription was a combination of a desirable product and the enthusiasm for participation. In the case of the ConstitutionDAO, the eagerness can also be attributable to fractional ownership of something monumental and the ability to govern its existence. Magdalena Kala had additional thoughts on this topic. While great in theory, Kala sees obstacles in the way for companies as large as Starbucks:

It’s a huge mindset shift and hard to do for companies with large teams, set cultures, or a vested interest in the status quo. Plus, execution is hard given our current regulatory environment which makes this particularly hard for publicly traded companies. But we may see some more adventurous young private DTC brands experiment. Even likelier, a new crop of brands will incorporate tokenization from day one.

CPG is an interesting use case but in my opinion, luxury brand use cases are even more interesting, esp when comes to “democratized exclusivity. That is the use of tokens to gate exclusive releases etc.

She is correct to be skeptical. There are three major barriers: technical execution, storytelling and onboarding, and regulatory limits. Smart contract developers are in short supply, a potential hindrance to technical execution. And then there is messaging. Will the average coffee consumer care about governance, involvement in brand guidance, or the added benefits that are associated with either. Kala adds:

We need tokenization-in-the-box startups (or at least great agencies specializing in this) to enable this product for interested founders.

Starbucks may be known as a second-wave coffee retailer but over its considerable time influencing America’s collective passion for coffee, Starbucks became one of the most impressive financial services companies. Few are better prepared for the leap from Web2 to Web3. On October comments to analysts, CEO Kevin Johnson agreed:

Through blockchain or other innovative technologies, we are exploring how to tokenize Stars and create the ability for other merchants to connect their rewards program to Starbucks Rewards. This will enable customers to exchange value across brands, engage in more personalized experiences, enhance digital services and exchange other loyalty points for Stars at Starbucks.

Johnson is speaking in the theoretical here. The idea of using Web3 to build the next phase of community will be one of the most storied developments for traditional retailers and Web2 companies alike. Starbucks has the DNA for this type of shift: the company is built atop of a passionate and loyal community. Now, imagine if they had the opportunity to govern, develop, or contribute in ways that only Web3 can facilitate.

Before, loyalty was paid in discounts. In the future, it may be paid with appreciation.

By Web Smith｜Editor: Hilary Milnes｜Art:クリスティーナ・ウィリアムス、アレックス・レミー