Starbucks and Uber: Siblings and Total Strangers

Starbucks and Uber have become part of our daily vernacular. We all understand Tall, Grande, and Venti , and certainly there are millennials who have never imagined needing a designated driver.

Uber and Starbucks’ omnipresence makes them fodder for parody, reviled for their real and perceived faults, and adored for their universality and comfort. And yet, the business press rarely, if ever, examines the two in relation to each other.

Uber’s business model is usually compared to digital market maker platforms like Ebay or Alibaba while Starbucks is a specialty food and beverage retailer that went public three years before Netscape’s bubble-inflating 1995 IPO. Nonetheless, their commonalities are striking.

Starbucks and Uber share a collection of attributes which, along with their differences, more sharply define each. Examining these similarities and differences is an interesting way to think more deeply about each company and imagine its future potential.

Uber and Starbucks — Similarities:

  • Global execution is essential: both depend on extending their models across the planet;
  • Both sell immediate consumables: Customers buy a short experience that fulfills an immediate need — your cup of coffee often lasts about as long as an average Uber ride;
  • Purchase frequency and loyalty drive the business: Habitual consumption is the key to building high customer lifetime value (LTV);
  • Convenience drives the value proposition: Starbucks saturates densely populated areas, both urban and suburban, to ensure a Starbucks is never too far. Innovations, like Mobile Order & Pay, are targeted at convenience. Uber’s main selling point is quick, seamless, transparent access to a ride — driving wait times and cost down are key goals. For both, without convenience, the value proposition falls apart.
  • Mobile is central to the customer experience: Starbucks and Uber each deliver a superior mobile experience and drive high payment volume through the mobile platform. For Uber, mobile is a critical part of the full customer experience and 100% of the transaction. For Starbucks, mobile started as the center of a loyalty program and gift card wallet and now enables much more, including order and pay, key partnerships, and ongoing marketing. By October 2015, 21% of all Starbucks transactions were completed through mobile.
  • Logistics and data analysis are core competencies for each company — creating deep competitive advantage and driving growth and innovation. Uber’s mega-unicorn valuation rests on operational execution so strong that Uber can change consumer behavior and significantly expand the current car-for-hire market. Uber plans to expand the market significantly by trumping car ownership/leasing, and rental by providing a clearly better choice based on cost and convenience. If Uber can influence this transformation, with their logistics platform at the center, Uber board member Bill Gurley explains, the numbers become very large. Uber’s platform creates adjacent opportunities in the logistics space that can drive their ceiling even higher. For Starbucks, logistics and data enable key strategies for managing stores/real estate, retail and product operations, and CRM — including mobile product and innovation. Both companies use data to drive loyalty programs. While Uber’s VIP program is young and low key, Starbucks Rewards is arguably the most effective and admired loyalty program in retail.
  • Uber and Starbucks have strong positive brands that have become universal. Again, both have entered the popular culture and and become a shortcode for experiences we understand and appreciate. References can be found frequently in movies and tv — SNL has skewered both with precision (Uber and Starbucks).
  • Ongoing brand equity is dependent on high touch consumer experiences: The SNL parodies are funny, but also expose the underlying sensitivity of businesses that must maintain satisfaction among millions of daily customers expecting convenience, consistency, and consideration. Ordering an Uber, or a latte can be automated with a clean and beautiful mobile interface, but the ultimate consumer experience is dependent on consistent excellence from front line drivers or baristas. Product quality and reputation are brand critical and defined by human interaction.

The above similarities center on the consumer experience and technology. Alongside these similarities, less visible to the consumer, there are two critical differences between the companies strategies.

Starbucks and Uber — Differences:

The first key contrast is Pricing Strategy as Starbucks’ overall strategy calls for premium pricing while Uber is committed to becoming the low cost provider in its space.

Starbucks’ customers are willing to pay more than average for coffee based on a variety of factors that comprise the buyer’s perception of value. Of course, Starbucks’ pricing strategy is much more complex than that simple statement. But the key point is that Starbucks thrives on earning premium prices from its customers — and generally moving in a premium direction with product, brand image, and pricing over time.

Uber’s ongoing pricing strategy quite opposite. Uber is committed to driving prices down for its riders over time. In this way, Uber does not conform to classical disruption theory behavior. The company started with a premium product at a premium price (Uber Black, and the premium of surge pricing), and has innovated downmarket in product (with UberX and now Uber Pool) at lower prices. Uber also leverages seasonal demand to opportunistically extend significant discounts to riders.

Bill Gurley, in another excellent post, describes Uber’s price leadership strategy in the context of Uber Pool. UberX, and UberX price optimization have achieved price reductions and grown demand in multiple cities. Now UberPool has moved the company further toward a low cost provider position.

Ideally the Uber model works like this: Consistent service at ever lower prices drives market share and demand. Increased rider volume triggers Uber’s network effects. The virtuous cycle kicks in: High demand keeps a critical mass of drivers on the road by providing a high total passenger yield per hour and hence higher earnings (drivers stay at full capacity). More Uber drivers also means less customer unfriendly surge pricing.

Good for drivers, good for customers, and good for Uber. A critical mass of UberPool riders makes ride sharing even more cost effective for riders and more lucrative for drivers.

While new and traditional competitors can copy Uber’s basic ride ordering app, the technology moat around UberPool is deeper and more creature infested.

The two constituencies that are most affected by Uber’s pricing policies are Uber’s passengers, and Uber’s drivers. This leads to the second key difference.

Uber and Starbucks both refer to their front line workers as “partners” but mean it in a very different way.

Starbucks classifies any worker who puts in 20+ hours per week a full employee and offers a complete package of benefits.

Uber, like many sharing economy and platform business peers, limits employee costs by classifying its front line workers as independent contractors.

When Starbucks calls its 190,000+ workers partners, it communicates a status that goes above and beyond simply employee. For Starbucks, the word “partner” means that the worker and the company have a mutual connected commitment. In addition health care and paid vacation, Starbucks contributes directly to its workers success by granting stock, and reimbursing tuition.

The relationship between Starbucks and its front line workers includes both the traditional social safety net of benefits, along with the concept of workers as part-owners via stock grants.

In contrast, Uber represents the “new new” economy, increasingly populated by workers as independent contractors. Uber operates with a relatively small number of full time employees by classifying its 327,000+ drivers as independent contractors. When Uber calls its drivers “partners” it means this in the sense of two independent entities coordinating specific activities for mutual autonomous economic benefit.

There is a class action lawsuit in California that could have a material impact on Uber’s model. If Uber were forced to reclassify drivers as full time employees, it is unclear whether the net result would be positive for drivers, or consumers. Uber would likely pass-on the higher employee and operating costs to its drivers potentially reducing the number of drivers on the road and limiting positive network effects of the whole model.

Starbucks’ store workers and Uber drivers clearly work hard for the money. According to Glassdoor, Uber drivers and Starbucks baristas and supervisors earn in the same cash range of $9 — $15/ hour (Starbucks at the low end, Uber at the high end). Factoring in the value of benefits to Starbucks workers, if Glassdoor is correct, the net hourly rates may be competitive.

An interesting datapoint comes from a Sherpashare study of gross earnings per Uber trip in various cities. Note that the Sherpashare figures are gross (before driver expenses including insurance, cost of providing a car, maintenance, gas, and Uber’s 20% commission) and are per trip — not per hour earnings. According to this study New York Uber drivers enjoy an exceptional upside per trip (and likely earn significantly more than their peers in other US cities). Buzzfeed conducted a small sample earnings survey in New York in 2014 that also generated very interesting data.

WWhat would you do?

If Starbucks Barista and Uber Driver were my only two job options, with net economic value my only criteria, I would start by experimenting with Uber and weigh my results against the more known benefit of working for Starbucks. Hopefully my experience would be better than hers.

Whether they are classified as employees or independent contractors, Starbucks and Uber must maintain loyalty and positive feelings among the people who deliver their value proposition each day.

Looking forward

The Uber model ultimately hits high gear in a society with driverless cars and minimal car ownership. One day our kids may look back on our present and think of the insanity of endless tons of hulking automobiles sitting idle and taking up space most of the day, and flawed humans controlling them the rest.

Consider the danger of human error and folly resulting in small and tragic accidents. Quantify the endless hours and money wasted on parking, retrieving our cars, and taking our cars to the service station for gas or repairs.

There will be a cost in lost jobs, but this will happen whether or not Uber thrives. Google, Amazon, Apple, Tesla, and others are all imagining this future.

As far as Starbucks, it’s hard to imagine the need for convenient decent coffee and food, or the “third place” experience going away. If Starbucks continues to innovate, and its global aspirations meet success, it should continue to play a major role in the future economy while offering some unexpected and transformative surprises along the way.