What Howard Schultz Is Saying About the State of Retail in 2014

After celebrating the best year in Starbucks'  42-year history in 2013, the company's CEO, Howard Schultz, had a few things to say about the state of retail going forward. In a letter to the company's store managers this week, Schultz shared his thoughts on two key trends that will shape the retail environment in 2014. Let's dig in and see how Schultz's insights can help investors better gauge the strength of the retail sector in the year ahead.

"Click trumps brick" is here to stay
First, Schultz noted that mall traffic suffered greatly during this year's holiday shopping season as more consumers shopped online and on mobile devices. This was hardly news to e-commerce giant Amazon.com, which enjoyed a record-setting holiday season in December. In fact, Amazon said it added more than 1 million new customers to its Amazon Prime service in the third week of December. Moreover, the e-tailer saw a record 36 million purchases on Cyber Monday alone. For perspective, that's about 426 items per second! 

However, as Amazon and other online retailers enjoyed record holiday sales, their success was underscored by a significant downturn in foot traffic at traditional brick-and-mortar retail stores. ShopperTrak estimates that the number of consumers walking into stores between Thanksgiving and Christmas in 2013 fell 14.6%. Meanwhile, online retail spending during that period increased 10% to $46.5 billion, according to comScore.

While this trend will certainly hurt traditional retailers going forward, Starbucks is well prepared to handle this shift in retail spending thanks to what Howard Schultz describes as its "world-class digital and mobile payment expertise." A big part of the equation for the java giant is its digital Starbucks reward card and loyalty program. During the holiday quarter, Starbucks processed more than $1.3 billion in Starbucks Card loads in North America, according to Schultz's recent letter. 

The coffee chain was quick to integrate mobile payments solutions into its business in 2012 when it teamed up with Square. Using Square, Starbucks customers can check out faster with an app on their mobile devices. Ultimately, Starbucks' head start in online and mobile should help it weather changes in the broader retail market.

This brings us to the next big takeaway from Schultz's note: More customers are "embrac[ing] the convenience and choice afforded by physical and digital gift cards." 

From cash to cards
Starbucks broke a single-day record on Dec. 19 when it activated approximately 2.4 million Starbucks cards. This is a monster number for Starbucks, and it could translate into a meaningful amount of new customers for the Seattle-based company in the new year. Schultz elaborates on this by writing, "Overall, we generated over $610 million in new card activations in the holiday quarter, representing a significant increase over both last year and plan." 

Source: Starbucks.

This is a promising trend for Starbucks because the company is very good at turning new customers from gift card recipients into repeat customers. Overall, the takeaway for investors is that between its strong online and mobile presence and gift card programs, Starbucks should be a retail winner in 2014, even as other brick-and-mortars struggle.