As a reformed Starbucks addict, I understand the appeal of a morning visit to the esteemed coffee retailer. I enjoyed the physical benefit of the caffeine jolt, and the emotional benefit of the morning ritual.  Starbucks reinvented the way I, and much of America, drink coffee, and now the company is redefining the gift card.

An article in yesterday's Wall Street Journal highlighted the importance of Starbucks gift cards in an article titled "Starbucks Sees New Growth on the Card."  Card transactions account for a 27% of Starbucks' domestic sales.  Consumers who register a Starbucks gift card online get perks.  The perks improve when the card is used for more transactions.

Starbucks started with an instrument that is typically used for gifting and re-purposed it so that consumers buy it for themselves.  For the customer, the benefits are smoother transactions (per the company's website, "The Starbucks card is the fastest way to pay at Starbucks.") and the program perks.  For Starbucks, the benefits are also substantial:

• Customers are more likely to indulge in a more extravagant drink, a larger size, or add an item to their order.  According to the great behavioral economist Dan Ariely, people spend more freely with credit cards than if they are using cash.  I suspect that using a gift card loaded with a credit card leads to even more free spending, as the transaction is one step farther removed from cash.
• Starbucks has a wealth of data to evaluate the behavior of its customers.  Most importantly, it can assess the purchases of its best customers.  This provides insight into what's working and what isn't in its stores.  As cards must be registered, Starbucks can use email, coupons, or other tactics to influence the behavior of card holders.
• Starbucks receives the cash from the sale of gift cards immediately, although it doesn't recognize the revenue until customers spend gift cards.  In 2011, gift cards accounted for almost 30% of the revenue from domestic sales prior to the sale--more than $2B!

Starbucks allows consumers to pay with the Starbucks card using iPhone and Android apps.  Starbucks apps have gotten more traction than other retailers, per the Wall Street Journal.  My hypothesis is that this works for three reasons:

1. Frequency of visits--Starbucks loyalists visit at least once a day almost every day of the week.  The implication is that the app provide real convenience for the user.  I don't see the same level of convenience from an app at a store that a consumer visits weekly or bi-weekly.
2. Low risk--based on Starbucks' website, the average reload to a card is $24 and the average transaction size is $5.  Even if something goes haywire with the account, this is a tolerable risk.
3. Starbucks consumers--I'm guessing that they are comfortable with technology and that they are never far from their smart phones.

In short, the Starbucks card is the currency that both loyal customers and Starbucks value.  Unlike traditional gift cards, customers buy themselves the Starbucks card to prepay for purchases and earn rewards.  I can't see a grocer, big box retailer, or department store replicating Starbucks' success with prepayment.  I question whether fast food and QSRs have the right customer profile and the loyalty needed to be successful with this strategy.  I would love to hear your thoughts!