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March was a busy month for Starbucks. It introduced a new blend, Pike Place Roast, as well as French press and espresso machines to turn out higher-quality drinks. And it began to generate buzz for April's rollout of the Starbucks Rewards program, which offers a twist on the company's mainstay stored-value cards: Customers receive additional benefits for logging on to a Web site, registering their card and volunteering contact information. All in all, it's a more focused effort to capture customer data.

Members can get extras like free refills on brewed coffee; a choice of free flavorings; a free tall beverage when they purchase a pound of whole-bean coffee; and two consecutive hours of free wi-fi access in company-operated stores.

This is a nice package of perks. But it seems to have been motivated less by altruism than by recent financial results.

Starbucks' retail transaction count was “flat to negative,” slipping 1% between fiscal 2006 and 2007. It also fell 3% in the first quarter of 2008 compared with the same period last year, according to Securities and Exchange Commission filings.

This happened despite an increase in company-operated U.S. retail store sales from $5.5 billion to $6.6 billion between 2006 and 2007. But these gains essentially came from 1,065 newly opened establishments. Organic revenue growth among comparable locations was just 4%, all due to two price hikes during the year, SEC documents show.

Starbucks spokeswoman Bridget Baker declines to say how many actual transactions that represented. But in 2002, then-CEO Orin C. Smith noted in a statement that the average transaction was less than $4. Between price boosts and an expanded roster, that number probably has risen to $5, although that's only a guesstimate.

Starbucks' U.S. company stores pulled in $1.89 billion during this year's first quarter. However, they generated only 97% of the transactions in the same 2007 period.

Do the arithmetic. At $5 per purchase, that $1.89 billion represents 378 million individual sales, meaning the gross number of transactions fell from around 389.7 million a year earlier — a drop of 11.7 million (again, a guesstimate).

More disturbingly, at the end of fiscal 2006 the company reported an outstanding balance of $4.4 million on its stored-value cards.

This figure ballooned to $12.9 million by the end of 2007.

Superficially, each of these occurrences can be positively spun. For example, the higher stored-value balance might indicate that the cards are becoming more ubiquitous.

So what's the problem, you ask? Doesn't an unredeemed card represents free money for Starbucks? On the surface, yes. But the company also loses out on ancillary sales. As a general rule, people spend more than the face amount when cashing in stored-value or gift cards and certificates. And unredeemed cards represent missed opportunities to build relationships with lapsed or potential customers.

Add it all up, and it's fair to ask whether those coffee lovers are turning to other alternatives for their brew. The answer? Quite possibly. According to the company's 2007 year-end report, “Starbucks has recently experienced significantly greater direct competition from large competitors in the United States quick-service restaurant sector, some of [which] have substantially greater financial, marketing and operating resources than the company.”

So what should the chain do? “There is a need for Starbucks to win back customers,” says Rick Ferguson, editorial director at Colloquy, a loyalty marketing consultancy. “The stored-value card is a vehicle for doing that.”

To Ferguson's mind, the increase in unredeemed cards indicates they've become commoditized. “There are a lot on the marketplace,” he says. “Everyone is giving them away, [such as] at conferences or trade shows.” The new program provides an incentive to register cards sitting unused in consumers' wallets or glove compartments, he adds.

Is the company doing so to maximum effect? “Consumers might be motivated by free refills, but if Starbucks wants a deeper relationship I think it needs to leverage those e-mail addresses and build some dialogue with them,” Ferguson says. He considers free refills a good way to restart the dialogue. The company could then mix transaction data with surveys and base offerings on customers' interests.

How about the company's music selections? “Offer discounts on CD purchases or downloads from the company's Web site,” Ferguson suggests. “Create a lifestyle brand around coffee products and music and entertainment and the in-store experience. Have a cardholders-only singer/songwriter evening.”

The key market, in Ferguson's opinion, is the lapsed-enthusiast customer, not the once-a-month buyer: “Starbucks probably has seen some attrition, and the unredeemed balance on the cards is a good indication of that.” The free refills are a good way to renew interest in key markets. To get transaction levels back up, any dialogue should focus on frequency-based offers.

But why did these buyers lapse in the first place? Some may have reconsidered a $5 coffee-purchase habit in light of the economic downturn. But Ferguson wonders if the brand has taken some of its core customers for granted.

“Starbucks built its whole empire on the experience in the store — the aroma, the seats, the fact that customers can relax, read a newspaper or work on a laptop,” he says. “There may have been brand dilution between the airport kiosks, its availability in bookstores, and the coffee beans appearing on shelves. It may have become just another coffee brand.”

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