Questions for Starbucks’ chief bean counter

November 21, 2013, 12:42 PM UTC
Troy Alstead: Bringing the Starbucks "experience" to groceries and more
Photo: JOHN KEATLEY

Starbucks stock has been highly caffeinated since the recession, up almost 10-fold from its 2008 low. The explanation includes many factors — products, operations, strategy, the return of Howard Schultz as CEO — and CFO Troy Alstead, 50, has been involved in almost all of them. The company had slightly more than 100 stores when he joined in 1992; today it has almost 20,000. Along the way the Seattle native has held operating jobs around the world; the company named him chief financial officer in 2008. He talked recently with Geoff Colvin about getting value from customer data, using social media skillfully, the magic of the customer experience, and much else. Edited excerpts:

About 70 million people go to Starbucks every week. What are they telling you now about the state of the U.S. consumer?

If all I could see over the past year was that fantastic customer coming into Starbucks (SBUX), I don’t think I’d recognize the underlying choppiness that still is out there in the macro environment.

We’ve had a fantastic year, and it’s not just the level of the results, but the consistency throughout the year. Yet we hear from other retailers and other consumer companies that while the consumer is a bit better than a year or two ago, it’s up and down, and we see that compounded by the fiscal crisis. The consumer is fragile. They are geared toward brands they trust, where they really believe the value is there and it’s genuine. Value means something different to people than it did a long time ago, and brands that are providing what they need and want in ways that make them feel respected and valued — that’s what’s winning the day.

You’re saying that in a choppy environment, people don’t want to eliminate the Starbucks part of their day?

That’s very true. There is something special and magical. I know those sound like odd words from a CFO, but there is a magical experience that happens in a Starbucks store. It is a connection. Our baristas and partners in our stores provide experiences. The products we offer are the platform, but the real magic and the reason we have the brand strength we have, the loyalty and consistency of sales and profitability quarter in and quarter out, is because of the fantastic experiences provided in the store. And, yes, I do think that matters to customers, even during difficult times.

Last year Starbucks invested $25 million in Square, the mobile-payments company founded by Twitter’s Jack Dorsey, and then started letting people pay with the Square smartphone app. What’s the strategy behind that move?

Before Square — and this is an important part of this — we also had the Starbucks app, which people can use as a tool to engage with Starbucks, so they can see their rewards and be part of the loyalty program, and they can load value onto that app or onto the physical Starbucks card and use that as the way they pay in stores. And increasingly people are doing that.

Square adds one more way for people to pay with Starbucks. What this speaks to broadly is embracing innovative ways for customers to engage with us in their lives and in our stores. Over time it will perhaps be extended to how they order and how the whole experience might happen through the drive-through or in the store.

All of that is about our ability to be a leader in this space. We love Square because they also are very disruptive and leading in their own space. The investment in the company and, more important, the commercial relationship we have, is an important part of our overall technology leadership.

You have access to a huge amount of customer data. How are you getting value from it?

You’re right, we have massive amounts of customer data, and we recognize its value in a multitude of ways. It might help us shape seasonal offerings by understanding what people buy and when, or day-part strategies. We understand and evaluate that data by country and by community.

Perhaps over time it will help us shape our strategies around site selection. We are very early in how we take that data and turn it into value-added business strategies. We are respectful of the trust our customers have in us, and we will never, ever push our use of that data so far as to violate that trust.

The data we collect about our customers is also helping us engage with them differently — to shape messages that are relevant to you in New York that might be different from a message to me in Seattle, for example, about La Boulange food coming into the marketplace. We have a chance by virtue of people registering their Starbucks cards and being part of our loyalty program to target appropriate messages focused on providing value to them.

Starbucks has a reputation for using social media skillfully. What have you learned about getting value from it?

We’ve learned to focus not on selling something to customers through social media, but on how to engage our customers. The Starbucks store was always about the power of the connection between the barista and customers. Social media allows a more frequent and additional way to connect to customers — and for them to connect with one another.

Our whole approach has been about how to use it to give our customers a platform to talk about their favorite products or what’s going on at Starbucks, not just have messages come from Starbucks to them. We can listen to that dialogue and understand how they feel about various things. It’s been like an avalanche, our customers engaging with one another around all things about Starbucks without us being in the middle of it.

The stock is up 60% in the past year, which means investors are counting on a lot of growth in Starbucks’ future. Where will it come from?

In the past two years, and compounded by the difficult days of the Great Recession of 2008 and 2009, we needed to step back and look at the business. It gave us the opportunity — I’d say the imperative — to relook at our growth strategy.

We came to recognize that the Starbucks store is a key creator of the brand, and it will always be the core of what we do. Yet we also recognized that increasingly the opportunity for growth is much bigger than that. We are fortunate to offer a set of products — coffee and tea and the core things that fit around them — that people consume in all parts of their lives: at home in the morning, at a Starbucks store on the way to work, then in their office two or three times during the day, on the way home, perhaps if they’re taking a trip. Our opportunity is to pursue that consumption. So we’ve built significant capabilities to execute a much more diversified, broad growth strategy. It’s focused heavily on continuing growth in stores, but also encapsulating within our products what people first experienced in a Starbucks store and making that available to them in food service, in the grocery store, wherever.

You’ve made some high-profile acquisitions, notably Teavana. Since it doesn’t use the Starbucks brand, what’s your edge in making it more valuable?

Before our acquisition, Teavana built a very strong team of people, deep capabilities in blending and sourcing teas, and a fantastic portfolio of 300 or so stores. We can bring those great assets together with the capabilities Starbucks has around how to engage the customer and build a brand, store development, site selection, store design — things Starbucks is remarkable at, better than most, if not everybody else out there.

We can pursue growth through a reimagined Teavana store, like the new one we just opened in New York City, and also bring the elevated Teavana tea experience into the Starbucks store and use that platform to help build that brand.

Over the past five years, Starbucks has done a spectacular job of increasing earnings without using more capital. How have you been able to do that?

We’ve been heavily focused on exactly that. We’ve broadened our growth strategy so that our growth is increasingly focused outside the store, which tends to be a less capital-intensive way to grow our business. We’ve focused on the disciplines of return on investment at the store level and on ensuring that, where we’re making investments, they’re strategic investments that will drive the business forward. We’re approaching the place where our return on invested capital is the best in our industry, and we’ve got our sights set on continued growth. We know our job is to take the precious capital of our shareholders and give them increasing returns, and we have confidence in our ability to keep doing that.

The Leadership Series: This is the latest interview with a top executive by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/leadership — plus find Colvin interviews with Charles Schwab, the team of Jeff Immelt (GE) and A.G. Lafley (P&G), Pimco’s Mohamed El-Erian, Novartis CEO Joe Jimenez, Whole Foods co-CEO Walter Robb, and many more.

This story is from the December 09, 2013 issue of Fortune.