How Customization Has Been Key to Years of Growth at Starbucks Corporation

By Markets

When you order a cup of coffee from Starbucks (NASDAQ: SBUX), there are literally thousands of forms your final beverage can take. And while Starbucks is just one company actively participating in the customization super trend, it often finds ways to up the ante and deliver impressive results in the process.

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In the accompanying video segment from the Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Asit Sharma break down just one instance of how the leading coffee chain has moved to customize offerings for coffee drinkers -- and its relevance to Starbucks' long-term growth rate.

A full transcript follows the video.

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This podcast was recorded on Oct. 4, 2016.

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Vincent Shen: We'regoing to go to the world of coffee. That's, of course, one of the biggest names there now,if not the biggest,Starbucks.Betweenwhat I feel is a pretty sizable menu, when you walk into a storeand you look at it, tons of options. Then, you have the different optionsfor what kind of milk you want. There's flavor shots, and they also offerdifferent temperature levels. I don't think I'm missinganything else there. That has to be hundreds, if not thousands, ofdifferent options for your final drinkand what it tastes likewhen you get it at Starbucks. How does this play into thecustomization trendthat we've been discussing?

Asit Sharma:Starbucks as a retailorganization is inherently aboutcustomization. This is the novelty of the anti-McDonald's. Before the show,Vince and I were talking about, 15 or 20 years ago, the lack of options,and how ubiquitous thatMcDonald's cup of coffee was. If youthink about extremes on the sides of the pendulum,this is the opposite extreme of the customizationpendulum. There are literally so many customization options,Starbucks could choose to rest on those laurels,but it doesn't. It's always trying to push customization one step further. There are two paths to customizationthat we're going to talk about today. One is pretty expensive per store, and the other is almost costless. We'll talk about the costless option forStarbucks at the end of the episode, and let you, the listener,try to figure out what we're talking about. What customizationoption does Starbucks offer that costs them almost nothing?

To get back to this first path,several of you who are coffee snobsorconnoisseurs like myselfprobably remember when Starbucksacquired a machine called a Clover. This was back in 2008. I had tried this coffee out inToronto several years ago. It's a machine that used to retail at $11,000. If youthink of a coffee machine that's a little bit bigger than the size of a laser printer, this is quite an expensivepiece of equipment.But what this machine does is,it allows the baristato work with the customer for brew time,down to the second,and how much exposure the water has to the actual coffee grounds. You can dial in aprecise temperature. This is the Holy Grail,for many people, of customization for coffee. It's a vacuum type coffee process,and it's extremely delicious when it's done right. But I will say, it takes some experimentation to get this right. Each cup runs you $3 to $4 for that small size, the tall size, at Starbucks.

Shen:I'm impressed. I remember hearing a bit aboutthe news, in terms of how they were adopting this Clover system, how costly it is.I'm not as big of a coffee drinker,so I will defer to your expertiseand your preferences here. But I understand in this world, whether it's with sneaker heads in Nike shoes, or coffee, or so many other things out there, there is someaficionado out there who likes it down to the most minute detail. That's playing out with the trend that we're seeing with some of these companies.

Sharma:Exactly.Starbucks is using precisely the same strategies that Nike uses. They'reeducating the customer, they're giving the customera sense of product design. In doing that, they're tryingto increase that lifetime value. Now, fellow coffee snobs,I know that in your cities,you're going to local coffee shops and hanging outdrinking great coffee. But how many times have you been in transit and stopped at a Starbucks? Forsome of us, we might as well go for the Clover optionif they have it, because it's closerto what we're used to having. AndStarbucks is well aware of this. They know that not everyoneis going to be a Starbucks loyal customerfor life. Butas they moved us all up this chain ofpremiumization,that is customers who, years ago, were drinking thatMcDonald's cup, and now come in and askfor all sorts of variation on their coffees,as you were talking about, Vince, that increases their profit.

And I would like to take just a second tosay something about both Nike and Starbucks, which isimportant to know if you're an investor. Each of these companies, fora large globalconglomerate, has anincredible growth rate. I think Starbuckshas been growing at a compoundedannual revenue growth rateof about 11% over the lastseveral years. Nike'smost recent quarter, they grew total revenues 8%. This isvery difficult to do when you're in thebillions and billions of dollars of revenue.

How does customizationplay into this? We talked today aboutthat incremental profit thatboth companies make when you start tocustomize your order. That's the first go-around.Customization, initially, is incremental. But as time goes on,it becomes part of the company'srecurring revenue base. So, when Vincefinally gets won over to highbrow coffeedrinking, and comes in every day andorders that same premium cup of coffee, they've turned thatfirst time incremental experienceinto their revenue base. That's how these companiesmanage to grow revenueseven as they scale up, again,into the billions of dollars.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.