Starbucks Plans a New Kind of Store

By Markets Fool.com

Starbucks (NASDAQ: SBUX) wants to "elevate" the coffee experience for more of its customers.

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CEO Howard Schultz said during the company's Q4 earnings call last week that his company has changed how the world consumes coffee. That may not be entirely true in the parts of Europe that already had a tradition of cafes and espresso-based drinks, but it's most certainly true in the United States and the rest of world.

Before Schultz's company made lattes, cappuccinos, and macchiatos commonplace, those drinks were mostly for after dinner at Italian restaurants or sold at funky local coffee shops in the U.S. In much of the rest of the world -- China most notably -- Starbucks has in many ways created the coffee-drinking culture tailored to the needs of the country.

Starbucks, Schultz noted during the earnings call, has been "delivering an increasingly elevated Starbucks Experience to over 85 million customers through our 25,000 stores in 75 countries every week." And the chain plans to further elevate that experience by bringing a unique coffee experience to more of the world.

Starbucks will soon be adding more Roastery locations like the original in Seattle. Image source: Starbucks.

What is Starbucks doing?

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The coffee chain currently operates a single Roastery & Tasting Room located in its home market of Seattle. The location serves as both a functional facility that produces small batches of roasted coffee beans for sale around the world, and as a place for visitors to have a higher-end coffee experience. The 15,000-square-foot facility has allowed the chain to double the number of Reserve offerings it sells in stores designated to carry the limited-edition beans for sale.

"Roasteries define coffee premiumization and are the epitome of the Starbucks coffee authority and retail experience," said Schultz during the earnings call, which was transcribed by Seeking Alpha (registration required).

That first Roastery has been an overwhelming success, with Schultz noting that it saw full-year comparable sales grow by 24%. He attributed that to average checks being four times what they are in a typical Starbucks.

The company plans to expand the Roastery program, adding locations in Shanghai, New York, and Tokyo. Those locations are slated to open by 2018 with a European Roastery planned to open in 2019 in an as-yet-not-selected city.

"Our decision to aggressively but thoughtfully and strategically expand our portfolio of Roasteries is supported by the one-of-a-kind, ultra-premium Reserve experience our Roasteries deliver to our customers," Schultz said. "In addition to elevating the Starbucks brand and customer experience, our Seattle Roastery has also become a working laboratory for breakthrough innovation that is driving new product introductions and contributing to results across the entire Starbucks ecosystem."

Both premium and practical

While the original Roastery has been a sales success, it has also led to new products that have been rolled out to other stores. The CEO detailed some of those during the call:

Nitro, for example, an innovative, new cold coffee beverage infused with nitrogen to create an ultra-creamy texture that has been enthusiastically embraced by our customers and is now being rolled out in coffee-forward markets across the country, was developed and tested in the Seattle Roastery. So too was Starbucks Affogato, our expression of a classic artisanal ice cream dessert infused with espresso, as well as handcrafted, proprietary Teavana iced teas.

Schultz also advised people to "stay tuned," explaining that the Roastery has produced "several other innovative new coffee-infused mixology beverages that are already showing great promise in test stores." Those existing and promised innovations, along with the stand-alone performance of the first Roastery make selective expansion a smart move.

As long as they are kept rare, Roasteries serve as a destination -- an event for consumers. These are not your local coffee shop, they are shrines to coffee where customers get a peek behind the curtain and a chance to drink some unique beverages. Clearly people are willing to pay more for that experience, so Starbucks gets to add production, research, and development facilities that are a profit, rather than a cost center.

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Daniel Kline has no position in any stocks mentioned. He wants to visit a Roastery. The Motley Fool owns shares of and recommends 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.