This Is Starbucks' Plan to Get Even More of Your Coffee Dollars

By Markets Fool.com

More than a decade ago, Starbucks'(NASDAQ: SBUX) ubiquity was often the butt of jokes.The Onion wrote that a Starbucks had opened in the bathroom of an existing Starbucks, and comedian Lewis Black said he had seen the end of the world -- a Starbucks across the street from another Starbucks.

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Though it seems that the leading coffee chain long ago reached cultural saturation, it keeps finding new ways to grow. The company's taking over China, where CEO Howard Schultz said he expects there to one day be more stores than in the U.S. It's grown profits through its channel development segment, which includes consumer products such as K-cups and bagged coffee, and it continues to find new ways to expand its footprint even in its home market. Its partnerships with Target(NYSE: TGT), for example, now has 1,300 Starbucks cafes inside its stores. The company is also licensing its brand in places like college campuses and expanding to new neighborhoods that it might have avoided earlier in its history.

The menu at a Starbucks Reserve bar in New York. Image source: Author photo.

Now Starbucks is undertaking a novel strategy to attract even more customers to its cafes. It's begun fragmenting its brand, offering Express stores for on-the-go customers and higher-end Reserve cafes that have a luxurious ambiance and an additional menu. It's what Schultz calls the premiumization of the Starbucks experience. The Reserve cafes are an extension of the Starbucks Reserve Roastery, the first of which opened two years ago in Seattle.

Starbucks goes upscale

Discussing the Reserve brand on the recent earnings call, Schultz noted that the response to the Seattle Roastery has been especially strong as comparable sales jumped 24% last year, and the average transaction has been more than four times that of a typical Starbucks cafe. The roastery has also served as a lab for developing new drinks such as Nitro, a cold-brewed coffee made with nitrogen, which gives it an "ultra-creamy texture," and Starbucks' own version of affogato, the Italian combination of espresso and gelato.

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For Starbucks investors, however, the biggest impact of the Roasteries is likely to be their support of a new chain of Reserve cafes. Schultz said he expected those stores to deliver double the profits of a traditional Starbucks store, representing a "significant new growth opportunity for the company domestically and around the world."

The company hopes to open up 1,000 or more Reserve stores and add Reserve bars to 20% or more of existing Starbucks locations. While Starbucks won't open any Reserve cafes until next spring, it has already added Reserve bars to a handful of locations, most of which are in New York.

A selection of Reserve coffees at the Reserve bar. Image source: Author photo.

On a recent visit, I saw a Starbucks that seemed to borrow from a classy hotel bar rather than the typical cafe. Leather banquettes and chairs offered customers cozy places to sit. Baristas came around to tables offering water and other beverages. Walls were decorated in a gold palette, adding to the upscale theme, and at the Reserve bar customers could order drinks including a smoked butterscotch latte and a selection of Nitro cold brew beverages.

Never standing still

Part of the reason why Starbucks has been able to overcome the old stigma of oversaturation is its constant innovation. The company has leveraged digital payments like no other retailer. 21% of U.S. sales are made through the Starbucks app,and 6% of domestic transactions are through Mobile Order & Pay, which allows customer to come in and pick up their orders seamlessly.

Starbucks has boosted its food offerings with the acquisition of La Boulange, and recently teamed with high-end Italian bakery Princi to supply its Reserve Roasteries and cafes. The company has also extended its platform through Starbucks Evenings, which offer wine, beer, and tapas to hundreds of stores. Similarly, it has extended its consumer packaged goods business with products like K-cups, Via instant coffee, and the Verismo single-cup brewing system.

The Reserve cafes should be a powerful addition to that innovation pipeline, as they will allow the company to continue penetrating mature markets and expanding its profit margin in the process.

At the end of 2014, Starbucks outlined a goal of growing revenue from $16 billion in 2014 to $30 billion in 2019. Two years in, the company seems well on its way to that goal after hitting $21.3 billion in fiscal 2016. The Reserve brand is a key component of that growth along with mobile commerce, store format diversification, and global and channel expansion.

While much of the domestic restaurant industry suffers under a "restaurant recession," innovations like the Reserve brand have made Starbucks consistently one of the top performers in the industry. Even as the company has expanded to more than 25,000 stores worldwide, it should continue finding new ways to grow.

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Jeremy Bowman owns shares of Starbucks. 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.