Here's Why Starbucks Is Growing Its Premium Roastery Business
Starbucks (NASDAQ: SBUX) CEO Howard Schultz has already changed the American coffee-drinking experience. His company has made its variant of the European cafe ubiquitous, with over 13,000 locations in the United States and 25,000 across the globe. Starbucks' influence has gone beyond its own stores as its success led to rivals including McDonald's and Dunkin' Brands' Dunkin Donuts adding espresso-based drinks.
Before Starbucks, lattes, cappuccinos, and other specialty drinks were reserved for French and Italian restaurants or a small number of non-chain coffeehouses. Now there are vending machines at rest stops that sell those drinks. It's a changed world and the outgoing CEO plans to take on a new role in the company and once again change the American (and the world's) coffee-drinking experience.
That's an idea that seemed like hubris, vanity, or at best a one-off project when the company first introduced its Premium Roastery experience in Seattle. Now, however, some numbers are in and it's easy to see why the chain wants more premium customers.
Starbucks has big plans for its Roastery and Reserve brands. Image source: Starbucks.
Premium is working
Starbucks debuted its first Reserve Roastery and Tasting Room in late 2014. Sales at the Starbucks Roastery in Seattle grew by 24% in 2016 over the previous year and another 18% in Q1 of 2017. Schultz attributed that to an average ticket that comes in at four times what a typical customer spends in a regular store.
"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, and the accelerating outperformance against plan we are experiencing in our Seattle Roastery," Schultz said during the company's Q4 earning call, which was transcribed by Seeking Alpha (registration required).
The CEO pointed out that the Roastery has not only been "elevating the Starbucks brand and customer experience," it has "become a working laboratory for breakthrough innovation that is driving new product introductions and contributing to results across the entire Starbucks ecosystem." These include Nitro Cold Brew (an iced coffee infused with nitrogen), Starbucks Affogato, an ice cream dessert infused with espresso, as well "several other innovative new coffee-infused mixology beverages that are already showing great promise in test stores."
More premium is coming
Starbucks plans to open Roasteries in Shanghai this year, and in New York City and Tokyo in 2018. Another location is planned in Europe in 2019 in a city to be announced early in 2017.
The company will also be opening up to 1,000 Reserve stores around the world. These locations will sell the small-lot premium coffees produced by the Roasteries along with higher-end food. Schultz also spelled out plans to take the Roastery/Reserve experience into some of its regular stores.
"We are extending elements of the high-end Roastery experience to include Reserve espresso bars in existing and new Starbucks stores as part of our plan to further elevate the overall Starbucks experience," he said. "Customers' response to this initiative has been both very positive and very encouraging, as customers are trading up to premium espresso beverages."
This is a risk
The Roastery has proven itself as a stand-alone experience and as an invention lab turning out new products. It's reasonable to think that a few more Roasteries, spread around the world, will work in the same way.
The Reserve store and adding Reserve bars into existing stores remains a risk. It's easy to see why customers would spend four times as much on coffee in a special setting like the Seattle Roastery. It's hard to know if they will be as willing to spend more than a traditional Starbucks charges at a Reserve store or Reserve bar.
Schultz clearly believes that people will pay for a premium coffee experience on a regular basis. If that's true, then he will have once again changed how Americans and the world drink coffee while launching a new brand, and increasing sales at existing locations that get the high-end bar.
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