Middle-Market Woes Inspire Starbucks's Bet on Luxury Coffee
06 December 2016 - 7:11AM
Dow Jones News
By Julie Jargon
About 25 years ago, Starbucks Corp. decided to become a public
company on the bold idea that customers across the country would
pay more than $1 for a cup of coffee.
Now, Starbucks is betting people will pay as much as $1 an
ounce.
Howard Schultz, who built Starbucks into a global brand with
more than 25,000 shops, said last week that he was planning to step
down as chief executive to work on a project within Starbucks to
build high-end coffee shops charging as much as $12 for 12 ounces
of coffee.
Starbucks plans to open 20 to 30 giant Starbucks Reserve
Roastery and Tasting Room outlets -- where rare, exotic coffee
grown in small batches will be roasted on site and prepared using a
variety of brewing methods -- as well as up to 1,000 smaller stores
under the Starbucks Reserve brand.
"We've seen so-called 'indies' selling cups of coffee for a lot
more than we're charging and creating an interesting buzz," Mr.
Schultz said last week in an interview.
Some experts say the company's plan to create a subbrand of
luxury coffee shops aimed at the affluent is a good strategic move,
given consumers' growing interest in better-quality coffee. They
also point to a shrinking middle class with less discretionary
spending power, which threatens demand for traditional Starbucks
coffee.
In addition to coffee, the new stores will offer craft
cocktails, informed by a new generation of high-end "mixology" bars
and trendy watering holes that strive for a speakeasy atmosphere.
Mr. Schultz said Starbucks executives studied such bars
clandestinely.
Starbucks has missed sales targets in its largest market -- the
U.S. -- for four straight quarters, which it attributes to economic
uncertainty, and has promised to return to its historic same-store
sales growth rate of 5%.
Mr. Schultz said the company's plans for going upmarket took
root three years ago when he noticed that consumers were
significantly curtailing their visits to malls in favor of online
shopping. He said Starbucks, which relies heavily on traffic from
mall shoppers, needed to find a way to give people a luxurious
experience worth leaving their homes.
Erich Joachimsthaler, chief executive of brand-strategy
consulting firm Vivaldi, likens what is happening in the coffee
business to what has happened in the beer industry, which has been
hurt by the rise of craft breweries. "They never protected
themselves on the high end," he said of beer companies. "I think
Starbucks sees that the middle is slowing down."
It isn't just wealthy consumers who might be willing to pay more
for coffee marketed as a more gourmet product.
Millennials are a big force in the better-coffee movement, as
they seek out quality products with a story behind them. Between
2008 and 2016, the percentage of 18- to 24-year-olds who said they
had bought a gourmet coffee beverage the day before rose to 36%
from 13%, while the share of 25- to 39-year-olds who did so rose to
41% from 19%, according to the National Coffee Association.
Consumers also have shown a willingness to pay lot more for such
products. The average retail price that certain specialty roasters
charge for lots of coffee that included growers' names was an
average of $9.95 higher per pound than those that didn't, according
to research group Transparent Trade Coffee.
Andrew Hetzel, a consultant on coffee policy and international
trade, said there is growing demand world-wide for higher-quality
coffee. Citing data from various coffee trade groups, he said
global consumption of specialty coffee is growing at 7% to 8%
annually, compared with 1% to 2% for all coffee.
Starbucks created the high-end coffee category but the landscape
has changed drastically in recent years. Starbucks now finds itself
in the middle of the market, with independent coffee shops and
larger companies such as Blue Bottle Coffee Co. serving an ever
more discerning customer while McDonald's Corp., Dunkin' Brands
Group Inc.'s Dunkin' Donuts chain and convenience stores are
offering coffee and espresso drinks on the cheap.
"In coffee you have to pick a path," said Credit Suisse analyst
Jason West.
Still, the only proof of the new Starbucks concept is the
Seattle Roastery, a store it opened two years ago. Sales there are
up 24% from a year ago and the average check is four times that of
a traditional Starbucks.
Brooke de Boutray, managing director and portfolio manager at
Seattle investment firm Zevenbergen Capital, said the questions
being asked now -- whether the Roastery model can be replicated and
whether people will really shell out $6 to $12 for coffee -- are
the same ones people asked when Starbucks went public in 1992 and
its coffees ranged in price from 65 cents for drip coffee to $2.85
for espresso beverages. "We talked to our clients in pension funds
and they said 'Who in their right mind would spend $2 on a cup of
coffee?' " she said.
Write to Julie Jargon at julie.jargon@wsj.com
(END) Dow Jones Newswires
December 05, 2016 14:56 ET (19:56 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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