Starbucks is betting that
consumers and investors alike will have an appetite for its products beyond coffee. With the recent acquisitions of Teavana, Evolution Fresh and La Boulange Café and Bakery, the Seattle-based coffee giant is aiming to expand its offerings and capture the midday and afternoon traffic that has been elusive so far.
It’s not the first time the coffee chain has tried the risky concept.“The first time they tried to expand into food, there were some missteps because of the way they incorporated food into the logistics of the restaurant,” says Darren Tristano, executive vice president of Technomic, Inc. With last year’s
purchase of La Boulange for $100 million, what Starbucks has done is “found a way to incorporate sandwiches and baked goods into that concept to create a broader meal offering.”
On the company’s most recent conference call in July, chairman and CEO Howard Schultz told analysts that was on track to be in 2,500 of the company’s U.S. coffee shops by September, including stores in
New York,
Chicago, Boston and Los Angeles. “We’re seeing both an enthusiastic customer response and substantial lift in incrementally,” he said at the time. On the conference call, Schultz credited Starbucks’ 9% sales growth in the U.S. to “continued beverage innovation and increased food attachment resulting from the success of our transformed and reinvented food program.”
Analysts say adding La Boulange positions Starbucks to compete better with Panera Bread, to an extent, and rival coffee purveyor Dunkin’ Donuts.
And the changes go beyond croissants. In addition to baked goods, Starbucks is hoping to do for tea and juice what it did for coffee, turning them from commodities into high-end, high-margin products. The first Teavana store is scheduled to open this month in New York City, and the company has visions for a standalone chain of Evolution Fresh juice bars.
“You’ll see juice bars with customization, you’ll see tea bars from Teavana,” says R.J. Hottovy, senior restaurant analyst at Morningstar. “Starbucks is a very good retail operator in finding locations and getting a lot of customer transactions at high velocity. I think you can replicate a lot of those things with tea and juice as well.”
Tristano says owning these companies rather than relying on outside suppliers for non-coffee menu items has two advantages: It lets Starbucks better control the quality and make changes, and it will shave a couple of percentage points off the company’s food costs. “Now, the downside is if they start to get into managing their own food supply. It does create more of a distraction from what they do best, which is serving a great cup of coffee.”
Analysts agree that demand is there, but say executing on new products correctly will be a challenge. The coffee shops don’t have full restaurant-style kitchens; many didn’t even have freezers, which had to be added to accommodate the new baked goods, according to the
New York Times. (The new baked goods arrive at Starbucks stores frozen.) Consultant and former Starbucks executive John Moore told the
Times, “The stores are set up as places to brew and serve coffee, and they don’t have a back of the house suitable for the prep work and other work that goes into serving high-end pastries like these well.”
But analysts see another benefit to this burgeoning growth, anticipating that an expanded product line-up will let Starbucks sell more items in more places. ”I also like the idea that they have new products to take to grocery stores and warehouse clubs,” Hottovy says. Starbucks has had success bringing its Tazo tea brand, Starbucks bagged coffee and K-cups into stores, he points out.
With baked goods and juices added to the mix, a lot more retail shelf real estate is up for grabs, which is likely to boost Starbucks’ profit margin. “This is the next evolution,” he says.
Starbucks CEO Calls
For End to Government Shutdown!
The outspoken CEO of Starbucks, Howard Schultz, penned an open letter Monday calling for an end to the federal government shutdown and partisan discord in Washington, asking fellow business leaders to help “address the crisis of confidence that is needlessly being set in motion.”
“Like so many of you, I find myself utterly disappointed by the level of irresponsibility and dysfunction we are witness to with our elected political leadership,” Schultz
wrote on the company website as the government shutdown entered its second week.
“I’d like to encourage you to consider what your companies and organizations can do to help shift the norms of our country back toward civility, compromise and problem-solving,” he said.
This isn’t the first instance in which Schultz has waded into politically charged waters. The CEO of the world’s largest coffee chain called in 2011 for lawmakers to reach a deal during a rancorous debt ceiling debate. Last month, after a spate of mass shootings, Schultz asked customers to voluntarily keep guns out of Starbucks stores.
The $7 Cup of Starbucks: A Logical Extension of the Coffee Chain’s Long-Term Strategy:-
This week Starbucks began selling a cup of coffee for $7. This may seem ridiculous, but it’s the logical next step of the chain’s long-term marketing strategy: To convince consumers that a product that used to sell for less than a buck is in fact worth much more.
In almost 50 locations throughout the Northwest, coffee drinkers can find a curious item next to peppermint mochas and gingerbread lattes: Costa Rica Finca Palmilera, a hard-to-grow bean also called “Geisha” that sells for $7 for a “grande” and $40 for a half-pound bag.
In a way, the release of Starbucks’ highest-end (and most expensive) coffee to-date is similar to what
the fast food industry has been doing – offering premium items in order to compete with so-called “fast-casual” restaurants like Panera Bread and premium burger joints like Five Guys.
Starbucks is starting to see smaller, high-end roasters like Stumptown Coffee Roasters out of Portland, Ore., Blue Bottle Bottle Coffee Company in Oakland, Calif., and Intelligentsia from Chicago start to grow in size and popularity. The funny thing is that Starbucks’ success helped spawn this new generation of roasters by showing that consumers are willing to upgrade their $1 cup of joe to $2, $3, even $4.
Now, high-end roasters are expanding in cities throughout the Northwest and along the East Coast. And eventually, they could begin chipping away at Starbucks’ dominance.
Starbucks’ new offering is designed to capture that super-premium customer who may be looking elsewhere and has money to spend, says Edward Jones analyst Jack Russo, who studies the industry. “It’s clearly not going to be a big part of their overall business,” he says. “But if you look at a lot of companies out there — restaurants for example — they’ve moved people up in their menu, offering more premium items. Beauty companies have been doing the same thing, offering premium-type products. What Starbucks is doing isn’t different from anyone else.”
Russo says that with the economy showing signs of recovery, the company may have seen this as a good time to unveil a coffee that you’d think most consumers would sneer at. At first glance, $7 seems ridiculous. But that’s the thing about Starbucks’ entire strategy: They’ve successfully convinced Americans that a few bucks more for a cup of coffee isn’t that big of a deal.
The whole thing is probably best summed up by Jimmy Kimmel, host of ABC’s “Jimmy Kimmel Live.” In addition to
rigging a Starbucks taste test showing unassuming participants trying to determine the difference between high-end and regular joe — both cups of coffee were the same, yet most thought one was the $7 cup of Starbucks — Kimmel said this: “Although while it’s ridiculous to spend $7 on a cup of coffee, it’s not that much more ridiculous than spending $4 on a cup of coffee.”
Starbucks: A Model of Success!!!
A new book offers a glimpse behind Starbucks’ massive success. Pour yourself a cup of inspired leadership, and maybe you can caffeinate your business.
If you’re an entrepreneur in need of an energy jolt, odds are that you head straight to Starbucks. And if you’re looking for a jolt of business inspiration, you’d be hard pressed to beat Starbucks as a model of success. The company earned $3.6 billion in revenues during its fiscal second quarter this year—that’s a lot of beans.
However, it takes more than capitalizing on a national love affair with caffeine to build a successful empire. In his book, “Leading the Starbucks Way,” author Joseph A. Michelli looks at different strategies Starbucks uses to create its success, and he shows how businesses of any size can adapt the those tactics to fit their business. Michelli recently shared some of those findings in an article on
Small Business Computing.
Personal Passion
Michelli’s first piece of advice is to “focus on fueling passion.” You can’t build customer loyalty without it. Of course, true passion isn’t something you can fake; customers will pick up on that immediately. You—and your employees—really need to love your products and services in order to help customers fall in love with them.
The company also excels at creating great rituals, which furthers customer loyalty and mindshare. Reexamine your business in this light: what rituals can you incorporate to recapture the passion and excitement you felt when you first started your business?
An Emotional Connection
Starbucks offers more than a high-priced cuppa joe. It provides an emotional experience: a retreat from a busy day, a place to meet and share with friends, a comfortable, daily destination. It’s welcoming and homey. That uplifting experience forms strong emotional connections, which in turn drives repeat business.
Ultimately, your customers want to feel that you care about them. Find and tap into the emotional value proposition of your business.
Stand for Something
Often companies avoid taking any kind of stand on issues of the day for fear of losing customers. But by doing that, says Michelli, they “create very little passion.” Case in point, through the strong leadership of its CEO, Howard Schultz—who was a driving force for the Create Jobs for USA program—Starbuck’s is known as a pro-jobs company.
Neither did the outspoken Shultz mince words with a stock holder who expressed dismay over the company’s support of marriage equality.
“We employ over 200,000 people in this company, and we want to embrace diversity. Of all kinds,” said Schultz. “If you feel, respectfully, that you can get a higher return than the 38 percent you got last year, it’s a free country. You can sell your shares in Starbucks and buy shares in another company. Thank you very much.”
It’s not about jumping on the hottest issue of the day or being controversial merely for the sake of controversy. It’s about incorporating your principles into your business, communicating authentically and ensuring that your actions mirror your principles.
One of the reasons customers continue to patronize Starbucks is that they feel as though they belong somewhere. How can you give your customers that sense of belonging?
As read in TIME's Business & Money!
