Next Howard Schultz wants to take Starbucks upmarket

Craig Giammona
Dec 4 2016
AFR
Howard Schultz, the billionaire who built a caffeine empire by bringing Italian coffee culture to the American mainstream, is ready for his next project: Starbucks 2.0.
Schultz, who will become executive chairman when he steps down as chief executive at Starbucks next year, says he’ll focus on his three-pronged bet that the world’s largest coffee chain needs to become more upscale. The program includes a line of premium coffee called Reserve, as many as 1000 cafes that will showcase the new brand and flagship stores as large as 1860 square metres called Roasteries.
The 63-year-old executive will soon be free from the daily grind of running a $US21 billion ($28 billion) business, allowing him to devote his attention to a initiative that’s been slow to gain momentum over the past two years.
“When you’re making an investment and taking a risk like this, there’s no better person to spearhead it than Howard,” says Darren Tristano, president of Technomic, which tracks the restaurant industry. “He has a very high chance of succeeding in this type of role and helping the brand evolve.”
With more and more shopping being done online, Schultz has said he wants to emulate the brick-and-mortar retail experiences offered by innovators such as Nike and Apple. Starbucks opened the first Roastery two years ago, a 1400 square metre emporium in its hometown of Seattle, and is planning others in New York, Shanghai and Tokyo. The menu includes small-lot coffee from around the world that can sell for more than $US20 a pound.
High-end flagships
The cavernous stores, where customers can watch coffee being roasted on site, are envisioned as high-end flagships for the company, but rollout has been slowed by high construction costs and trouble finding suitable real estate.
Analysts are sceptical a handful of Roasteries can move the needle for the huge company, which operates more than 16,000 cafes worldwide. Instead, they say financial growth is expected to come from the Reserve locations.
The new cafes are planned to be similar to the Roasteries but without the actual bean-cooking operation. It’s part of a move by Schultz to add different store concepts around the world and reimagine the 45-year-old chain.
“He’s always had grand visions for where Starbucks can go,” says Jennifer Bartashus, an analyst at Bloomberg Intelligence. “The ability for him to separate himself from the day-to-day running of the company and focus on big ideas is well within his wheelhouse.”
Starbucks said Schultz wasn’t available to be interviewed for this article.
To be sure, there are risks in going more upscale. Some customers already balk at paying more than $5 for a coffee and, with rising health-care costs and stagnant wage growth causing anxiety among US consumers, the effort may run into headwinds, particularly if there’s an economic downturn, Bartashus says.
Difficult proposition
Starbucks needs the Reserve cafes to work because there’s more competition from local and regional chains that are pulling in younger customers. To secure the next generation of consumers, Starbucks has to convince millennials it’s a cool place for coffee, a difficult proposition after four decades of growing into a mainstream brand like McDonald’s.
Starbucks is also pushing into the Chinese market, with plans to open hundreds of stores. Growing domestically won’t be easy given the rise of competitors such as Blue Bottle, Stumptown and Intelligentsia, independent chains that cater to a premium audience.
It’s those chains that are pressuring Starbucks, in addition to mainstream competitors such as Dunkin’ Donuts or Coffee & Bagels, a new chain being developed by JAB Holding. The European investment company, backed by Austria’s billionaire Reimann family, has used acquisitions, including Stumptown and Krispy Kreme, to build its own coffee empire.
When Schultz acquired the then six-unit chain in the late 1980s, it wasn’t typical for Americans to spend hours in a cafe sipping expensive coffee. That changed, and with Starbucks established as a daily ritual for millions of Americans, Schultz is again focused on changing their habits.
The move upscale is in line with where the restaurant has been heading in recent years, and it helps that Starbucks sells a product that most customers consume daily and consider an affordable luxury, says Peter Saleh, an analyst at BTIG Research.
“Being a premium brand is where it’s at in this industry,” he said. “People gravitate to more and more expensive coffee.”
Bloomberg