Competition | May 2014 | By Tamara Omazic

Siren Song

Experts weigh in on Starbucks’ recent growth and diversification strategy.

Coffee giant Starbucks has invested in diversifying its product portfolio.
iStockphoto.com/shaunl
Bookmark/Share this post with:
Email this story Email this story
Printer-friendly versionPrinter-friendly version

Like the melodic tune of a mythical fish-tailed woman luring in unsuspecting sailors on the open ocean, the siren of Starbucks’ famous logo beckons the masses toward a promise of quality, of familiarity, of a ubiquitous yet iconic American coffee experience. Part muse, part marketing tool, she sings of an experience upon which a quick-serve empire was built and continues to grow. And, as a writer who worked on the brand’s 2011 logo redesign, Steve M., put it in a company blog post, “she’s a promise, too, inviting all of us to find what we’re looking for, even if it’s something we haven’t even imagined yet.”

Recently, the siren’s call has led executives of the 43-year-old coffee chain to a brand-building strategy centered on portfolio diversification featuring juice, tea, baked goods, and more, diversification that no one could have imagined even a decade ago. But CEO Howard Schultz and his team are rising above today’s stagnant industry landscape, bolstered by three key acquisitions, to fuel growth and demand.

The numbers, so far, prove the strategy successful: The company reported record growth for the first fiscal quarter of 2014, citing a comparative growth increase of 5 percent driven by a 4 percent increase in traffic in the Americas and U.S. market and a consolidated operating income increase of 29 percent to $814 million. These positive financial trends span back across the past few years, and coincide with the diversification strategy that allowed Starbucks to bounce back after the financial troubles it faced in the mid-to-late 2000s. If the brand continues to grow its newest subsidiaries—cold-pressed juice brand Evolution Fresh, bakery concept La Boulange, and high-end tea retailer Teavana—in a smart and effective manner, industry experts say, Starbucks’ future could be as alluring as ever.

A cut above

The environment in which Starbucks is pushing forward with new growth isn’t entirely conducive to such a strategy.

“There are a lot of pressures in the industry right now, and the industry is not necessarily blooming,” says Maeve Webster, senior director at Datassential, a foodservice market research company. “It’s more of a traffic-share grab with a lot of these operators. There’s not a lot of organic traffic growth going on … and I don’t know that we’re going to see any in the near future.”

In late January, the National Restaurant Association (NRA) reported soft same-store sales and customer traffic levels, which registered a moderate decline for December 2013 in its Restaurant Performance Index (RPI), a monthly composite that tracks the industry’s health and outlook. Overall, the NRA’s RPI reports for the past few months show operators are less optimistic about growth.

In early February, The NPD Group, a global information company, reported that, while overall industry growth remains largely stagnant, the fast-casual segment saw an 8 percent increase in visits and a 10 percent increase in spending in 2013. With consumers flocking to fast casuals, traditional quick serves have had to push innovation into higher-end menu offerings. That’s led to increased competition for brands like Starbucks, which operates on a higher price point than many other coffee concepts.

“It’s not just other coffee shops who are doing very similar models; you also have McDonald’s coming in, and Dunkin’ Donuts is doing very, very well, and a variety of others are now playing in a category where Starbucks used to be the only player,” Webster says.

Elizabeth Friend, a consumer foodservice analyst with Euro­monitor Inter­­national, says the evolution of the coffee segment, in which consumers seek more than coffee from such brands, sparked some competition from other quick serves looking to have a share of morning and beverage traffic. “As a way to combat that, we saw people like Starbucks saying, ‘Hey, you can get everything you find there here and it’s better, with a better experience,’” she says.

La Boulange, the San Francisco–based bakery concept Starbucks purchased for $100 million in June 2012, allowed the brand to significantly improve and expand its food offerings and compete with brands like McDonald’s and Dunkin’ Donuts. Starbucks has said La Boulange bakery items will be available in all company-operated stores in the U.S., about 7,000 units, by the end of 2014.

“So much of the conversation lately surrounding Starbucks has been about La Boulange and tea … but if you look at their balance sheet, the segment that includes all those new brands is around 3 percent of the total portfolio,” Friend says. “They’re still going very much in the direction of coffee and playing with these other parts that have a lot of potential for the future, but it’s something that will require slow branding up.”

Though new subsidiaries may not account for hard growth on the bottom line, they are increasing opportunity and potential, thereby driving traffic, experts say.

“One of the most impressive things about the company is how well they’d done without a really strong food offering,” says Jason Moser, a senior analyst with Motley Fool One, a finance solutions advisory service. “When they made [the La Boulange] acquisition, the way they were looking at this was, of every three transactions that happen in a Starbucks store, two of those transactions don’t have a food item involved. What they viewed that as was a potential opportunity to tack on food items to those transactions.”

Moser says diversification is serving Starbucks well and has even brought the brand back to its former glory, undoing the financial troubles it faced less than a decade ago, when Schultz stepped down from his position as CEO. At that time, the company’s strategy revolved heavily around growth at the unit level.

“There was a joke about Starbucks stores being opened in the bathrooms of Starbucks stores. It felt like at that point the growth story had played out,” Moser says. “What it took was getting Howard Schultz back on board to lead the way, focusing on trimming the fat of the operation, becoming more operationally sound, honing the supply chain, and diversifying the menu by offering more items.”

One-stop shop

Ordering at a Starbucks store, particularly one of the company-operated units, is a markedly different experience today than it was just a decade ago. High-end, cold-pressed juices and fruit-flavored energy drinks made with green-tea extract sit alongside bottled Frappuccino drinks; Bistro Boxes offer a small plate–style dining option alongside hearty sandwiches and salads; and the bakery case boasts treats of both sweet and savory varieties, all developed or inspired by a specialty bakery brand with West Coast roots.

La Boulange is integral to all these new options, as the subsidiary has allowed Starbucks to do two key things, says Darren Tristano, executive vice president at foodservice consulting firm Technomic Inc. “The first thing is it improves the quality of the food they’re able to offer their current customer, and second, it gives them an opportunity to compete in the fast-casual bakery-café space where Panera has been very dominant,” he says.

Pushing its food offerings into the fast-casual realm is a smart play because Starbucks has always been seen as a premium brand, Webster says.

“It makes perfect sense because the items—the croissant-based bakery items, the savory Danishes, and things of that nature—are very interesting and very on trend,” she says.

Many of La Boulange’s treats are similar to what Starbucks used to offer, but come in smaller portions and are warmed up for customers upon ordering. But a few new additions play to the high-end, fast-casual bakery treats Starbucks was previously missing out on. These include items like the Ham & Cheese Savory Square, a flaky pastry with ham, Swiss cheese, and béchamel sauce. Last fall, Starbucks featured a seasonal Butternut Squash Savory Square.

Consumers have responded well to La Boulange, experts say, and by offering a bakery brand that Starbucks owns, they’ve been able to keep the revenue stream while upping quality. In many other aspects, Starbucks has transferred revenue streams from external to internal.

“Starbucks used to sell a number of third-party brands in their stores; they were selling Naked juice and various others,” Euromonitor’s Friend says. “We’ve seen them take back each of those revenue streams one by one as they looked to own all of the brands they sell through their retail stores. … Even the milk cartons you can buy at Starbucks now, the little single-serve milk bottles, are branded.”

Pages