To really understand how critical this is, you need to stretch back about a year and a half. Starbucks was splitting innovation between food and beverage, CFO Pat Grismer said this week at the Morgan Stanley Global Consumer and Retail Conference.
“And we’ve taken our product innovation resources and focused them more around beverage …” he said. “We recognize that we are a beverage-forward concept. Beverage is our key point of differentiation.”
Cold beverage development in particular—a sector Dunkin’ has long fronted—is where research directed Starbucks. It was essential to unlocking daypart expansion, especially in the afternoon, and reaching younger consumers flocking to local cafes.
In recent years, Starbucks struggled to generate afternoon business thanks, largely, to the downturn of its Frappuccino platform. As consumers looked to pivot away from indulgent options, Starbucks saw sales of its iconic platform decline, “and that weighed particularly on our afternoon daypart,” Grismer said.
Today, two things have happened: Frappuccino sales have plateaued. They remain a meaningful part of the chain’s business, Grismer said. But while they’re not growing, they’re not declining at the rate of previous years, either. Meanwhile, Starbucks poured those innovation resources into cold beverages fitting of today’s espresso-crazed demographic.
Considering Dunkin’ for a moment, which completely reinvented its espresso offering in 2018, the company said 2017 was the first time consumers under 35 drank more espresso beverages than hot drip coffee. And more than 50 percent of millennials ordered espresso beverages when they chose coffee. CEO David Hoffmann likened espresso to the transitional role drip coffee once played for soda-drinking consumers as they matured. Espresso is now the gateway coffee choice for millennials and Gen Zers.
In Starbucks' case, these new cold beverages have taken up some of the demand left behind by Frappuccino’s sales decline.
This isn’t just Nitro Cold Brew or Cold Foam Cold Brew. It also includes Starbucks’ Refreshers line and flavored iced teas. Cold drinks currently mix more than half of U.S. Starbucks beverage sales.
Overall, the brand’s beverage growth expanded across all dayparts in Q4. Again, it was anchored by cold drinks, which proved effective sales and traffic drivers regardless of season or occasion, Grismer said.
Starbucks rolled nitro equipment across company-owned stores over the last 12–18 months. It hit 80 percent penetration in the U.S. in August and was fully onboarded by year’s end. This allowed Starbucks to support nitro with national advertising for the first time, which it did in August. It drew more occasional customers into the brand and slightly favored the afternoon daypart, Grismer said.
“By applying more focus and more resource to beverage innovation and driving more consumer research to drive more insights around what is going to resonate most with our customer base, particularly young customers, we've identified those insights that have allowed us to introduce new products that have performed better than in earlier years,” he said.