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.”
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.”
Prior to 2013, Starbucks sold Horizon Organic milk; today’s packaged milk dons the Starbucks name as well as a green circle, sans siren, to mimic the logo in a kid-friendly manner.
Evolution Fresh, acquired by Starbucks in November 2011 for $30 million, represents another revenue channel the company took internal, ridding its ready-to-drink case of most third-party brands. In late February, Evolution Fresh expanded into Starbucks stores in the Chicago area, where it had previously only been available in high-end grocery retailers. Chicago, along with other Midwest cities such as Minneapolis, St. Louis, Detroit, and Cleveland, represented the last metropolitan markets it had yet to reach.
In October 2013, the cold-pressed juice brand opened its first juicery, a $70 million, 264,000-square-foot operation that added to Starbucks’ five roasting plants. The new juicery allowed Evolution Fresh to quadruple its production, which has been integral to expansion. As it stands, Evolution Fresh juices are sold in about 6,000 of Starbucks’ 7,000 company-owned stores, and the brand is nearing its goal of being available in all company stores by the end of 2014.
“Their belief is that fresh juices are going to have a strong appeal, especially for middle- and upper-income consumers, as well as Millennials,” Technomic’s Tristano says. “So they can not only create fresh juice concepts and grow, but they can leverage that brand in their stores to sell those juices, which generally are [sold at] higher price points than coffee.”
The Starbucks experience
Menu expansion and brand diversification at Starbucks have been offset by investment in the consumer experience. High-end beverages and food offerings, the company figures, deserve an upscale environment that invites guests to sit and stay awhile.
“Originally, and as recently as 10 years ago, they had this big push for ubiquity. The message was: Anywhere you go, you’re going to get the same experience, you’re going to get the same quality. Of course, that was a selling point at one point. But that became part of the problem—it didn’t feel special anymore,” Friend says. “They’ve been working a little bit harder to emphasize the one-of-a-kind brand experience in going to a Starbucks.”
Creating a one-of-a-kind experience has meant mindful interior design, and the company is taking a localized approach when opening new Starbucks units in recent months.
In December 2013, its new Canal Street location in New Orleans gained much attention for a store design inspired by the city’s rich history and jazz culture, which included a chandelier build from vintage horn instruments.
Sometimes enhancing consumer experience was a bit simpler. For example, in July 2013, Starbucks partnered with Google to speed up its WiFi in company-operated stores.
“They’ve done a good job at changing people’s behavior and really shifting the way people look at beverages, and people are visiting coffee shops for much different reasons than they did before Starbucks came in,” Datassential’s Webster says. She points to Starbucks Evenings, a post-lunch program offering wine, beer, and small plates at select locations.
“They’ve captured everything from early morning to late afternoon, and by expanding into small plates and alcoholic beverages, they can expand their reach into the dinner daypart,” she says.
This diversification is one that Technomic’s Tristano doesn’t believe quite fits with the Starbucks brand DNA. Still, he says, there is potential for the concept, and “it can work in a small number of units in neighborhoods where the opportunity to offer beer and wine is very strong.” Available after 4 p.m., Starbucks Evenings is offered in about 40 urban locations, and at press time, executives announced intentions to expand the program to thousands of units over several years.
A modern tea movement
In December 2012, Starbucks closed on its purchase of Teavana, the final of the big three acquisitions, for $620 million. While the company gained about 300 well-established teashops across the U.S., some questioned the viability of the purchase, given that Starbucks already had Tazo teas in its units and in grocery stores.
“Tea doesn’t have an identity [in the U.S.] like coffee does. Tea today is only about 8 percent of Starbucks’ store business, so it’s a small amount,” Moser says. “But I think if you consider that along with the opportunity tea presents, it’s something they could potentially double.”
He points to Tazo, which Starbucks bought for $7 million and turned into a billion-dollar brand.
Starbucks’ Teavana has differed from the approach taken with Tazo. In October 2013, Starbucks debuted its flagship Teavana Fine Teas + Tea Bar in New York City’s Upper East Side. The upscale tea boutique offers hot-brewed and iced teas, tea lattes, and sparkling tea fusion beverages, alongside a wall of high-end loose-leaf tea, merchandise, and food items like pastries and small plates. Moser says part of what accounts for the different approach is the premium brand perception Teavana carries.
“Teavana has a brand that’s already had its own strong consumer base, so we can expect to see them continue to build that brand separately,” Technomic’s Tristano says. “But over time, they may find some natural fits to introduce coffee products.”
He says there is immense potential in global markets, though U.S. consumer interest in tea has grown by about 16 percent in the past two years. According to Euromonitor data, the global hot and iced tea category is worth $90 billion.
In March, Schultz unveiled a partnership with Oprah Winfrey, who co-crafted Teavana Oprah Chai Tea for a philanthropic endeavor with the Oprah Winfrey Leadership Academy Foundation. Brand executives also expressed intentions to include Teavana teas in Starbucks units, though no date for that expansion was announced at press time.
“On the one hand, Starbucks’ line about this is, ‘We’re going to do for global tea what we’ve done for global coffee,’ which is a really tall order. But tea and coffee have a lot of similar opportunities, so it feels like a natural transition,” Friend says. “They have the start of a modern tea-drinking movement, much in the same way they were able to start the modern coffee-drinking movement.”
The retail front
In 2013, Starbucks dissolved its relationship with Kraft, which had been a license partner in selling the brand’s coffee in grocery stores. While the move cost the chain $2.23 billion in damages, plus $527 million in interest and legal fees, industry experts say it was ultimately smart.
“Starbucks realized Kraft needed Starbucks far more than Starbucks needed Kraft. Ending that relationship sooner rather than later saved them the hassle and gave them time to plan and strategize for that long-term channel of revenue,” Moser says. “Over the course of the next 10 years, I think you’re going to see their brands grow across grocery stores.”
Starbucks has the opportunity to leverage its grocery retailer channels to include products from its three newest subsidiaries, Tristano says, adding that Evolution Fresh juices and La Boulange baked goods have the most appeal for that market.
“Bringing branded, high-quality offerings in other locations provides a stronger play for fresh, high-quality food at a higher price point,” he says.
With Evolution Fresh, expansion has included retail channels both in high-end grocery stores like Whole Foods and in four branded stores open across Washington and in San Francisco. Coupled with a drive to ensure the brand is available in all company-owned stores, the grocery focus means increased brand awareness, which could translate to even more expansion in the market. Experts say Starbucks has similar opportunities with all three recent subsidiaries—but the key is thoughtful pacing.
“There is a possibility of doing too much, too fast,” Friend says. “Yum! Brands and even McDonald’s are two examples of companies that had a period where they acquired a lot of brands and then had to trim back to their most successful, most profitable concepts. Anytime you’re diversifying, you’re also taking a risk. But so far, their strategy seems sound.”