Will Starbucks Fizzio Carbonated Drinks Succeed?

The company is rolling out carbonating machines and a new line of beverages to some U.S. stores.

Jul 11, 2014 at 8:26AM

In its early days, Starbucks (NASDAQ:SBUX) sold only coffee beans. The company's original owners fretted about adding coffee by the cup, and they likely would have been appalled by a Double Chocolaty Chip Frappuccino. But since Howard Schultz took over the company in 1987, it has slowly grown outside its original niche.

In adding baked goods from its wholly owned La Boulange Bakery and tea from its Teavana brand, the chain has expanded well beyond its origins. Now Starbucks is preparing what could be the biggest expansion of its product line ever -- the launch of the Fizzio line of carbonated beverages. 

Adding a line of tea to a coffee chain is a natural fit, as the two drinks are usually served in the same places. Rolling out a fancy system of making "handcrafted" carbonated beverages is a leap that could make Starbucks a viable brand to a whole new set of customers who don't care for coffee or tea.

What is Fizzio?
When a customer orders an espresso-based beverage at Starbucks, a barista must create the drink by hand. The carbonated Fizzio beverages will work the same way. 

"We are changing the game in terms of how to get a carbonated drink," Josh Fine, brand manager for Fizzio, told USA Today. "Like what Starbucks did to coffee 40 years ago, we think we can do in the carbonation space."

About 3,000 of the company's roughly 12,000 U.S. stores will get the Fizzio machines in the initial rollout. The machines are not soda fountains. Fizzio "carbonates finished beverages, ensuring every ingredient in the beverage receives the same level of carbonation and maximum flavor," according to a Starbucks press release. The machine also delivers a customizable experience with the capability to adjust the amount of "fizz" in each beverage, and customers have the option to carbonate other Starbucks beverages, including Teavana Shaken Iced Tea and Starbucks Refreshers for $0.50. (Carbonating your coffee does not seem to be an option).

The initial Fizzio sodas are explained in the same press release.

Fizzio Handcrafted Sodas are carbonated fresh and debut in three classic flavors with a Starbucks twist – Spiced Root Beer, Golden Ginger Ale, and Lemon Ale. Each Fizzio soda contains no artificial flavors, no preservatives or high fructose corn syrup and has 100 calories or less in a Grande (16 fl. oz.). 

Fizzio is definitely different, but the handcrafted and customizable aspects should fit in well with the company's coffee and tea drinks. Adding a traditional soda fountain would not feel like a Starbucks experience; a made-to-order Lemon Ale with light fizz sounds like it's up the same alley as a half-caff soy vanilla latte.

It's all about the afternoon
Aside from the people who seem to live in Starbucks, "working" on laptops, many of the chain's locations are less busy as the day goes on. Fizzio is an attempt to lure in two different types of customers -- the ones who only have coffee in the morning and the ones who don't drink coffee or tea at all.

For the non-coffee drinkers, Starbucks already offers some coffee-free Frappuccinos and lots of pastries, but those are calorie-laden treats that few people are willing to make an everyday thing. A fancy carbonated drink that's under 100 calories, however, may seem like a reasonable everyday indulgence. That could turn irregular visitors into regulars.

Though soda sales have been falling in the U.S. for the last few years, the numbers are still enormous. Soda sales declined 0.6% in 2012, to $28.7 billion, at U.S. stores tracked by SymphonyIRI Group. They fell a little bit more in 2013, but even a small piece of a nearly $30 billion market is pretty huge.

Starbucks had roughly $3.9 billion in worldwide sales in the second quarter of 2014, with U.S. business up 6%. At some point, however, the company will have maximized its ability to sell more coffee, tea, and related products. Fizzio is a logical brand extension that has enormous growth potential.

This will work for Starbucks
Bringing customers in during the afternoon has been the holy grail for coffee purveyors. It's why Dunkin' Brands (NASDAQ:DNKN) has tried selling everything from apple pies to pizza to chicken-salad sandwiches at its Dunkin' Donuts shops. Essentially, the costs of operation are the same at a Starbucks whether you are lightly busy or very busy, so adding volume to slower hours will directly boost the bottom line.

Fizzio is an up-market soda brand, which is something that barely exists in the U.S. The line may well appeal to the core Starbucks crowd that's willing to spend more money to avoid buying coffee in a convenience store or a fast-food eatery. Those same people may be willing to pay extra for a fancy Fizzio drink because grabbing a cola from a drive-through is not the experience they identify with.

This line lets Starbucks deliver a slightly snooty beverage experience for people who don't like coffee or who don't want it during certain parts of the day. Like the company's espresso-based drinks, the Fizzio drinks are familiar, but still exotic enough to make it seem like an experience worth paying for.

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Daniel Kline has no position in any stocks mentioned. He is eager to try a Fizzio drink. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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