Starbucks' (NASDAQ:SBUX) plan to open 1,000 high-end Reserve coffee bars has aged as well as a day-old cup of joe. CEO Kevin Johnson has largely shelved the grandiose scheme of the coffee chain's former chief executive, Howard Schultz, as being merely a goal the company could strive for, not one that is set in stone.
Because Johnson also needs to achieve his own goal of growing comparable-store sales by 3% to 4% globally, Starbucks' plans for the Reserve chain are being scaled back dramatically. The company will open just six to 10 stores as a pilot program before deciding whether to build more. It's doubtful this luxe coffee experience will ever attain the grand sweep Schultz originally envisioned.
A history of missteps
Starbucks has a poor track record when it comes to straying too far from its regular coffee fare. The Starbucks Reserve concept -- which pairs exorbitantly-priced premium coffee beverages with an equally high-end bakery featuring the creations of Italian chef Rocco Princi -- goes well off the path of its core business.
Previously, Starbucks tried to tap into the juicing fad by purchasing Evolution Fresh juice bars for $30 million to cash in on the $50 billion health and well-being market. It eventually shut down the venture as it failed to catch on (you can still find Evolution Fresh juices in Starbucks coffee shops, however). It also bought its former baked goods provider, La Boulange, and planned to open as many as 400 cafes under that banner. That experiment also failed because it was "not sustainable for the company's long-term growth."
Then there was the takeover of tea purveyor Teavana, which also didn't work out as planned. The lofty expectations for a string of tea houses similar to Starbucks coffee shops came to naught as the Teavana specialty stores were shuttered in favor of selling tea and tea-based beverages in its cafes and at other retailers. The Starbucks Evenings concept -- where you could grab a late-night alcoholic beverage instead of a cup of coffee at certain stores -- was also discontinued.
With this history, it's not surprising that the Reserve coffee bar and cafe plan is turning out to be something less than originally touted.
Slow growth in the core business
Schultz has always touted coffee drinking as an experience. There can be a market for that, but it seems a hard sell to convince most consumers that coffee is of such craftsmanship that it's worth as much as $35 for a flight of three cups of coffee.
Johnson told The Wall Street Journal that the idea of opening 1,000 Reserve stores was simply an "aspiration" the company had, though he probably could have said it was a pipe dream of Schultz's.
Starbucks first needs to focus on its core business, which is suffering from a growth slowdown. That's probably why Starbucks made little mention of the Reserve concept at the investor conference it held last month. Instead the existing store base, growth in China, and expanded delivery options took center stage.
The slightly rising comps Starbucks experienced in 2018 were a result of higher prices, not more customer traffic. It is losing ground to McDonald's (NYSE:MCD) and doughnut shop Dunkin', which have continuously invested in their coffee businesses and are seeing higher returns because of it.
McDonald's McCafe line of coffee beverages represents about 16% of total revenue, and also helps drive more visits from customers. After years of losing customers, McDonald's has now put together a string of quarters featuring higher guest counts.
Meanwhile, the Dunkin' Brands (NASDAQ:DNKN) chain has successfully expanded its afternoon menu, which could be siphoning customers away from Starbucks. Perhaps more importantly, Dunkin's coffee is seen as being of good quality and more affordable than that of Starbucks, making it harder for Starbucks to hit its ambitious sales goals.
Stick to its knitting...and coffee
Starbucks isn't killing off the Reserve concept completely. It plans a much more modest six to 10 test stores in the U.S. to give the concept a chance to prove that customers will accept high-priced artisanal coffee before committing to the growth phase, if it ever does.
So it's probably not correct to say that Johnson's vision for Starbucks is completely opposed to the one held by Schultz; rather he would prefer to have data in hand to support the expansion plans, while Schultz was seemingly willing to let his vision lead the way.
We can reserve judgment on whether the Reserve store concept will eventually prove it is worthy of further investment. However, Starbucks would still likely do better to focus on its strength, which is making a good cup of coffee without turning its stores into brewpubs.
Check out the latest Starbucks earnings call transcript.