Starbucks(NASDAQ:SBUX) is back in the serious coffee game.
The company -- which can trace its history back to a time when roasting beans was its business, not selling cups of coffee or frozen drinks -- has returned to its roots with the new Starbucks Reserve Roastery and Tasting Room in Seattle. CFO Scott Maw spoke of those efforts and what they mean for the company at the Bank of America Merrill Lynch Conference in New York on March 3rd.
Clearly a point of pride for Maw, the roasting room specializes in producing small batches of high-end coffee for consumption in stores and at home. It is a higher-end play for the company with less obvious upside than adding a new flavor of latte for its mass-market audience. But it is clearly a calculated move by the company to show that no matter how many cake pops, breakfast sandwiches, and Oprah Chai Lattes it sells, it is still, at its core, a coffee company.
The Roastery could be big
While the Roastery is a one-off operation that both sells coffee to in-store customers and ships it nationwide, it could be a model for stores offering a higher-end coffee experience.
"We believe this is the pinnacle of a retail coffee experience and really the pinnacle of any retail experience you can get, because you actually get to see the product made on-site and then choose how you wish to consume some of the finest quality coffees in the world," he said.
A more refined coffee experience involving a rarer product comes with higher prices. Comparing Starbucks prices is always difficult, because they vary not only from market to market but within markets. However, The Wall Street Journal recently charted the price of a "grande" 16 oz. latte in Starbucks stores around the world.
New York was the highest-priced U.S. city at $4.30, while Atlanta came in at $3.83, and Detroit priced out at $3.55. A 16 oz. latte at the Roastery cost $5.50 at launch, according to a picture of the menu posted by Capitol Hill Seattle.
In addition to possibly opening more Roastery locations to push pricey drinks, the company is leveraging the original to sell higher-priced coffee. A pound of regularly available Starbucks beans sells for between $11.95 and $13.95. The limited-quantity Reserve sell for $12.50 to $17.95 for an 8.8 oz bag -- that is just over half the coffee for a higher price.
"It's off to a great start," Maw said. "The transaction volume and customer volume is way above what we expected when we opened."
Growth is still possible
Starbucks has grown into a $20 billion company and Maw laid out how it plans to "continue to grow the top line at 10% while continuing to grow the bottom at 15% to 20%. It's a pretty big task."
The CFO explained that the company has seven strategies for growth:
- Be the employer of choice
- Lead in coffee
- Grow the store portfolio
- Create new occasions
- CPG brand growth
- Grow Teavana
- Extend digital engagement
Maw placed high value on each of these areas but cited the opportunities in coffee as a key driver, mentioning the Reserve line. He also explained how the company works with farmers around the world to "improve yield" and create a sustainable system.
Adding a planned 1,650 new locations will also drive growth, according to Maw, and the company can do that because it has improved its ability to track analytics around a variety of store formats. "We've been opening in the U.S. as an example an increasing percentage of drive-through stores that have an eat-in aspect," he said. Those stores, he added, have higher profitability on average and a better total return than traditional stores.
The company has also been expanding its number of drive-through only locations which allows it to enter markets which might not be able to support a traditional store. Starbucks has also been working with kiosks and mobile stores, specifically for use on college campuses.
Pity the fool who dislikes tea
Among all the opportunities Starbucks has, Maw called growing tea sales the biggest.
"It's happening today in Starbucks stores," he said. "We continue to see lift both in price point and unit volume as we continue to introduce Teavana, so we know we have a winner."
Maw mentioned that he expected to expand the tea-bar concept with six currently operating in the U.S.
"We want to see how the concept might work, what it might look like, then we will roll the concept across the country," he said.
Daniel Kline has no position in any stocks mentioned. He drinks a lot of Starbucks coffee. The Motley Fool recommends Bank of America and Starbucks. The Motley Fool owns shares of Bank of America and 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.