One of the things that grates bullish Starbucks (NASDAQ:SBUX) investors is the refrain that it sells "$4 cups of coffee": and for good reason. Even a large latte -- or in Starbucks parlance, a venti caffe latte -- costs less than that, and a small -- er, "tall" -- drip coffee can run less than $2 a cup. It's only when you get into the more specialized brews, like a caramel macchiato or a cinnamon dolce latte, that you'll run north of $4 on the largest sizes.
Yet even though its coffee is priced higher than Dunkin Donuts, McDonald's, or your local convenience store, you're arguably getting a better cup of coffee at Starbucks, or at least paying for the ambiance to drink it in.
Price is what you pay
Like Whole Foods Market, which can't seem to shake its "Whole Paycheck" moniker despite offering a line of private label goods that many times are cheaper than even Wal-Mart's offerings, Starbucks may be about to cement its image as an overpriced java slinger.
The coffee shop recently cornered the market on Sitio Baixadao, a special Brazilian bean that was recently awarded the Cup of Excellence recognition of quality coffee by the non-profit Alliance for Coffee Excellence. Starbucks won the auction for the beans by bidding some $23.80 per pound for the 2,000-pound lot, over $53,000 total.
That's the most that has been bid on any coffee in an auction so far this year. The record for a lot of coffee at a Cup of Excellence auction is the $80 per pound paid for a No. 1 coffee in Guatemala in 2008.
The Seattle Times reports that Starbucks paid just $1.72 per pound on average for its coffee in 2014.
Value is what you get
But don't think you'll be able to walk into just any Starbucks and get a cup of this rich blend. It is being sold exclusively at its Reserve Roastery and Tasting Room on Capitol Hill in Seattle. This is a new Starbucks coffeehouse concept that specializes in producing small batches of high-end coffee. The price for a cup of Sitio Baixadao is $80 a pound, or the equivalent of about $7.50 a cup.
The Seattle Times describes Starbucks' entrance into the Cup of Excellence auction market as a potentially disruptive force that could drive prices of these beans well above the 21% increase already seen over the past two years. It also marks a change for Starbucks in how it's approaching the marketing of itself to the masses.
A luxury cup of coffee?
Starbucks describes its Reserve Roastery and Tasting Room as "the Willy Wonka of coffee," a veritable immersive wonderland of premium coffee aromas and flavors. It will use the Roastery to source these special blends for its namesake shops.
During the last quarter's earnings conference call, chairman and CEO Howard Schultz hinted that Starbucks would be a new player in this premium market and he said the Roastery was allowing Starbucks to make its reserve coffees available to over 1,000 Starbucks locations.
As part of its effort to build out the Reserve brand, Starbucks is launching 500 Starbucks Reserve coffeeshops worldwide. A second Starbucks Reserve Roastery will open next year to support this operation, and more will be coming to select U.S. and international cities in the years ahead.
Certainly there's a level of risk involved in shedding its image as a coffee for the masses. But unlike McDonald's trying to reinvent itself from a cheap burger joint into a classier fast-casual chain or handbag maker Coach seeking to evoke an image of "modern luxury" instead of being the purse of choice for upwardly mobile women aspiring to achieve finer things, Starbucks is already perceived as a premium brand. It can leverage that reputation to sell pricier cups of coffee.
In its second quarter financial report, Starbucks said the Americas division grew revenue by 11% to $3.1 billion, partially as a result of adding more than 600 new stores to its portfolio, but primarily driven by comparable store sales growth of 7%, comprised of a 5% increase in average ticket and a 2% increase in the number of transactions.
Not your average Joe
So Starbucks is selling more coffee these days, but also successfully selling it at a higher price. Introducing rare blends like Sitio Baixadao will continue to raise the floor beneath its bottom line.
Premium coffee also isn't like what you get at your local grab-and-go store. Starbucks' entrance into this rarified world should be seen as a welcome enhancement to the coffeemaker's growth story.