Coverage: Coffee from Starbucks gets fancier – really

Apparently a $4 pumpkin spice latte isn’t fancy enough. Starbucks is trying to capture the high-end coffee market by launching a new brand. As more places serve the brew, the coffee has lost some of its luxury luster, something it is trying to recapture.

Craig Giammona had this story for Bloomberg:

Starbucks Corp. is opening a store in Seattle that combines a cafe with a coffee bean roastery as the chain boosts production of its Reserve line of premium coffee.

The Starbucks Reserve Roastery and Tasting Room is a 15,000-square-foot facility that will serve Reserve coffee, which is sourced in small batches and sells for more than $20 a pound. The store, which opens tomorrow, will let Starbucks double its small-batch roasting capacity and expand the Reserve coffee presence to 1,500 locations from 800 worldwide.

The world’s biggest coffee-shop operator is experimenting with new store formats, including smaller express stores in New York City and a three-story cafe in Bogota. Chief Executive Officer Howard Schultz has said Starbucks is seeking to emulate the retail environments offered by Apple Inc. and Nike Inc.

The Seattle facility provides a blueprint for other major urban markets, Troy Alstead, the company’s chief operating officer, said in an interview.

“Our new store formats give us the ability to grow in the U.S. and other parts of the world,” Alstead said. “That unique roastery experience gives customers an understanding of our heritage.”

The Bloomberg Businessweek story by Venessa Wong offered these details about how Starbucks plans to create a different experience in its new stores:

Gone are the cramped tables of a typical Starbucks, replaced by barstools and a view of brew paraphernalia. Gone, too, is the term barista that Starbucks helped put into wide circulation; the workers who prepare your order here are instead known as “coffee masters.” At a separate bar, these skilled artisans hold coffee information sessions for curious customers. Even the classic green mermaid logo has vanished, replaced by a sans serif R topped by a star.

Over the next five years, the company plans to open 100 of these Reserve cafes around the world. The new wave of shops will serve small-batch beans like Colombia Montebonito and Sumatra Peaberry Lake Toba. Starbucks expects to produce 1.4 million pounds of Reserve coffee in the Seattle roastery during the first year, and other Reserve facilities will be added to beef up the output, including one planned for Asia in 2016.

Starbucks is considering opening Reserve cafes in “hip urban areas” like Chicago, Washington D.C., New York, and Los Angeles. There’s certainly no shortage of regular Starbucks in these places already, not to mention the next-generation coffee upstarts that Reserve imitates. “We’re always trying to stretch and let customers know that we offer a spectrum of experiences,” Russell says.

Gary Strauss wrote for USA Today that shares of the company rose on the news of the new stores, which Starbucks is opening to try to combat lower traffic:

Starbucks founder and CEO Howard Schultz says the company began noticing slowing traffic during the 2013 holiday season and began altering growth plans in January.

“The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it,” says Schultz, 61. “Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways.”

That includes doubling food revenue, broadening sales of its premium Reserve coffee, expanding mobile ordering and launching delivery service. Starbucks Chief Digital Officer Adam Brotman says delivery “is one of our most requested ideas.”

Starbucks projects annual revenue of almost $30 billion by 2019. It posted 2014 fiscal revenue of $16.4 billion, up 10.6% from 2013. But overall same store sales were up just 6% in North and South America – which accounts for 14,191 of Starbucks’ 21,366 stores – vs. 8% in the year-ago quarter.

Stephanie Strom wrote for The New York Times that Starbucks is struggling since fewer people are drinking coffee:

The reach into a higher-end market is another sign that coffee consumption in the United States is growing only modestly, according to trade data on imports collected by Panjiva. The popularity of single-serve coffee makers like Keurig and Nespresso have added pressure.

“If you look at coffee imports over all for the last several years, it looks like a pretty mature market,” said Josh Green, chief executive of Panjiva. “There’s been a roller coaster in terms of price, but in terms of volumes, we’re talking about very modest growth — and that kind of market is usually where you see companies trying to go upmarket in terms of price and exclusivity.”

The new Starbucks Roastery is rumored to have cost more than $20 million. Part retail store, part manufacturing facility and part theater, the store intentionally evokes the chocolate room where Augustus Gloop met his fate in Willy Wonka’s candy factory. See-through tubes snake up out of the floor and under the ceiling, ferrying green coffee beans to copper-clad roasters and roasted beans to the coffee bars scattered like islands around the 15,000-square-foot space.

No matter what, it’s clear that Starbucks and other coffee shops are suffering as fewer people buy coffee – especially expensive brew. But shareholders responded well to the new concept. But it’s hard to see how creating a new brand and spending a lot of money to do so will actually help in the long-run. It’s an expensive bet that people will continue to treat themselves on a daily basis.