Wed January 25, 2012
To Grow Business, Starbucks Thinks Outside The Cup
Just four years ago, Starbucks seemed to be losing its mojo. Howard Schultz, the man who made Starbucks a household name, returned to the company as CEO. He closed hundreds of stores, streamlined operations and set the company on a path to record revenues and strong profits.
Starbucks serves 60 million beverages a week, which adds up to big profits. The company reports its earnings Thursday. In a bid to further expand its consumer base, Starbucks has a new roast and plans to produce more retail products to sell outside of its coffeehouses.
The Lighter Side Of Starbucks
Every morning, the coffee tasters at Starbucks headquarters in Seattle sample about 800 cups of java for quality and consistency. It's a bit like tasting wine, and it's pretty intense, says Dub Hay, the company's senior vice president for coffee.
"Because we do taste so many cups, we do spit it out. So we are going to do everything your mother told you not to do: sip, slurp, spit," he says.
With a giant slurp from a spoon, Hay lets the coffee coat his palate.
The coffee is a dark roast, the kind Starbucks is known for. Some people think it's too dark, describing it as burnt or over-roasted. Starbucks disputes those characterizations, but after 40 years of producing only dark coffee, Starbucks has just introduced a lighter roast coffee, one it calls "Blonde."
Starbucks says more than 50 million coffee drinkers were looking for something that, until now, the company didn't offer.
"That's who we are after, and I think once they taste this versus other lighter coffees, we are going to convert quite of bit of them to Starbucks," Hay says.
In Your Grocery Aisle
The company hopes those customers will drink the coffee not just in Starbucks stores, but also at home.
The company's stores have impressive profit margins, but Bob Goldin of Technomic, a food industry research and consulting firm, says the profit margin on consumer products is substantially higher.
"They are having a lot of success in the retail channel with supermarkets and mass merchandisers with products like Via, Tazo Tea and now K-Cups — the little pods," he says.
Starbucks sees a huge new market for its grocery store offerings with the addition of Blonde.
Financially, Starbucks has never been stronger. In the past year alone, the stock has climbed 40 percent. Portfolio manager Bob Bacarella of Monetta Mutual Funds holds a miniscule number of the company's shares.
"You would think in this slowing economic environment that we've experienced, people would cut back on their coffee. No. Hasn't happened," he says. "It's addictive, and Starbucks has played it up right."
Not Just Java
But the company continues to look for growth, and it's looking beyond coffee.
"One of the things I like talking about is why they feel this compulsion to grow," says David Reibstein, a marketing professor at the University of Pennsylvania's Wharton School. "You have shareholder pressure, and if you aren't growing, then investors will go somewhere else where there is growth."
But Reibstein says for Starbucks, expanding beyond coffee carries the risk of diluting the company's coveted brand. He says he has often thought Starbucks should find a new venture where it could leverage its ability to source products, find real estate and manage complexity.
That's what Starbucks is trying to do now. Late last year, the coffee giant bought a premium juice company called Evolution Fresh, and it plans to use it as a springboard to create a new health and wellness brand. The first store will open later this year.