Starbucks rose to number 37 on the Forbes list of most valuable brands. Why did this corporate behemoth decide to launch its Reserve Roastery franchise?
I recall the days when Starbucks was still a novelty. The paparazzi pics with celebrities purchasing from the highly desired, premium coffee chain. Over the years, Starbucks has grown into a giant corporation. While 2020 has been a tough year for Starbucks, its revenue across 2020 reached $23.17 billion. If the company was increasing its revenue so steadily, why did it come to decide to launch its Starbucks Reserve franchise?
The United States loves coffee and the variety has taken a flight. The Specialty Coffee Association and Square INC looked at the coffee market in the US over 2018 and we can see some interesting developments which will help us better contextualize the rationale behind the launch of the Reserve Roastery. Dairy has been on the decline, with Oat Milk sales increasing by 425% since June 2017. The same growth can be observed with Cold Brew, which was sold 42% more than ice coffee. The US also saw an influx of more exotic foreign styles of coffee. Flat whites rose 41% in popularity and Cortado sales increased 36% in 2018 compared to the year prior.
A Seattle Story and expansive growth
Starbucks was founded by Jerry Baldwin, Gordon Bowker, and Zev Siegl in 1971. In the same year, the first Starbucks shop was opened in 1971 in Seattle. The name Starbucks stems from the novel Moby Dick, referring to the first mate. During the founding years, they bought arabica beans at California-based Peet’s Coffee and Tea. Peet, a Dutch immigrant, specialized in importing premium coffee and tea. Peet’s business was the spark of inspiration for the founders to build a brand around premium coffee. The founders bought a roaster in the Netherlands, where they played around with different techniques inspired by Peet.
Nine years later, during the 1980s, the trio operated four stores across Seattle. It was at this time, in 1980, the trio became a duo as Siegl left the company. One year later, the now-famous, Howard Schultz walked through the door of the coffee shop. At the time Schultz was a sales representative for a kitchen equipment and houseware supplier saw impressive sales figures at a local coffee shop, which was Starbucks. He was utterly impressed with the concept and dedicated his career to building the company.
With Schultz on board, the coffee company saw tremendous success. In an interview with McKinsey in 2011, Schultz reflected on the strategy Starbucks had been pursuing for decades prior. He and the team set out to build a unique brand, ingrained with inspiring values. In 1987 Starbucks had grown to 11 stores and 100 employees. They were onto something as they were able to grow durably with their new stores. Schultz, “we had this dream to create a national brand around coffee and a unique experience in our stores that, hopefully, we would be able to extend from the West Coast to around the country.” Further stating, “ What we were building seemed to work wherever we opened stores.”
Starbucks went public in 1992. At the time the company had 140 stores and had a valuation of $217 million. According to Nasdaq, the IPO helped raise $25 million and helped the company to double the number of stores in the following two years.
In 1994, Starbucks bought Boston-based The Coffee Connection for $24 million. Specialty coffee roaster The Coffee Connection operated 23 shops in Connecticut, Massachuttes, New Jersey, and New York. While this acquisition looks like any other, The Coffee Connection is the house of the Frappuccino. The coffee recipe, and name Frappuccino, was invented by the marketing manager at The Coffee Connection, Andrew Frank. Frank was tasked to come up with an iced coffee variant that would ensure sales during hotter summer months and so the Frappuccino was born. The Boston Magazine said that the Frappuccino ‘revolutionized’ the Boston coffee scene, which helped the company double the number of stores. Through the acquisition, Starbucks bought the rights to the name. This was the defining decision for the growth of Starbucks, as the coffee blend, accounted for 20% of annual sales, or roughly $2 billion, in 2012.
Starbucks launches its first Reserve Roastery
Starbucks has opened many Reserve roasteries over the years, but I want to highlight some of the key locations, which will guide us through the different strategic decisions the corporation has made. Starbucks launched its first Reserve Roastery in the Capitol Hill neighborhood in Seattle in 2014. The birthplace of the brand. Its first Reserve location is situated in a 1920s building, which was fully restored with its original facade. Howard Schultz, chairman, and CEO of Starbucks, said about the opening, ‘ This Roastery is the fulfillment of a decade-long dream – an homage to our relentless pursuit of coffee innovation that will create for our customers the most immersive, sensory demonstration of how we source, roast, and craft the finest coffee from around the world.’ The aim of Starbucks is to elevate the Starbucks experience every step of the way. The roastery will deliver the rarest coffees imported from all around the world. The Seattle location is the first from the 100 that Starbucks is planning to open across different parts of the globe.
Three years later the second Roastery opened in Shanghai. A 30,000 square foot mega Starbucks, twice the size of its Roastery in Seattle. Or as Starbucks put in in a more tangible figure, ‘the equivalent of 40 average NYC apartments.’ The location further incorporated local influences into its location, decorating the copper cask of the roasting silos with 1,000 hand-engraved stamps from local Chinese shops. This is the embodiment of Howard Schulz’s pledge to further expand the brand in mainland China.
Shortly after the opening in Shanghai, the first Starbucks location opened in Italy in 2018, the Reserve Roastery in Milan. Conquering Italy might still be one of Starbucks’ least glorious moments as Italian coffee culture is running through its veins, may it be through its Frappuccino or its product names they were unable to successfully integrate themselves into the Italian coffee market. Forbes noted it took them 47 years to enter the country, who is particularly reluctant to welcome American corporations who want to commodify age-old traditions. Starbucks, therefore, decided to go all-in, opening 25,000 square foot establishment Poste building located at the Piazza Cordusio. In the press release, Starbucks oozes humbleness saying, ‘We have taken our time to ensure our entry into Italy is done thoughtfully and respectfully.’
The experience economy
Starbucks through its Reserve franchise aims to focus on the premium coffee experience. This move doesn’t come as a surprise, as we’ve been witnessing a shift in how consumers and especially millennials want to experience brands in recent years. Millennials are changing the way brands need to market themselves, partially fueled by the drive of this demographic to part ways with materialistic consumer behavior.
Marketingweek noted this trend in 2015 through a study conducted by ZenithOptimedia. They observed that Millennials gravitate towards brands that help them lead fulfilling lives, not just selling them goods. Millennials have a more holistic approach to their personal development, where wellbeing and careers path take the center stage. It’s, therefore, no wonder that objects take a backseat. The way how millennials promote said experiences is also noteworthy, as 32% of the respondents replied they posted photos of interesting experiences on social media where 28% dedicated a status update. 24% in the age group 18 to 34 years old, recorded those experiences, where 13% of them would share the video on social media.
We’ve seen this in many industries. In 2018 Expedia performed market research on how different generations travel. They found that 74% of Americans value experiences of products and 65% of Millennials were saving up for travel. Blake Morgan at Forbes said, ‘Many malls are moving from traditional product-focused retail shopping to experience centers. Instead of pushing products, brands like T-Mobile and Casper else are creating showrooms where customers can experience the product, make a memory and buy something if they desire.’
The previous sections may sound like a fluff piece for the bean factory, but Starbucks has been planning to revamp its company strategy for some time already. In 2018, Starbucks revealed its strategic vision for the company to bring more value to shareholders. It will achieve this by stepping up its pace in opening up stores across the United States and China. This in effect will expand the presence of the brand across the globe.
Despite its previous success, Starbucks faced many challenges in recent years. In 2018 8,000 stores were closed during one afternoon to combat racism by its employees. This was the result of an incident where two black Americans were arrested in one of the company’s establishments in Philadelphia. The store manager suspected trespassing by the two men who were waiting for a friend to arrive and consequently called the police. This caused such an uproar that Starbucks CEO Kevin Johnson announced on national television he would apologize to the arrested men personally.
In the same year, they announced they would be closing 150 underperforming stores in 2019. Additionally, the company would focus on healthy beverage options, to facilitate healthier options for its customers.
The company announced in 2020, it would close up to 400 stores to better match changing consumer demand. To CNN, Starbucks said that larger cities across the United States will have a mixture between cafes and pick-up locations. The company backed up this decision, by revealing that around 80% of transactions across 15,000 US stores, were for on-the-go products. Starbucks later revealed it would add another 100 stores that would be closed down in 2021. Another 300 would be closed down in Canada, totaling the number of stores to 800.
Adjusting to the new economy
We’ve seen the rise of the pop-up store and the flagship store in recent years. They pave new ways for brands to connect with customers and create the perfect environment for their products to realize their full potential. The Starbucks Reserve can be placed into this category as well, as this top brand tries to adjust itself to the new consumer, the millennial. Starbucks is not immune to the experience economy and it realized that just opening as many of its regular retail stores as it could, wouldn’t cut it in the long term. Especially as most of their sales are take-out orders. It’s hard to convey an integral message infused with values when your customer is out of the shop in just a few minutes.
The Starbucks Reserve Roastery doubles as a marketing tool in and of itself as well. While the investments for such grande locations are substantial. They are ‘Instagrammable’, eye-candy. The smells, the sounds, the design. They convey what Starbucks wants, and needs, to be. A coffee experience. This is especially true for entering conservative markets like Italy, which are skeptical of big brands. Or establishing a luxurious brand image in emerging markets like China. You need to go big or go home. It remains to be seen how Starbucks plans to utilize the Reserve in the long run, but for now, they are the perfect catalyst to alleviate the brand further into the premium coffee niche.