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?
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?
A Seattle Story and expansive growth
Starbucks was founded by Jerry Baldwin, Gordon Bowker, and Zev Siegl in 1971 and opening their first Starbucks store 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.
During the 1980s, they operated four stores across Seattle. Although 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. Schultz was a sales representative for a kitchen equipment and houseware supplier who discovered impressive sales figures at a local coffee shop called Starbucks. He was impressed with the concept and dedicated his career to building the company ever since.
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 said, “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.” He noted that wherever the opened a store, the concept was always a success.
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 added $25 million in capital and helped the company double the number of stores in the following two years.
A key moment came Starbucks bought Boston-based The Coffee Connection for $24 million in 1994. Specialty coffee roaster operated 23 shops in Connecticut, Massachusetts, 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. 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. But had Starbucks had to do more than just add new coffees to its menu.
Starbucks launches its first Reserve Roastery
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 would deliver the rarest coffees imported from all around the world. The Seattle location was the first from the 100 that Starbucks was 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 Reserve Roastery in Seattle. Or as Starbucks put in in a more tangible figure, ‘the equivalent of 40 average NYC apartments.’ The location incorporated local influences, decorating the copper cask of the roasting silos with 1,000 hand-engraved stamps from local Chinese shops.
Shortly after the opening in Shanghai, the first Starbucks location opened in Italy in 2018, the Reserve Roastery in Milan. Conquering Italy is one of Starbucks’ least glorious chapters as Italian coffee culture is running through its veins. Forbes noted that 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 a 25,000 square foot establishment located at the Piazza Cordusio. In the humble press release, Starbucks said, ‘We have taken our time to ensure our entry into Italy is done thoughtfully and respectfully.’
Starbucks becomes part of the experience economy
Starbucks through its Reserve franchise aims to focus on the premium coffee experience. This strategic shift doesn’t come out of thin air, as we’ve been witnessing a trend in how consumers and especially millennials want to experience brands. 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 found 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 well-being and the career path take the center stage. It’s therefore, no surprise that objects take a backseat. The way millennials promote said experiences is also noteworthy, as 32% of the respondents replied they posted photos of interesting experiences on social media, where 28% made a dedicated 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.”
Strategic re-calibration at Starbucks
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 to bring more value to its shareholders. It aims to do so through improved agility to adapt more quickly to change in consumer preferences, expand its digital initiatives and the introduction of product innovations. This in effect will expand the presence of the brand across the globe.
Despite its previous success, Starbucks also 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. In the same year, the company announced it would be closing 150 under-performing stores in 2019. Additionally, the company would focus on healthy beverages, to facilitate healthier options for its customers.
In 2020 the company announced, 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 found that around 80% of transactions across 15,000 US stores, were on-the-go products. Starbucks later revealed it would add another 100 stores that were to be closed down in 2021. Another 300 would be closed down in Canada, totaling the number of stores to 800.
Starbucks is adjusting to the new economy
We’ve seen the rise of the pop-up 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.
Starbucks is not immune to the rise of this changing consumer landscape and it realized that just opening up 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. 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. It remains to be seen how Starbucks plans to utilize the Reserve Roastery in the long run, but for now, they are the perfect catalyst to alleviate the brand further into the premium coffee niche.