Starbucks Part IV: Product Innovation And Brand Elevation To Drive Sales

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Starbucks is at the cusp of great changes, with the old CEO Howard Schultz stepping down and the new CEO Kevin Johnson taking hold of the reins. Along with the change in leadership, the company has talked about a new five year plan, which pivots on a five-part strategy. In a series of articles, we have already discussed the important role digital developments will play towards integrating the Starbucks’ customer experience; expansion of Starbucks’ store portfolio across different geographies and its affect on sales; and increasing reliance on consumer packaged goods for revenue growth.

In the following article, we talk about Starbucks’ efforts at elevating its brand through customer experience and product innovation.

Starbucks is as much a key social space as it is a coffee chain. People flock to a Starbucks store not only for the coffee it offers, but the customer experience it gives. Starbucks is increasingly becoming more about a community experience. It has succeeded in creating a brand consciousness among people that wasn’t seen before. When a Starbucks opens a store at a new city or even locality, people are seen waiting in long queues just to participate in the experience of a coffee at Starbucks. This brand consciousness, in addition to product innovation, could be a great step for the company in order to attract a larger number of customers. Furthermore, outgoing CEO Schultz mentioned how Starbucks is well-positioned to leverage off the demise of brick-and-mortar retail in the U.S., through its Roasteries and other store formats, for consumers seeking social interaction.

Since the very beginning, Starbucks has been a pioneer in innovation. Its products are generally copied by the likes of Dunkin’ and McDonald’s McCafe. In the following time line are mentioned some of the key products that the company has launched in its lifetime.

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The company strongly believes that innovation in product offerings is the main factor driving financial performance at stores. For instance, the U.S. company operated stores have seen a roughly 7% y-o-y growth in comparable sales on an average between FY 2013-2016. Starbucks attributes this growth to its innovative coffee offerings, such as flat white and latte macchiato, and iced coconut milk mocha macchiato.

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The innovation seen in Starbucks’ beverage offerings are unique, and accountable to a huge extent to its Roastery business, which sits on top of its store portfolio pyramid. The Roasteries are targeted at premium customers, such as the uber-rich and coffee connoisseurs. The company is looking at potentially 10 Roasteries, offering different types of coffee experiences: pour-over, siphon, clover, specifically roasted Reserve coffees on-site that you are able to buy from a scoop bar, and interactive experience with bars and baristas. The birth of Cascara Latte and Smoked Butterscotch came about from its premium roastery business. Below we talk about some of the main product innovations and major growth drivers at Starbucks:

  • Cold Beverages

The biggest innovation in coffee is in the cold category. The advent of the new age coffee, that is the nitro cold brews, has changed the way people drink coffee. With the coffee market set to grow multi-fold in the next few years, the company is pulling all stops to position itself as the most preferred coffee shop. While making cold brews available across all its stores, Starbucks is also bottling its cold brews to place them in the ready-to-drink industry. Through its various offerings, cold beverages are seen accounting for 50% of all drink sales.

  • Teavana

Since its launch, Teavana has become one of the biggest growth drivers for the company. It has contributed one percentage point in comparable sales growth for seven consecutive quarters. Its successful launch has led to Starbucks rolling out Teavana in China and Europe. The company is betting on Teavana’s popularity in China, one of the largest tea consuming countries, to give the brand a boost. Further, it may positively impact the sales of premium Teavana brewed and iced teas in Starbucks’ stores, helping increase the average spend per customer on beverages.

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  • Food sales

Food sales now represent 20% of Starbucks’ revenue and has been consistently contributing almost a percentage point to comps. Further, the company has found that each day part is far below its saturation level in terms of food offerings. To fully leverage off the gaining popularity of its complementary coffee and food menu, the company is working towards establishing partnerships and making food one of its major future growth drivers. To this end, Starbucks has struck a partnership with the Italian bakery, Princi. The company will be serving fresh Princi food at its new premium restaurants. The incoming CEO Kevin Johnson mentioned that he expects food in the lunch daypart to be a significant sales driver in the coming years. Consequently, the management believes that over the next five  years, the company will be generating 25% of its revenue via food sales.

Have more questions on Starbucks? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Starbucks

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