Here’s Why Starbucks Is Innovating Around Iced Drinks

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Recently, Starbucks (NYSE:SBUX) unveiled “Cold Pressed Espresso” a new cold extraction process which will become the base of the company’s iced beverages. A new menu of cold beverages based on this process will debut at the company’s Roastery in Seattle. As the demand for cold brew increases rapidly, coffee houses are investing significantly on innovative cold beverages. Starbucks expects to quadruple its cold brew business by 2021 and its overall cold beverage mix to nearly 50% by this year. Cold brew consumption in the U.S. is increasing rapidly as the millennial population favors this drink. According to research by Mintel Menu, 66% of U.S. millennials drink iced coffee compared to 34% of Gen X. With demand for gourmet coffee rising, a cold pressed technology to serve high quality cold coffee at its Roastery stores can help Starbucks increase the average beverage spend at its restaurants, impacting the valuation of the company positively.

According to our estimates, the average beverage spend per customer visit at a Starbucks company owned store is around $6 and we expect this number to increase to nearly $6.70 by the end of our forecast period.

A faster pace of increase in this driver can lead to an upside to our price estimate. For instance, if the beverage spend increases to nearly $8 by the end of our forecast period, there can be a nearly 15% upside to our price estimate.

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The millennial generation prefers gourmet coffee, however they do not particularly like hot coffee. Most of the innovation so far in the gourmet coffee segment has been in hot coffee, indicating that there is a huge opportunity in the iced “gourmet” coffee segment. Experts believe that the aromatic and complex ingredients of coffee are released only when it is brewed at high temperatures and hence cold coffee would lack that flavor. With its innovation via the cold pressed process Starbucks is looking to exploit the gourmet opportunity in cold coffee. Gourmet iced coffee would be a strong driver to attract the high spending generation and can become a key growth driver for the company in the long term.

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