Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

It's not about the $10 cup of coffee. 

Critics have derided Starbucks Corp.'s push into higher-end coffee bars, which the chain discussed in detail on Thursday, at an all-day confab with Wall Street investors and analysts. Skeptics questioned whether millennials would pony up for pricey drinks such as the $10 Nitro cold-brew coffee, which is infused with nitrogen gas. Others poked fun at descriptions of exotic beans small-batch roasted in Seattle. 

They are missing the point. 

Starbucks is not trying to change its current business model by going even more upmarket than it already is, nor is it trying to convince folks to spend more on its run-of-the-mill drip coffee just because it's served by hipsters in hats and leather-lined cloth aprons (the new uniform of the higher-end Roastery stores).

On the contrary, Starbucks has launched a completely separate, brand new restaurant chain -- one that rejects the old model of brick-and-mortar ubiquity, while also getting back to the chain's roots.  

Stock Jolt
Starbucks shares are up 175% in the past 5 years, compared to an 82% rise in the S&P 500
Source: Bloomberg

Back in the 1970s, CEO Howard Schultz fashioned Starbucks in the vision of a "third place"-- corporate jargon for somewhere for people to hang out when not at work or home. But over the years, many of the 25,000 stores worldwide have basically turned into fast-food stations, where people get their coffee fix and get out. 

Store Count
Starbucks aims to get up to 37,000 stores by 2021, which would overtake McDonald's store footprint
Source: Bloomberg

Many of the stores don't look all that different from McDonald's higher-end McCafe's. Starbucks has invested in drive-thru's, mobile ordering and payment and virtual baristas, to speed up the process and get more money flowing through the chain. 

The problem is, this model depends greatly on foot traffic. And with consumers spending increasingly less time at the malls and shopping centers Starbucks locations were built to serve, the company knows it can no longer rely on the "pull" model of intercepting existing foot traffic. Instead, it will have to create more of a "push" model, giving consumers reasons to get off their couch and come in to get a coffee. 

Traffic Jam
Shopper traffic at retail stores is in a steep, years-long decline
Source: Prodco

Enter Starbucks Reserve and Roastery stores. They are more wine bar than coffeehouse, replete with tastings, mixologists and educated baristas. They're a place to take a date, to sit at the bar and experience the tastes and smells, as you'd do at a wine bar or craft brewery.

Indeed, customers at the already opened Roastery outpost in Seattle spend an average of 40 minutes at the restaurant, according to the company. Compare that to the few minutes it takes to swing by a Starbucks on your morning commute and pick up the vanilla latte you pre-ordered on your cell phone. It's a totally different business model. 

It's no wonder CEO Howard Schultz is stepping down as chief executive of Starbucks to work on this new, higher-end line. It's a better fit for Schultz to focus on the romantic drama of building this new concept, leaving the day-to-day work of infusing technology into an established fast-food chain to his successor, former Microsoft executive Kevin Johnson. `

To be sure, the new lines could flop if ...

  1. Schultz's vision doesn't play out. As consumers let technology and screens take up more of their time, Schultz is betting people will seek out human interaction. Millennials who may spend more time at a party posting selfies on Instagram than actually talking to others may prove him wrong. Then again, Starbucks said Roastery is already the second-most-visited tourist spot in Seattle after the Space Needle, so maybe folks are looking for cool places to capture on Snapchat.
  2. Starbucks can't focus both on rolling out the new higher-end concept and keeping the current fleet of stores growing at the same time. Retail history is littered with companies, such as The Home Depot Inc. and Wal-Mart Stores Inc., which tried to juice growth by opening new retail concepts, only to shut them down. 

So far, Starbucks seems to be taking a somewhat measured approach. Its immediate plans call for only 20 to 30 Roastery outposts globally. This could limit the damage if the concept flops.

As Schultz explained to an analyst Thursday: "Let's say it doesn't work; what have we lost?" 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net