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Starbucks’ Sales Jump Leads To Confidence In High-End Coffee Strategy

November 3, 2016, 10:52 PM UTC
Starbucks Roastery photographed on March 10, 2016. (Joshua Trujillo, Starbucks)
Starbucks Roastery photographed on March 10, 2016. (Joshua Trujillo, Starbucks)
Photograph by Joshua Trujillo Starbucks

It is a sign of conviction that Starbucks executives can boastfully tell Wall Street analysts that they will have no problem convincing customers to spend more for ultra-premium coffees.

That’s the takeaway from the latest quarterly results from Starbucks (SBUX), which caps off another banner fiscal year. Net revenue jumped 16% to $5.7 billion and adjusted earnings hit a new record for the final quarter of the fiscal year. Starbucks hiked its quarterly dividend by 25%. And the good times are expected to roll in 2017, as executives outlined financial sales and profit targets that indicated higher growth than Wall Street expected.

All of those factors helped lift Starbucks shares in after-hours trading on Thursday.

It is from this position of strength that CEO and Chairman Howard Schultz was able to talk at length about his vision for the Starbucks brand of the future. It all has its roots in the debut of a Starbucks Roastery in Seattle at the end of 2014. That unique retail store—which includes a massive, almost 6,700-square-foot cafe and tasting room—kicked off the company’s bigger bet on selling a more premium Starbucks experience. Executives are confident in that concept as they reported sales at the Seattle Roastery are up 24%.

Interestingly, while Schultz said the roastery has no peer from a retail perspective, he conceded that building a new brand around Starbucks Reserve isn’t entirely a new concept. He pointed to Nike (NKE) as an example of what Starbucks is trying to achieve: The world’s largest athletic purveyor generates a ton of business from the namesake brand, but the in-house Michael Jordan label is another way to connect with consumers and “shines a halo on the entire company.” The goal is for Reserve to do the same for Starbucks.

Starbucks is in the middle of rolling out additional massive roastery locations in a few key cities. It has planned openings in Shanghai, New York City, and Tokyo and will announce a European location early next year. Schultz says as many as 30 cities could see these retail destinations.

Building on those high-concept stores, Starbucks is also planning to open up 1,000 Starbucks stores with a “Reserve” coffee bar—an espresso bar that makes coffee using a greater variety of brewing methods than what customers see in a typical Starbucks store today. That Reserve bar experience is more exotic, comes with higher price points, and “shines a halo on the experience,” Schultz argues.

“In addition to elevating the Starbucks brand and customer experience, our Seattle Roastery has also become a working laboratory for innovation that is driving new product introductions and contributing to results across the entire Starbucks ecosystem,” Schultz added. He pointed to a few notable examples, including cold coffees infused with nitrogen and Starbucks affogato—an ice cream dessert that is infused with espresso.

This increasing bet on premium coffees comes as a time when the retail landscape looks challenged for most. Department stores have struggled to connect with millennials, affordable luxury retailers have had to pull back distribution to protect their brands, and numerous restaurants—including Wendy’s (WEN) and Dunkin’ Brands (DNKN)—have blamed recent sales weakness on the looming presidential election.

Starbucks executives, who conceded that the election has affected consumer confidence, said that unlike their peers they wouldn’t blame any perceived weakness in performance on politics or the weather. Starbucks seems to believe they are in control of their own fate.

And the latest results on Thursday prove that Starbucks continues to steer their business smoothly. In the U.S. market, for example, comparable store sales increased 4% in the latest quarter as average ticket spending jumped 6%. There was a slight 1% dip in transactions, but that’s because of a change that Starbucks implemented to the company’s loyalty program earlier this year that discouraged order-splitting.