Starbucks Aims to Move Beyond Beans

October 8, 2013

Starbucks Aims to Move Beyond Beans



La Boulange baked goods at a Starbucks in Seattle.

SEATTLE — In a suburb due east of Los Angeles, Starbucks is opening a $70 million, state-of-the-art plant that will produce cold-pressed juices. The factory is the latest investment that underscores Starbucks’ determination to transform its brand from being synonymous with coffee to a food and beverage juggernaut. In the last two years, Starbucks has spent $750 million acquiring three new businesses — Evolution Fresh juices, La Boulange Café and Bakery, and Teavana — as it tries to muscle in on prized grocery shelves and compete in territory now dominated by the likes of Panera Bread and Chipotle. “We have a lot going on,” Howard Schultz, the chief executive, said in an interview at the company’s offices here.La Boulange’s sweet and savory pastries and snacks now are displayed on pink paper that lines bakery cases in 3,000 of Starbucks’ 10,000 domestic stores.

This month, Teavana will open its first tearoom on Madison Avenue with the goal of teaching customers how to order tea the same way they order coffee in a Starbucks — double tall light whipped soy oolong, anyone?

Whether the diversification and expansion will catch on is something analysts and Wall Street are watching. Given that Starbucks’ primary business is still concentrated during the morning hours when coffee drinking is most popular, the company has struggled for years to lure customers into its stores through the rest of the day. Beverages, mainly coffee drinks, still account for three-quarters of the company’s overall sales, while food contributes 19 percent.

Fueling its moves into new ventures are record results. In the first three quarters of its fiscal year, the company’s sales grew 11.7 percent to $9.9 billion, with sales in stores open at least a year climbing 7 percent to produce earnings of $1 billion, up 21 percent.

Now, despite Starbucks’ addition of those display cases with tempting pastries and juices, analysts are flagging the potential risks associated with any drift away from attention to its still enviable and dominant brand.

Bonnie Herzog, a stock analyst at Wells Fargo who follows the company, recalled how Wall Street punished PepsiCo when it took its eye off its namesake soda business to focus on developing the snack-and-cereal side.

“Starbucks is asked all the time whether with all the balls they are throwing up now, they can keep the core business healthy and strong,” Ms. Herzog said. “That business, after all, is what is going to fuel and finance growth of all these other areas.”

She said she saw value in the company’s cross-marketing of its portfolio of brands. Evolution Fresh juices and healthy snacks are now sold in Starbucks stores, displacing national brands like Naked and Kind, and La Boulange products are likely to end up in Teavana and Evolution Fresh stores.

Shoppers can already find Evolution Fresh juice in Whole Foods stores across the country and in many Stop and Shop locations. Starbucks is preparing to open a string of stores dedicated to the brand. There, Lucite levers on the wall will allow customers to mix their own juice blends to go with a menu of soups, salads and sandwiches that try to cater to the health-conscious.Although a few Starbucks stores offered light lunch options, even some finger food and wine after 4 p.m., the company’s previous attempts with food have not wowed customers. “Some people have said our food is not much better than cardboard, which I think is a fair criticism,” Mr. Schultz said.

Changing that ho-hum selection has fallen to Pascal Rigo, who is responsible for all the pink paper showing up in Starbucks stores these days. The founder of La Boulange, Mr. Rigo has not only figured out how to squeeze freezers into all the Starbucks stores — one tiny outlet in Manhattan was a particular headache — but he also is coaxing legions of baristas into selling baked goods and sandwiches.

One example of the attention to detail is the assignment of one employee in each Starbucks store to mind the pastry case, to make sure that most of La Boulange’s baked goods are served warm, as they are intended to be eaten that way. The chocolate croissant, which is not too sweet, is particularly popular.

The sheer logistics of the new food business would be a challenge to any company. Mr. Rigo is essentially in charge of training hundreds of regional bakeries to make scores of La Boulange products consistently, flash-freeze them, and deliver them to Starbucks stores in the right quantities every day. “There are a lot of moving parts,” he said, “but I think we can do it.”

“Food is something they’ve been trying to solve for 20 years,” said John Moore, a former marketing executive at Starbucks who is now chief operating officer of Brains on Fire, a marketing consulting firm. “The stores are set up as places to brew and serve coffee, and they don’t have a back of the house suitable for the prep work and other work that goes into serving high-end pastries like these well.”

Additionally, Mr. Moore said, Starbucks does not have a great track record for succeeding with brands other than its own. An earlier acquisition, Tazo teas, has become a $1 billion brand almost in spite of Starbucks, he said.

Steve Smith, a founder of Tazo, said Tazo had struggled to hold its own inside Starbucks, where it was viewed more as an additional product line than as a brand. “I have the utmost respect for Howard Schultz, who told me when we first started putting our products on their shelves, ‘Don’t let us get our fingerprints all over your brand,’” Mr. Smith said.

But Mr. Schultz left the company in 2000 and did not return for eight years. “There was a long period of time when we were viewed as just a very small piece of the Starbucks business, not as a brand that needed space of its own,” he said.

By the time Mr. Smith left Starbucks in 2006, Tazo was generating roughly $1.5 billion in yearly revenue for Starbucks and outpacing coffee in same-store sales growth, said Mr. Smith, who now owns Smith Teamaker.

“We had to fight to get displayed on the back of an étagère, and sometimes we even got front and center,” he said. “But there was this constant tension between coffee and tea and merchandise and ready-to-eat, with everyone managing those categories vying to be the next featured item in the store so they could demonstrate that they could grow their business.”

Jimmy Rosenberg, the founder of Evolution Fresh, empathizes with Mr. Smith. He started his juice career selling blended juices, made from fresh fruits in his mother’s kitchen, out of a backpack along Venice Beach in California, he said. He sold that business, Naked, to Chiquita Brands in 1991.

But he left the company shortly after the sale because, he said, he felt pressure to increase growth and profits at the expense of quality. “They insisted on using banana pulp instead of fresh banana and things like that,” Mr. Rosenberg said.

He then started Evolution. A couple of years ago, he found himself having to invest several million dollars in a small machine that could cold-press fruit, a process some believe better preserves nutrients. He realized then that it would be a long time before Evolution could ever challenge a competitor like Jamba Juice unless he found a partner.

A short while later, he was invited to Mr. Schultz’s house in the Hamptons. Soon after, Mr. Rosenberg agreed to do what he had sworn he never would: sell Evolution. “I had a bad experience with Chiquita, but I really trust Howard and Starbucks to respect my vision,” Mr. Rosenberg said. “Besides, I don’t know that I ever could have gotten to the point where I could invest $70 million in a plant.”

Nonetheless, he has already made at least one small concession. Evolution now offers a Sweet Greens and Lemon juice spiked with apple juice because, Mr. Rosenberg said, wrinkling his nose a bit, the new owners thought the original Essential Greens juice was not sweet enough for most consumers.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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