Howard Schultz’s New Project: The 4X Starbucks


Published:

Rob Bertholf

Starbucks (NASDAQ: SBUX) shocked investors when it announced CEO Howard Schultz would be stepping down in April to play the mad scientist in the company’s high-end locations.

Current COO Kevin Johnson, who was instrumental in the rollout of the popular mobile ordering and loyalty system, will replace Schultz as CEO. To investors, it signaled the risk of faltering from the incredible, seven-year high single-digit U.S. comp growth over which Schultz presided.

Even with Johnson’s strong background in technology (he was formerly CEO at networking giant Juniper Networks and an executive at Microsoft before that) and his near-decade tutelage under Schultz, he’s just not Howard.

“There’s never any good time for someone like Howard Schultz to step down because he’s so iconic, he’s been a combination of founder, entrepreneur and savior of the company multiple times,” said Will Slabaugh, restaurant analyst at Stephens. “There’s going to be questions in inventor’s minds regardless, just because of what happened the last time he stepped away.”

Those fears are largely unwarranted as Starbucks is a wildly different company than it was when Schultz last returned. With the stable foundation, Johnson might prove to be the ideal CEO as the brand expands the technology offering he helped implement. Sure, he’s not Howard Schultz, but the traditional Starbucks might not need one right now.

“To be fair, it’s the direction we’re moving,” said Slabaugh. “You have to be more fully integrated into the daily life of the consumer, which is more technology oriented.”

Time will tell what Johnson can do; the stock certainly took a hit, sinking 2% since the news broke. But Schultz could still be the merchant entrepreneur, guiding the company into the future from his brass-clad coffee lab, the Starbucks Reserve.

The high-end concept counts just two locations so far in Seattle and New York and another slated for Tokyo for 2018. In a word, the new concept is experiential; there are demonstrations of brewing techniques like the Chemex and siphon brewing, a blend of retail (another of Schultz’s focus areas) and lounge space and a foundation for restaurant-quality food.

“You have sort of a sort of Willy Wonka coffee experience, you can try coffee many different ways from different parts of the world, beans you can’t get anywhere else, different types of brewing,” said Slabaugh. “People are really paying up for this, and it’s also higher quality food, so your food attachment is higher and people actually go there to eat meals.”

Schultz has said he wants to create a “third place,” that regular intermediary between work and home that is typically filled by a bar or neighborhood café. That lofty goal is just as lofty are the AUVs at the new locations.

“What we know is that the AUV is around four times the typical Starbucks, so we’re talking somewhere in the in the $4.5 million range—so that’s a big number,” said Slabaugh.

That impressive café volume is built upon experience and high-dollar items. In Seattle, the menu includes a chocolate espresso tart, mini pecan pie and a coconut cream tart from local restaurateur star Tom Douglas, all for $7.50. Pair those with a cup of tea for $4.50, a special latte for $6.50 to $7.50, a flight of “origin roasts.” Customers can also get the now famously expensive $12 cup of black coffee brewed with visually appealing siphon brewing for a “nuanced cup.”

Certainly, few will be sipping that $12 cup of coffee every day, but the new features cut right to the core of what millennials want from a restaurant: a unique experience, customization and high-quality products.

What should be music to investors’ ears is that some of those elements will show up at Starbucks across the country. Starbucks announced in October that by the end of 2017, 1,000 Starbucks locations would feature a central part of the Reserve concept: the “Reserve coffee bar experience.”

What exactly that will look like remains to be seen, but if Starbucks can bring in some curious, experience-seeking coffee fans as well as some of the highbrow independents, AUVs will rise with traffic. And the brand needs traffic; malls just aren’t bringing in customers anymore.

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