Beverage Industry

Starbucks Brews New Coffee Concepts

November 1, 2007
Starbucks Brews New Coffee Concepts

By SARAH THEODORE

CPG group extends business into new categories and locations
Starbucks Coffee Co., Seattle, built its coffeehouse business on the idea of being the "third place" — the community gathering spot outside of work and home. But during the past three years, the company's Consumer Products Group has been filling those other locations outside of Starbucks stores with coffeehouse-inspired products as well. Through Starbucks’ own community of business partners such as PepsiCo, Kraft Foods and Beam Global Spirits & Wine, its products can be found in supermarkets, convenience stores, restaurants and bars, and soon, even vending machines.
The Consumer Products Group came together as a division within Starbucks three years ago, with the mission to “extend the [Starbucks] experience to a time and place of our customers’ choosing,” says Gerry Lopez, president of the Global Consumer Products Group.
“The way we think about these businesses outside of the store is that we’re trying to take that experience that we create inside of the stores and extend it to other places — to the home, to the workplace, frankly to anywhere that our customers choose to be or want to be,” he says.
The division is responsible for products such as bottled Frappuccino; Tazo teas; Ethos water; packaged Starbucks, Seattle’s Best and Torrefazione Italia coffees; Starbucks Coffee Liqueur and Cream Liqueur; Starbucks ice cream; and the soon-to-be-released Starbucks chocolate platform. The division has enjoyed year-over-year growth of 31 percent, and has plans to expand in several additional directions late this year and early in 2008.
Starbucks feels strongly that its core capabilities lie in its on-premise coffeehouse business, and it created partnerships with other beverage and food companies, both in the United States and abroad, to get the CPG products to market in other channels.
Starbucks first partnered with PepsiCo in 1996 to develop bottled Frappuccino products and distribute them through Pepsi’s extensive bottling network, alongside Pepsi’s soft drink products. For its packaged coffees and Tazo teas, the company teamed up with Kraft Foods to distribute the coffee through supermarkets and other retail accounts. Most recently, it turned to candy giant Hershey to develop its new chocolates, including three varieties of drinking chocolate. Beam Global Spirits & Wine handles production and distribution of its liqueur products, and Dryer’s is responsible for sales of Starbucks Ice Cream.
According to Lopez, it made more sense to partner with companies that were experts in the CPG trade and their respective beverage and food categories than to try to cover each of those businesses itself. The decision to use joint venture agreements as opposed to licensing, however, allows the company to have more control over product development, its trademark and the way its products are sold.
Most of the products in the CPG lineup are sold only through other retailers, not in Starbucks stores, but Lopez says, “Our stores provide the inspiration for everything we do outside of the stores,” adding that the company would not create a product for CPG channels that would not fit in its coffeehouse locations.
Building a category
In the United States, ready-to-drink coffee is a relatively new category, and it mostly belongs to the Starbucks/PepsiCo North American Coffee Partnership (NACP). According to sales information from Information Resources Inc., the NACP holds nearly 92 percent market share in RTD coffees. The category is still small, however, with plenty of room for growth, says Richard Burjaw, NACP vice president and general manager.
“This partnership invented the category back in the mid-‘90s, when Pepsi and Starbucks came together and launched Frappuccino in 1996,” Burjaw says. “It was the first mass ready-to-drink coffee available ... We’ve seen in the 12 years since then great growth.
“The household penetration of ready-to-drink coffee is just under 10 percent right now, so it’s a very young category and has lots of great upside,” he adds.
The company expanded from bottled Frappuccino to two canned products — Doubleshot in 2002 and Starbucks Iced Coffee, which was introduced last year. While all are coffee-based products, each has a slightly different consumer base, and Doubleshot’s branding positions it as more of a morning beverage, Frappuccino, an afternoon treat, and Starbucks Iced Coffee as an all-day product.
Starbucks ready-to-drink products do not always tie in to what’s going on in Starbucks retail stores, but Burjaw says the coffeehouse is always the inspiration for ready-to-drink offerings.
“The most important part of our business is the Starbucks retail store,” he says. “Their growth at retail continues to drive our awareness.
“We like to use the store and then we combine that with the power of our bottlers,” he adds. “Our bottlers are in many thousands of stores every day and that’s where their strength comes in, that’s what makes the partnership work so well.”
This year, the company is adding to the Frappuccino line with a new Dark Chocolate Mocha platform. The first launch will be Dark Chocolate Peppermint Mocha for the holiday season, which will tie in to a similar flavor in Starbucks stores. Next spring, Dark Chocolate Mocha will debut as a permanent addition to the ready-to-drink Frappuccino lineup.
“We can’t physically do everything they do in the store, both operationally and practically with [retail] customers,” Burjaw says. “We have to pick our spots and see ... what do we think is going to be the most incremental for our customers and drive the business for the partnership?”
The NACP also is wading into uncharted waters with the test rollout of Starbucks hot vending machines late this year. Dubbed the “Hot Boss” internally, the vending program uses proprietary vending machines built by PepsiCo that will vend packaged hot coffee in hospitals, universities and other vending locations. The companies are placing 50 machines in test market this fall, and will launch more broadly in the first quarter of 2008.
While the move may seem surprising for a company that built a reputation on drinks that are custom-made for customers by baristas, Burjaw says it is a natural extension for the partnership.
“The ‘Hot Boss’ vending project fits the strategy of the partnership perfectly because the partnership takes the great products that Starbucks makes, the premium brand equity it has and combines it with what Pepsi does really well,” he says. “We’re known for innovation and we’re known through our bottling system for doing a really good job of reaching consumers outside of traditional retail, which is vending.”
The line of six coffees will include Italian Roast Coffee with milk and sugar, Caffe Latte, Caffe Mocha, Caffe Mocha Light, Caramel Latte and Hot Cocoa. The vending machines will heat product on demand — to 140 degrees F in 47 seconds — and the products are packaged in 9-ounce steel cans with an insulated wrap and a lid on the top and bottom of the can to protect consumers’ hands from the heat. The vending machines will be serviced by Pepsi bottlers, similar to the way bottlers handle their soft drink vending machines.
The “Hot Boss” products will sell for a premium price, at least as far as the vending world is concerned — $2 for the Italian Roast variety and $2.50 for the specialty coffees and cocoa.
Burjaw and Starbucks executives say the concept has tested well with consumers. “We’re really excited about it,” Burjaw says. “There was work done with consumers a little over a year ago on the concept. The concept rated very highly, and then we put in their hands the actual product ... the product taste tests were at the very top end of the charts.
“If you think about it, in the soft drink business that we’ve built over 100 years, vending was a natural extension,” he adds. “It was just a matter of time before we got really good-tasting Starbucks products out there, and we’re really looking forward to the test.”
In a press video on the vending project, Starbucks Chairman Howard Schultz expressed his belief that vending today is at the point the coffee industry was at when Starbucks began, pointing to what he believes is great potential for the concept.
The at-home market
If Starbucks stores are the community gathering place, and “Hot Boss” takes Starbucks to work and school, Kraft Foods covers the third location in that triumvirate, the take-home market. Kraft carries the company’s packaged coffees and teas, to the tune of 56 million pounds of coffee each year. Starbucks roasts all of its own coffee in one of four plants around the world. It then ships the coffee to either its own stores or to its distribution partners for retail sale. It also creates coffee extracts for use in Starbucks ice creams, Starbucks Coffee Liqueur and some of its other products.
The Starbucks/Kraft partnership is responsible for a 41 percent share of the premium take-home coffee market. This year, the companies teamed up to create the Center Store Café, a supermarket retail display designed to recreate the feeling of being in a coffeehouse. The Center Store Café can be used in a variety of sizes and configurations, either as a stand-alone display or to replace an entire coffee section in the supermarket. It carries both Starbucks coffees and other coffee brands, and can carry ready-to-drink products as well as whole bean and ground coffee. It also can be used in non-coffee locations around the store, such as the bakery section, where a logical tie-in to coffee can be made.
The companies hope to convert more than 2,000 coffee aisles to the Center Store Café concept this year, and say it is the biggest investment they are making in the next three to five years. “It’s going to be suited to what the customer wants to do,” says Wendy Piñero DePencier, vice president of global consumer products. “They are very adaptable. The concept is to turn the aisle into an inviting experience, organizing coffees into ways that are easier for the customer to shop and really highlighting the differences in taste.”
Of the idea that some retailers or other coffee companies may balk at the concept of a Starbucks-themed display, Piñero DePencier says the concept elevates coffees as a whole. “You have to make sure you really meet the needs of the variety-seeking customer. We have to trust that the quality and range of our coffees will lead them our way, but you have to make the experience welcoming for anybody that comes down that aisle.”
Starbucks actually expanded its own coffee lineup several years ago, with the acquisition of Seattle’s Best and Torrefazione Italia coffees. Lopez says each of the coffee brands has a unique roast profile, allowing them to reach different consumers rather than cannibalize one another.
“Starbucks has a very distinct and unique roast profile to it,” he says. “Seattle’s Best adds a dimension to our portfolio that, candidly, Starbucks couldn’t add. The roast profile is totally different. It’s much smoother, some would say it’s even more approachable. It also adds to our portfolio the ability to do flavored coffees, which we would not do on the Starbucks brand.”
In keeping with the philosophy that the Seattle’s Best brand is appropriate for flavors, the company is getting ready to roll out a new Almond Roca Buttercrunch Toffee flavor of Seattle’s Best, as well as a Decaf Cinnabon flavor.
Piñero DePencier adds that Torrefazione offers yet another taste profile, with its Italian espresso style. “Coffee is an ingestible product,” she says. “There is no right or wrong, it’s just whatever you like. Having all these coffees really gives the customer [permission] to explore and find the one that really suits their taste.”
Kraft and Starbucks also have added Starbucks Limited Reserve coffees to the lineup this year, playing on the success of the Black Apron coffees sold in its retail stores. The ultra-premium line carries the tagline “Geography is a Flavor,” and takes a page from the wine industry by emphasizing exceptional crops and agricultural conditions. The line consists of several more difficult-to-source coffee varieties, which have included Rift Valley, Papua New Guinea Estate, Coupage del Sol, Tanzania Estate, Mexico el Retiro and Sumatra Lintong. Due to the limited nature of the crops, the coffees rotate in and out of market every three or four months.
Piñero DePencier says most retailers are reluctant to take on rotational SKUs because limited availability can leave them with holes on the shelf. But, she says, while it is still early, retailers are taking interest. “They’re trusting us that we’re going to deliver on the concept and we’re going to keep it in stock as we have promised,” she says.
In addition to coffee, the Starbucks/Kraft partnership includes Tazo teas, which Starbucks acquired in 1999. Tazo teas are available in both tea bag varieties and ready-to-drink flavors.
“What Tazo added to the mix was a perfect complement to coffee, and was a brand with a heritage, and a brand of a quality and stature that could stand right next to the Starbucks coffee brand,” Lopez says.
Tazo maintains its tea blending operations in Portland, Ore., and this year rolled out Vanilla Apricot White Tea and Organic Apple Red, as well as ready-to-drink Diet Mojito Green. Next year will see the introduction of ready-to-drink Organic Iced Red.
Starbucks also has worked the tea into on-premise offerings such as Green Tea Frappuccino. “They are complementary tastes and the ability to work with both of them at the same time was very intriguing to us,” Lopez says. “I think you’re going to continue to see us doing work there.”
Chocolate indulgence
One of Starbucks’ newest partnerships is both a beverage and food venture. The company teamed with Hershey to create a line of chocolates, including drinking chocolates and confections, that carry the tagline “When coffee dreams, it dreams of chocolate.” As with the coffee category, the growth in chocolate is coming from the premium end of the segment, the companies say. The Starbucks chocolate platform was created in conjunction with Hershey’s Artisan Confections Co., which produces brands such as Scharffen Berger and Joseph Schmidt.
“It is inspired by our coffee, tea and coffeehouse flavors,” Piñero DePencier says. “They are going to be very authentic in that way. You will be able to taste our coffee and our teas in them.”
Initially, the company will stay close to its beverage roots with a line of drinking chocolates that are hitting the market this fall. Double Delish is a blend of dark and milk chocolates, Marshmallow Memories are chocolate-covered marshmallow nuggets, and Peppermint Merriment is peppermint-infused chocolate. Following the drinking chocolates will be confections that will roll out next spring and incorporate Starbucks flavors, such as espresso or tea, either as flavor extracts or as actual ingredients in the chocolate. At least 50 percent of the platform will be café flavors, the companies say.
Also on the indulgent side, the Starbucks’ partnership with Beam Global Spirits & Wine has produced two liqueurs that have taken the Starbucks brand into unexpected places such as bars and cocktail lounges. Introduced in 2005, Starbucks Coffee Liqueur sold more than 100,000 cases in its first year — a feat achieved by only 19 percent of brands during the past 20 years, according to Starbucks and Beam Global. And the follow-up brand, Starbucks Cream Liqueur, received flavor accolades from the Beverage Tasting Institute in Chicago.
Starbucks Coffee Liqueur is 40 proof, and uses Starbucks House Blend as its flavor base. The Cream Liqueur variety is 30 proof and is made with Starbucks Colombia Roast extract.
A question that creeps up time and again as Starbucks expands both its coffeehouse and retail businesses into so many new locations is the potential for consumer fatigue. Lopez says that’s a topic the company always keeps in mind, but says ubiquity is not as much a concern as relevancy and whether or not the brand still matters and has meaning to consumers. He points out that with all of the coffee the company sells, both on-premise and off, it still only adds up to 10 percent of the coffee category in the United States, and 2 to 3 percent globally. As it expands in coffee and any of its other ventures, keeping a premium position will always be part of the criteria.
“What we’re trying to do is really change the game in the beverage world,” Lopez says. “We try to give them more options. We try to give them better options. The customers guide us. They become more discriminating and more discerning about their coffees. Hopefully we’re there to serve them.
“It’s that interaction back and forth,” he adds. “We’re fortunate to have 40 some-odd million of those interactions every week [in our stores]. We try to surprise and delight them ... That’s what Starbucks is all about — how you connect with those customers, how you enable our baristas in the stores to connect with those customers, and then, for us, it’s how do you extend that connection to a place that is beyond the four walls of our stores.”