Starbucks’ Focus On Cold Beverages Heats Up Sales

During Starbucks’ annual meeting in March of 2018, CEO Kevin Johnson said the company was planning to double its food business by 2021.

Now, the company seems to be taking a very different approach. During the Morgan Stanley Global Consumer and Retail Conference Tuesday morning, Starbucks CFO Patrick Grismer discussed the strategy behind the brand’s product innovations, noting that a pivot to a beverage-first approach 12 to 18 months ago has contributed significantly to comp sales growth. 

“There’s no doubt that food remains an important part of what we offer. But one of the aspects of our business that has been instrumental to the overall positive momentum we’ve witnessed has been focus,” Grismer said. “We recognize that we are a beverage-forward concept. Beverage is our key point of differentiation.” 

Since that sharpened focus, Starbucks U.S. has gone from a comp store sales increase of 1% in Q3 2018 to a 7% jump in Q3 2019.

It’s also helped with traffic, an important metric considering much of the industry is struggling to find new guests. During the company’s Q4 call, Johnson said traffic has increased from the first part of the year, and no doubt driving much of that traffic is beverage innovation, specifically cold beverage innovation. 

“Cold beverages have figured quite prominently in the growth of our beverage platform in the last couple of years. This speaks to what appeals to young people and what resonates across all dayparts,” Grismer said during the Morgan Stanley conference. “Cold beverages have performed very well for us … truly year-round.” 

As a category, the global cold brew coffee market is expected to reach $1.63 billion by 2025, registering a staggering compound annual growth rate of 25.1%. In other words, Starbucks is striking the cold brew iron while it’s hot. 

Cold foam was initially introduced by the company in 2014 in Starbucks Roastery locations and was rolled out to its traditional coffeehouse locations in April 2018. The Irish Cream Cold Brew introduced earlier this week is the fourth iteration in the lineup, following Cold Foam Cascara Cold Brew, Salted Cream Cold Brew and Pumpkin Cream Cold Brew. The latter was the first new pumpkin coffee beverage since the brand’s wildly popular Pumpkin Spice Latte was introduced in 2003. 

Don’t expect this beverage momentum, cold or otherwise, to slow anytime soon. You can, however, expect a significantly different approach. Two years ago, the company relied on its beverages for exciting limited-time offers, which drove spikes in the business, according to Grismer. 

Such LTOs, however, tend to disrupt operations. At a time when Starbucks is pressing the accelerator on mobile ordering and delivery, there are already plenty of operational disruptions to worry about without throwing a complex, but brief, beverage in the mix.

And so the company changed its course: “The approach we’re taking today is to land more beverage platforms around what we can innovate going forward,” Grismer said. 

That means, for example, the cold foam line and those four iterations, or what Grismer calls “examples of how we have introduced platforms in ways that don’t drive a lot of disruption in our stores.” 

An additional benefit to this platform is it has helped reignite a spark in Starbucks’ afternoon business which has suffered slightly from a decline in the company’s signature Frappuccino sales.  In 2015, Frappuccino sales grew 17% over 2014. By May 2018, sales of the drink were down 3%. Executives cited more health-conscious consumers for the drop. 

“We’ve been very successful with what we’ve launched by way of new cold beverages that have taken up some of that [Frappuccino] demand; not just Nitro Cold Brew or Cold Foam Cold Brew, but also our Refreshers line and our line of flavored iced teas. Those have all performed really well and have contributed to the turnaround in our afternoon business,” Grismer said. 

What cannot be overstated, too, is that beverages drive habituation, and habituation tends to drive loyalty–another area where Starbucks has been tremendously successful. During its most recent quarter, the Starbucks Rewards program active member base grew by 15% year-over-year and now includes more than 17 million members. The company made some changes to this program at the start of Q3 with an intention of removing a bit of friction for consumers in their quest to achieve redemption levels. Consumers have responded favorably, according to Grismer. 

“We have seen improved engagement with the loyalty program. We’ve attracted more occasional customers into the programs … which creates significant opportunity,” he said.

Starbucks has also beefed up the technology behind its loyalty program, leveraging machine learning to garner more data about consumers’ habits and enhancing personalized marketing efforts accordingly. These changes, Grismer said, have contributed to engagement and comps the last two quarters. 

And they’re not the only benefits: “We know when customers join our rewards program, their total spend increases meaningfully,” Grismer said. 

All of this has led to a so-called virtuous cycle for Starbucks. As it leans heavily into beverages, it generates more visits, more loyalty and, by the nature of the product, more profits. As a result, the company is able to reinvest in the brand to maintain that digital edge over competitors. 

“As a beverage-forward concept, we enjoy high product margin coupled with limited kitchen investment,” Grismer said. “Our margin is further enhanced by our unique brand stature that generates unpaid media exposure, reducing our need for advertising expenses compared to other concepts.”

Such a cycle also tends to enable more growth, including a clip of 3-to-4% net new unit growth for Starbucks in the U.S., primarily in the central and southern regions. This pace, Grismer said, is industry-leading for a concept that already has such a deep footprint of more than 14,000 locations. 

“Importantly, Starbucks is the only brand at this scale which has grown store count in the U.S. in the past three years,” Grismer said, noting that the brand’s runway remains long. “Starbucks is far from full penetration in our home market.”