SBUX Starbucks Corporation

By Julie Jargon 

Starbucks Corp. is making its next move into the high-end food and beverage market, seeking to find new sources of revenue amid a broader slowdown in the industry.

The opening on Tuesday of luxury Italian bakery Princi inside Starbucks's Seattle Reserve Roastery is one way the coffee giant is seeking to differentiate itself. Starbucks last week reduced its long-term sales and profit growth outlook due to the difficult retail environment.

Howard Schultz, who stepped down as chief executive in April to focus on developing high-end coffee shops within the company, said Starbucks needs to create another brand tier to appeal to more affluent consumers.

"If we don't do it, someone else will," he said in a recent interview.

The company, he said, is spending "tens of millions of dollars" on the venture that it announced last year involving the Princi bakeries, though he declined to give more specific details.

Mr. Schultz said he envisions including Princi bakeries inside all of the Roastery shops the company plans to open globally. Roastery sales still are too small of a contributor to move the needle for the company's earnings. But the average transaction in the Seattle Roastery -- a tourist destination -- is $20, compared with $5 at a traditional Starbucks, Mr. Schultz said.

Some industry analysts question the wisdom of opening more outlets selling premium-priced products when there already is an oversupply of food-and-beverage retailers that consumers have been shunning in favor of lower-priced alternatives.

"Diluting management's attention to a side project that it isn't going to be material and that further entrenches them in operating retail stores at a time of accelerating competition and decreased traffic doesn't sound like a great idea," said John Zolidis, president of Quo Vadis Capital, an independent equity research firm.

Inside its Princi's first commercial kitchen, an 11,000-square-foot space adjacent to Starbucks headquarters, bakers make dough, chop vegetables and prepare ingredients, including some imported from Italy, for thrice-daily delivery to the Roastery less than four miles away, where cornetti (the Italian version of a croissant), pizza and bread made from owner Rocco Princi's recipes are baked in one of three huge pizza ovens. Starbucks said it plans to open a commercial kitchen in every market where a Roastery will be built, including Shanghai, New York and Chicago.

Cliff Burrows, the Starbucks executive in charge of the Roastery, Reserve and Princi businesses, said the central kitchens are necessary because Princi bakeries will be too small to accommodate a full kitchen and that it is critical that the products be served fresh.

Starbucks said it is also planning to open 1,000 standalone Princi bakeries around the world, with hundreds in the U.S., serving small-batch Starbucks "reserve" coffee.

Write to Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

November 07, 2017 08:27 ET (13:27 GMT)

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