Inside Starbucks' ambitious plan to combat the 'seismic shift' that could kill its business

The slow and steady decline of retail that’s shuttering department stores and putting malls out of business is also taking a toll on Starbucks.

“We can’t hide behind the fact that there is a seismic change that we’re experiencing as a brick-and mortar retailer,” Starbucks CEO Howard Schultz said at the company’s Investor Day on Wednesday.

As customers increasingly shop online instead of in person, Starbucks can no longer rely on foot traffic as a way to get people in the door, Schultz said. The US currently has too many stores and not enough people willing to shop in them, which Schultz predicts will result in lots of companies closing stores.

Despite the challenging retail climate, however, Starbucks plans to open 12,000 new stores around the world in the next five years, with projections of 10% revenue growth.

Schultz said that, in order to make this growth a reality, the company is banking on two strategies: becoming a “destination” and investing in digital.

“We believe we not only have the antidote to the seismic change in consumer behaviour, but we have an opportunity to really transform not only the core business to create a new source of growth and revenue,” Schultz said.

Becoming a ‘destination’

Starbucks Roastery SeattleMatt Weinberger/Business InsiderStarbucks’ Seattle Roastery, which has become a major tourist destination.

Schultz is stepping down as Starbucks’ CEO and will focus on the first goal: ensuring that Starbucks is a “destination.” A large part of Schultz’s new job as executive chairman will be focusing on the company’s Roastery and Reserve brands.

“With the opening of the Roastery, this gave us an opportunity to create a premium brand within Starbucks,” Liz Muller, Starbucks’ senior vice president, creative and global design, said Wednesday.

Starbucks said it is planning to open 20 to 30 planned Roasteries, which are the company’s tourist-friendly locations that serve expensive drinks like the $10 Nitro Cold Brew Float and roast coffee in-house. One currently exists in Seattle and five more are in the works around the world.

StarbucksSlide from Starbucks’ Investors Day

The company also plans to open roughly 1,000 Reserve stores, which will serve essentially as Roasteries minus the roasting, serving up small-batch coffee and a menu of food made in-house. Reserve stores will be twice the size of an average Starbucks.

Starbucks also wants 20% of all its stores to have a Reserve Bar, which will serve more exotic, small-batch blends made in a wider variety of preparation methods.

When Howard Schultz last stepped down as CEO in 2000, one of the company’s biggest struggles was that the Starbucks brand had become diluted by its own ubiquity. When Starbucks became “sterile,” in Schultz’s words, customers no longer had a reason to spend money at the chain.

With the Roastery, Schultz seems determined to build a super-premium brand to prevent this from happening again — especially as customers have fewer and fewer reasons to shop in stores instead of online.

Fighting fire with fire

Starbucks has ambitous plans to fight the challenges presented by the growth of ecommerce by investing in tech.

“We look at digital not as a marketing channel, but as a foundational part of the customer experience at Starbucks,” said Matthew Ryan, Starbucks’ global chief strategy officer.

Starbucks’ digital strategy is centered on the chain’s app, which combines rewards, ordering, and payment. The company has 12 million Starbucks Rewards members, up 18% from this time last year, 8 million of whom use Mobile Order and Pay.

Mobile ordering is much more efficient than ordering in person, which allows stores to processes more customers per minute during busy and crowded times. People ordering on mobile also tend to spend more money per order, research shows.

The coffee giant is in the early stages of rolling out a new personalised rewards program that will allow it to push certain products and incentives to customers based on what it already knows about them. Each Starbucks customer will receive completely unique offers via email and the Starbucks app.

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