With Market Saturated, Starbucks Looks to High End

SEATTLE - It's hard to believe that this coffee-crazed city would get excited about yet another coffee shop, particularly another Starbucks.

For over a year, the Seattle coffeecenti has been buzzing with speculation about the opening of the Starbucks Reserve Roastery and Tasting Room, the flagship of a planned chain of 100 plush stores selling high-end coffees from around the world.

With this new venture, Starbucks has signaled that it intends to lure the high-end coffee aficionados, as it eyes the growing market for rare coffees, those beans grown in small quantities that sell for as much as $45 for less than a pound.

But it already faces considerable competition from boutique coffee roasters like Stumptown Coffee Roasters, Dillanos Coffee Roasters and Blue Bottle Coffee that have already developed thriving businesses in what are known as single-origin coffees and microlots. Such coffees come from a single farm or small collective, typically hard to reach and fickle, so that production is limited and often available only at specific times of the year. Their customers tend to shun the sort of big-business ubiquitousness that a mass-coffee purveyor like Starbucks embodies.

In fact, Laila Ghambari, director of coffee at Cherry Street Coffee House, which has 10 shops in the Seattle area, calls it the 'McDonald's of coffee.'

So to distance Reserve from its mass-market cousin, Starbucks is vanquishing to a great extent its green mermaid logo at the new shops and in the product line. The Reserve stores and line of coffees instead carry a star logo, along with a red 'R'.

The reach into a higher-end market is another sign that coffee consumption in the United States is growing only modestly, according to trade data on imports collected by Panjiva. The popularity of single-serve coffee makers like Keurig and Nespresso have added additional pressure.

'If you look at coffee imports over all for the last several years, it looks like a pretty mature market,' said Josh Green, chief executive of Panjiva. 'There's been a roller coaster in terms of price, but in terms of volumes, we're talking about very modest growth - and that kind of market is usually where you see companies trying to go upmarket in terms of price and exclusivity.'

The new Starbucks Roastery is rumored to have cost more than $20 million. Part retail store, part manufacturing facility and part theater, the new store intentionally evokes the chocolate room where Augustus Gloop met his fate in Willy Wonka's candy factory. See-through tubes snake up out of the floor and under the ceiling, ferrying green coffee beans to copper-clad roasters and roasted beans to the coffee bars scattered like islands around the 15,000-square-foot space.

'This is a magical place where coffee comes to life,' said Liz Muller, director of concept design for Starbucks.

The noise the beans make as they rattle through the tubes - 'like rain,' Ms. Muller says, is punctuated by the click-clack of an old-fashioned railway station split-flap display, except the schedule tracked here is of varieties of coffees being roasted. They are small lots tracked down in remote highlands in Africa, Latin America and Asia.

'We're going to take the customer on a journey, immersing them in an interactive environment where they'll be introduced to handcrafted, small-batch coffees within feet of where they're being roasted,' said Howard Schultz, chief executive of Starbucks.

Virginia Morris, vice president for consumer insights and strategy at Daymon Worldwide, noted that consumers were seeking singular experiences that would include individualistic brews. But specialty brewers who have coaxed and attracted loyalists doubt that a giant in the mass-market will be viewed favorably.

'I think you can start out small and grow large, but once you're large, it's really hard to get the consumer's perception that you are authentic,' said David J. Morris, half-owner of Dillanos.

The company says the price per cup of a Reserve line will be $4 to $7, depending on the exclusivity of the beans, of course.

While Starbucks had record sales and earnings in the fiscal year that ended in September, with $16.4 billion in revenue and earnings per share of $2.66, its domestic sales have been dampened a bit by the growth in online shopping, the company said.

To address sluggish same-store sales that were slightly lower than anticipated by investment analysts, this week Starbucks began testing a mobile order and payment system in Portland, Ore., and began a promotion that will award 14 lucky consumers a gold card entitling them to a lifetime supply of the company's products. Take that, Willy Wonka. It has also been offering beer and wine in certain stores, even as it has expanded into offering tea and food lines.

Single-origin coffees typically are named for the places they are grown, not just the country. Stumptown's website includes a link to Google maps, so a customer can see, say, where its Colombia San Isidro is grown.

Microlots come from a specific parcel of land, like the section of Finca El Manzano coffee farm in El Salvador that grows Dillanos's El Manzano Porton Lot, which produced just 60 bags of coffee last year and was used by Ms. Ghambari when she won the United States Barista Championship this year.

'Each one has a signature nature, and each year it may be different, depending on when the rain comes and how much shade it gets,' said David Schomer, the proprietor of Espresso Vivace, which has three locations in Seattle, including a sidewalk stand in the Capitol Hill neighborhood, not far from the Reserve Roastery. 'Each one will be roasted differently by the roaster, who may develop more or less caramelization or more or less bitterness.'

Mr. Schomer, who is considered something of a legend in elite coffee circles, said consumers' tastes were shifting. 'I've seen an evolution toward less milk and stronger, richer coffee.'

He also suspects that more young people are making their own coffee at home, using hot water boiled to a specific temperature and using a French press, because Vivace is selling more of its roasted coffee online.

Until recently, Dillanos Coffee Roasters largely served commercial customers, roasting private-label coffees and helping them develop house blends. 'They need lots of coffee, not small lots of great coffee, and consistency is very important there,' said Chris Heyer, who owns the business together with his half brother, Mr. Morris.

About a decade ago, they started the One Harvest Project, a line of fair-trade, sustainable coffees, providing education, health and other benefits to growers with whom the company wished to develop long-term relationships.

That led to an even more exclusive line of coffees, DCR, which Phil Beattie, the Dillanos coffee director, called a natural progression that included the El Manzano microlot.

The company may purchase less than 300 pounds of such coffees, like Honey Margarita from Caicedonia, Colombia, and Kikai Peaberry from the Mount Elgon District of Kenya. In comparison, it roasts 2,000 pounds of its signature Dillons Blend coffee each day.

So what happens when a company the size of Starbucks begins shopping for the same precious beans, some of which may only be available for less than a month a year? Peet's Coffee is selling a half-pound bag of scarce Jamaica Blue Mountain coffee, one batch roasted on Wednesday and the second scheduled for roasting next week, for $45. Starbucks has been selling half-pound bags of single-origin and microlot coffees under the Reserve label in some of its stores since 2010.

Specialty coffee companies say relationships established over many years with growers will protect them from competition from bigger players. 'We have worked with our growers for a long time and we expect to continue to work with them,' said Eric Hoest, director of operations at Stumptown, which is based in Portland.

To expand in this area, Starbucks bought Hacienda Alsacia in Costa Rica, an estate that will produce specialty coffee just for the company.

Starbucks also will be sourcing coffee from other places as it plans to offer Reserve customers a choice of beans freshly roasted on the premises by roasters they can see at work and talk to. The roasters will be available only at a few new sites, but some of the Reserve coffee brands will be for sale in more than 1,000 Starbucks stores.

Mr. Schultz said his vision for the Reserve Roastery store stretched back a decade or more, and he collected a scrapbook with ideas for finishes and furnishings. But it wasn't until a used car dealership nine blocks up Pine Street from the first Starbucks store that he began executing his plans.

'I've probably touched thousands of our stores in one way or another, but as time has gone by, given the scale of the company and other things, I've not been as directly involved,' Mr. Schultz said. 'But I can't tell you how personal this project has been for me.'

He said the Reserve stores - only five or six will have on-site roasting facilities - will be run as a business and must make a profit to survive. 'At the end of the day,' he added, 'this all has to be proven in a cup - and it will be.'

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