Starbucks courts millennials with $10 coffee at new Reserve bars

Starbucks Corp Chief Executive and co-founder Howard Schultz's plan to build a new prestige brand is a bet that moving upscale can raise the profile of the world's largest coffee brand with millennials like Megan Sauers.

Schultz in April will move into the role of executive chairman to focus on opening 1,000 new "Reserve" brand stores and adding Reserve bars to 20 percent of its traditional cafes, which now number 25,000 around the globe.

Starbucks also envisions as many as 30 large, showcase Reserve Roastery and Tasting Rooms in major cities around the world.

Schultz's transition marks a turning point for Starbucks, which introduced millions of people around the world to higher quality coffee and espresso drinks and now must find a way to avoid being labeled pedestrian when compared with upscale rivals like Blue Bottle and Intelligentsia, which are popping up in U.S. cities.

"Starbucks is the millennials' parents' coffee house and Starbucks is acutely aware of that," said Ric Rhinehart, executive director of the Specialty Coffee Association of America.

Its Reserve projects are "a reminder that they did this first and they do this best," said AB Bernstein analyst Sara Senatore.

Reserve stores will be about twice the size of typical stores and exclusively sell and serve exotic, small-lot coffees that can cost $50 per 8-ounce bag. The first are planned for Seattle and Chicago.

The new Reserve stores and Roasteries will serve wine, beer and spirits and bake their own pastries from Princi, a boutique Italian bakery and Starbucks partner.

Executives expect customers to stay longer and spend more at Reserve cafes, driving twice the financial returns of typical Starbucks stores, which have average unit sales of about $1.6 million annually.

Schultz told attendees at the company's investor meeting on Wednesday that the halo from Reserve will make Starbucks a more compelling destination while providing an antidote to customers spending more of their time and money online.

"If Starbucks was a 20-chapter book, I still think we're in chapter 4 or 5," said Schultz.

Starbucks already has added Reserve bars to a handful of Starbucks shops in major cities, including New York, Chicago and Atlanta.

Reuters recently visited a Reserve bar on Manhattan's Upper East Side, which offered $10 cups of coffee made in glass siphons, $10 "flights" of Reserve brews and nitro cold brew via a separate Reserve menu.

Twenty-four-year-old Sauers came in for her standard Starbucks caffeine jolt and discovered the new brand.

"I'd probably just stick to the regular, I'm not too picky," said Sauer, who showed the kind of aspiration that Starbucks seeks.

"If I had the money to spend more towards coffee I'd do it," she said. "I think people want it, too."

The new Reserve stores could boost Starbucks' revenue if they hit targets, said Bernstein's Senatore, who cautioned that Schultz's new project has investment requirements that could become less attractive in a slowdown.

Seattle-based Starbucks debuted the first Roastery in its hometown two years ago, spending a reported $20 million on the 15,000-square-foot industrial-chic playground for coffee enthusiasts. The Shanghai Roastery, which will be twice that size, is slated to open in about a year, with Manhattan to follow about six months later.

But as Starbucks has already learned, moving upscale carries its own risks.

"There is always a market for what is different, special and rare, but the minute you become so available that anyone can get what you are selling, you lose your cachet," said market researcher Robert Passikoff, president and founder of Brand Keys.

(Reporting by Lisa Baertlein in Los Angeles and Tim Baysinger in New York; Editing by Peter Henderson, Leslie Adler and Jonathan Oatis)