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How Starbucks Is Starting to Offer Ultra Premium Coffee

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Jan. 28 2016, Updated 7:06 a.m. ET

Outlook on growth expectations

Starbucks (SBUX) coffee is often regarded as a premium product. The company is taking this reputation to the next level by offering what it calls “ultra-premium Starbucks Reserve” to customers through its Reserve Roastery stores. These stores offer not only specialized coffee but also premium loose-leaf tea under the Teavana brand.

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Brick and mortar

The company reiterated its plans to build 500 Reserve stores across its main global markets. These stores aim to provide a premium experience for customers. CEO Howard Schultz stated during the latest conference call, “Starbucks Reserve stores provide customers with a unique, highly premiumized in-store experience that showcases the finest assortment of exclusive Starbucks Reserve micro-lot, single varietals and new specialized coffee brewing methods through an intimate one-on-one partner customer experience that takes place as the barista crafts and explains the custom beverage.”

The subscription model

For customers who can’t visit brick-and-mortar stores, Starbucks offers a subscription model that starts at $19 per month. Under this model, customers receive an 8.8 ounce bag of select micro-lot coffee at their doorstep. This is another revenue source that should add to the company’s growth.

China market developments

Starbucks’s goal to penetrate deeper into China has moved ahead another step. During the quarter, the company began offering gift cards through Tmall, under the umbrella of Alibaba in China. These cards have stored value. In other words, they’re a pre-paid card. This is a very positive step, as the company stated, “Gift cards lead to increased MSR membership” in the United States. As we saw earlier, these cards helped drive traffic. A similar initiative in China may also increase MSR membership, which will drive higher traffic.

An alternative way to access Starbucks is through ETFs such as the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY invests about 4% of its portfolio in Starbucks and also has holdings in other restaurants such as McDonald’s (MCD), Darden (DRI), and Chipotle Mexican Grill (CMG).

Next, we’ll see how these initiatives may have impacted analyst estimates.

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