Tuesday, February 28, 2023

Why Olive Oil-Infused Coffee Won't 'Transform' Starbucks

By Herb Greenberg (View Archive)

Betting against Starbucks (SBUX) CEO Howard Schultz has proven over the years to be a losing bet...

He beat the shorts in the early days of the chain when critics (including yours truly) said the company's business model of opening stores across the street from one another made no sense... and that the coffee was too "burned" for the average American.

Schultz did it again after retiring the first time around – he came back to work his magic and get things back in shape.

Now, he's back again – on an interim basis – and this time he's overseeing the rollout of Starbucks' new "Oleato" coffee drinks, which amount to infusing several hot and cold coffee drinks with olive oil. They're now available in Italy, and you can expect to see them in the U.S. starting in Southern California in the spring.

That's right – olive oil in coffee, which Schultz says "is a transformational moment in the history of our company, creating a new category, a new platform, and sense of discovery for our customers."

New category... Transformational?

If it gains traction, it sounds more like a potentially cannibalizing line extension than a transformational new category to me.

But the thing with Schultz is that he's a compelling promoter. In a recent interview on CNBC with Jim Cramer, he seemed genuinely excited about the launch.

Then again...

Schultz was equally effusive when Starbucks rolled out its "Reserve" brand back in 2014, with a target of 1,000 Reserve-branded stores. As he said at the time...

Everything we have created and learned about coffee has led us to this moment. The Starbucks Reserve Roastery and Tasting room is a multi-sensory experience that will transform the future of specialty coffee. We plan to take this super premium experience to cities around the world, elevating the Starbucks experience not only through these stores but across our entire business.

Then there was the 2012 acquisition of La Boulange, a San Francisco bakery chain, when Schultz said...

After more than 40 years, we will be able to say that we are bakers, too.

And let's not forget his comments when announcing the 2012 acquisition of Teavana...

We believe the tea category is ripe for reinvention and rapid growth. The Teavana acquisition now positions us to disrupt and lead, just as we did with espresso starting three decades ago.

As it turns out, Teavana and La Boulange disappeared... Both deals were a bust.

And as for those Reserve stores, there are six Reserve roasteries rather than 1,000... and Reserve coffee is available in 1,500 existing Starbucks locations.

I say all of this as a huge fan of Schultz...

Regardless of what you think of him, he deserves to be in the business hall of fame for turning Starbucks into the global brand it has now become.

Schultz's Pour Your Heart Into It about the beginnings of Starbucks is one of my favorite business books. I loved his discussion of how early on he was obsessed with short sellers... until he learned to ignore them and run the business for the business, not Wall Street. Once he did, everything else started falling into place.

I'm such a fan that back in 2004, when I used to give out a "Worst CEO of the Year" award, I named Schultz best CEO of the decade.

What about the subsequent failures?

They all show that Schultz is human.

Plus, he's doing what any good exec should do – not resting on past success. Experimenting through acquisitions and new products is critical for a brand like Starbucks that has to constantly reinvent... not just to keep the brand fresh, but to not be killed.

As I wrote in 2016, in a piece headlined, "Are Local Coffee Roasters Beating Starbucks at Its Own Game?"...

The very kind of independent shops that Starbucks steamrolled now appear to be eating into Starbucks. Just based on casual observations in San Diego, Los Angeles, and San Francisco: The local coffee shops that do their own roasting appear to be flourishing.

In San Diego, for example, Bird Rock Coffee Roasters and Lofty Coffee are both expanding. A friend turned me on to Four-Barrel in San Francisco. And I love Jones when I'm near Pasadena. And while I haven't seen the stats to prove it, there are no shortage of stories... suggesting that local specialty coffee roasters have been booming.

Perhaps most telling: Bird Rock's original shop, just south of La Jolla, is across the street from a Starbucks. And Bird Rock is always packed.

Since then, Bird Rock has added another eight locations while the number of competing local roasters in San Diego seems to have exploded. Ditto for everywhere else.

This brings us back to olive oil-infused coffee and whether it will truly be transformative for Starbucks...

I have no idea, but what I do know is this...

Expect to see a surge of stories about the health benefits of taking a teaspoon of olive oil a day... along with controversy over how much olive oil is too much.

I'm going with my cardiologist, an olive oil fan who admonished me a few years ago not to use more than two "capfuls" a day.

Good thing for Starbucks, the only people who listen to cardiologists are those who've had heart attacks... or those trying to avoid them.

Put another way, the total addressable market is huge. (I kid, I kid – sort of.)

For the Starbucks drinkers out there, what's your take on the rollout? Will you try it? And what do you think of Starbucks' business – and stock – in general? Send me an e-mail by clicking here... I look forward to hearing from you.


Herb Greenberg
February 28, 2023