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Shanghai Roastery Advances Two Key Starbucks Plans

The new Starbucks (NASDAQ: SBUX) Reserve Roastery in Shanghai brings together two of the coffee chain's key growth drivers. First, it advances the company's strategy to launch a premium brand and second, it shows the company's commitment to China, its fastest-growing market.

Officially the largest Starbucks location in the world, the 30,000 square foot Shanghai Roastery is twice the size of the original Reserve Roastery in Seattle. It houses three different coffee bars, including one that is 88 feet long.

Like its Seattle counterpart, the Shanghai Reserve Roastery will have exclusive menu items not offered anywhere else in the world. There will be over 100 beverages on the Roastery's menu including "including Teavana tea infused with nitrogen as well as a new take on tea brewing with the Steampunk, which uses steam to extract unique flavors from each tea leaf," according to an email from Starbucks public relation.

The new Reserve Roastery has multiple bars for serving customer. Image source: Starbucks.

A commitment to China

Starbucks has plans to eventually open 20-30 Roastery locations around the world with New York following Shanghai in 2018, a year which should also see Roasteries open in Milan and Tokyo. Chicago, which at a planned 43,000 square feet will become the biggest of the currently announced locations, is expected to open in 2019.

It's not an accident that the second Roastery -- after the one in the company's hometown -- went to China. The chain recently bought back total control of its East China stores and it has been opening a new location in China every 15 hours, according to the company. There are over 600 Starbucks locations in Shanghai alone, making it the city with the largest number of the chain's cafes globally.

"We've created a space that both recognizes and celebrates our 46-year history of coffee leadership and retail innovation with China's rich, diverse culture," said Schultz in a press release.

The Shanghai location also includes a Princi bakery, using local bakers to bring "Rocco Princi's artisanal Italian recipes to customers in China for the first time." Also, it will have China's first-ever Teavana Bar, which the company describes as "a reimagined tea experience supported by the world's only tea bar made entirely from 3-D printed recycled materials."

A third brand

The Roastery locations are part of Starbuck's broader plan to launch a premium brand. Each Roastery will supply Reserve stores and regular cafes with limited-edition coffees, special beverages, and other innovations.

In an effort led by former-CEO Howard Schultz, the company plans to open several hundred Reserve stores all around the world. It also expects to add Reserve bars to up to 20% of its global locations by 2021.

The Roastery and Reserve locations offer a higher-end experience than traditional Starbucks cafes. That should mean customers spend more, driving same-store sales growth at the cafes which add Reserve bars.

In 2016 sales at the original Roastery grew by 24% over the previous year. During the chain's Q4 2016 earnings call, Schultz credited that to an average ticket that comes in at four times what a typical customer spends in a regular store.

A step forward

The original Reserve Roastery serves as a tourist destination that's sort of a coffee theme park. It's a draw for fans of the brand and a way for the company to lure new customers. The Shanghai location builds on that concept, serving as the company's flagship in its fastest-growing market.

This is an important step forward for the company in China and in its efforts to grow the Reserve brand. How well it works will depend more on the success of the Reserve stores and bars than the Roastery locations, which should do well simply because of their uniqueness.

Consumers will clearly pay more for special experiences. Whether that will translate into less-special, but still-more-expensive Reserve locations remains to be seen.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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