Starbucks (NASDAQ:SBUX) has transformed the coffee-drinking experience in the United States, essentially Americanizing a cafe concept born in Italy and turning it into a global phenomenon.

The chain has become one of the biggest brands in the world, with 26,736 stores across 75 countries. In the U.S., Starbucks took coffeehouses and made them mainstream.

It evolved a concept associated with ratty old couches and an offbeat clientele and made it something for everyone, with sleek furniture, Wi-Fi, and comfortable space to work or socialize.

Founder and chairman Howard Schultz built Starbucks with the goal of creating a third place for people in addition to work and home.

He succeeded in doing that, and that’s how it makes most of its money.

How does Starbucks make most of its money?
While Starbucks has become a brand that can be found in grocery stores, convenience chains, and pretty much everywhere beverages are sold, it still makes most of its money from operating its stores. In fact, revenue for company-owned stores are more than four times revenue from licensed stores, consumer packaged goods (CPG), and various other sources.

The third quarter was a record for the company in terms of revenue, but you can see from the chart above that stores continue to drive its business. CEO Kevin Johnson’s remarks in the Q3 earnings release suggest that’s unlikely to change anytime soon.

“Starbucks leveraged food and beverage innovation, an elevated in-store experience and personalized digital connections to our customers to deliver another quarter of record financial and operating performance, despite the softness impacting our principal sectors overall,” he said. “Continued focus on execution against our strategic priorities enabled us to gain share and positions us well for the future.”

What’s next for Starbucks?
While Starbucks will continue to expand its product line in grocery and convenience stores, its biggest growth will come from changes to its own cafes. Schultz himself is taking the lead in building a handful of Roastery locations in some of the world’s leading cities. He is also charged with launching about 1,000 higher-end Reserve stores and adding Reserve bars to around 20% of its cafes.

Each Roastery is sort of a coffee version of Willy Wonka’s Chocolate Factory. The huge facilities serve as research and development centers and cafes, and they do actually roast coffee for sale as well as distribution to area stores. The Reserve stores and bars are sort of mini-Roastery locations. They offer higher-end coffee, and more of a wine bar-like experience, led by baristas.

Since the Reserve concept is new, Starbucks has shared little data on how it performs. In 2016, however, Roastery customers spent an average of four times what a typical customer spends in a regular store. Reserve bars will likely have a smaller multiple because visiting one won’t be the same level of a special occasion as visiting a Roastery, but higher-priced items lead to bigger checks.

Stores lead the way
In addition to its premium Reserve and Roastery efforts, Starbucks has not slowed down in building its regular stores. In fact, it has plans to add another 5,000 locations in China by 2021.

Going forward, stores will continue to drive the Starbucks brand and provide most of its revenue. In fact, as the Reserve and Roastery brands grow, the percentage of revenue driven by the chain’s stores in relation to its other revenue should only increase.

— Daniel B. Kline


Source: The Motley Fool