Starbucks Goes Healthy, Opens First Juice Store - Will It Succeed?

| About: Starbucks Corporation (SBUX)

Starbucks (NASDAQ:SBUX) will open today its first Evolution Fresh juice store in the city of Bellevue, Wash., east of Seattle, just months after buying Evolution Fresh and hiring key personnel in an attempt to go after the $50 billion health and wellness market.

The Coffee and Snack Shops industry is expected to resume its long-term growth trend starting from 2012, according to research firm IBISWorld. Consumers, however, have become increasingly health-conscious, and the general trend toward healthy eating has taken market share from other unhealthier segments like donut and ice-cream shops. A perfect timing for Starbucks to get into this new, faster growing segment.

Starbucks CEO, Howard Schultz, is not new to the juice industry, having been one of the first investors in Jamba Juice (NASDAQ:JMBA), the leading retailer of better-for-you food and beverage offerings.

Apparently, he recently looked at other similar ventures like Liquiteria in Lower East Side, New York, looking for new ideas. According to the NY Post his first move was to hire Liquiteria's manager Yohana Bencosme to train staff in Seattle for his new healthy concept shops. It was just after getting her on board that Starbucks bought Evolution Juice for $30 million, targeting to "reinvent" the $1.6 billion super-premium juice segment.

While Evolution Fresh will also replace Pepsi's (NYSE:PEP) Naked Juice offering within the existing Starbucks shops, the real challenge will be to build a healthy juice brand for the retail and consumer packaged goods markets out of a relatively unknown brand.

USA today had exclusive access to the Bellevue shop before the official opening. Some comments are worth a quote:

"Our customers are looking for a healthier lifestyle," says Jeff Hansberry, the former Procter & Gamble executive who is now president of Starbucks Channel Development, which will ultimately oversee a plethora of new brands and products. "Juice and nutrition is no longer a fad. It's a full-blown trend," he says.

Some 66% of Americans say they factor in the "healthfulness" of a product before they buy it, Hansberry says.

The first Evolution Fresh store, which Starbucks has kept under wraps, will be like an upscale health food store. All food and drink is natural - no artificial colors, preservatives or additives. Juices are customized in an area where employees mix juices from eight taps while videos explain the benefits and options.

"Evolution Fresh is the most innovative store since Apple entered retail," boasts Arthur Rubinfeld, president of global store development.

The prices may seem Apple-like, too. A full-size juice and salad (or sandwich) could set you back the better part of $20. Figure $7.99 for a 16-ounce hand-crafted juice. Another $8.25 for a salad - and $2.50 more if you want chicken or steak on it. Hot or cold sandwich "bowls" fetch $8.75. And a wrap - wrapped in collard greens, not pita - will set you back $7.50.

High prices are little surprise to those who know how existing retailers, including Jamba Juice and Liquiteria, market similar products - unlike McDonald's (NYSE:MCD) McCafe Real Fruit Smoothies offering, Starbucks is targeting creating a new shop concept, where price isn't supposed to be the consumer's main issue - the "inflating prices and upgrading atmosphere" concept that worked so well with coffee and guaranteed very good margins to the company.

As the best marketing company in the sector, it will be interesting to see if/how Starbucks will succeed in its effort to reshuffle the juice sector.

The company intends to open additional shops in the next few months, however, investors should not expect to see thousands of openings soon as the juice retail market remains relatively small compared to the coffee market, and the largest existing player, Jamba Juice, has about 750 shops in the USA.

Jamba Juice is an interesting turnaround story in the sector. The company has just completed its re-franchising effort, that lead to a decline in revenues, but a healthier balance sheet (no pun intended). The company expects to open about 40 to 50 new U.S. locations in 2012.

Jamba enjoyed comparable store sales increases in the last few quarters, and also improvements in store-level margins. The consumer product platform is also growing, and Jamba Juice products have reached about 30,000 points of retail distributions in 2011, with a target of about 50,000 shops by the end of this year. Additional concepts like JambaGO (self-service units, mainly intended for schools) are also being implemented to strengthen brand awareness and increase revenues.

As Starbucks approaches the same market, it will be interesting to see how Jamba Juice will react to the new competitor. While Starbucks' marketing skills are outstanding, so far Jamba has taken the approach to welcome any competitor as potentially raising awareness for the health-and-wellness category as a whole.

Here is a comment from Jamba's CEO, James White, related to the potentially increased competition for the same market:

As we faced the competition a few years ago from the likes of McDonald's, we wanted to make sure, hands down, there was no one - not any of the big players, whether McDonald's or Starbucks, and we have lots of people in the smoothie business - that would have the opportunity to deliver the quality or the range of custom smoothies as Jamba.

White noted that McDonald's spent $45 million in the first quarter of its smoothie line launch last year. Since then, Jamba Juice has had its best run of performance.

"We kind of joke about Jamba versus Goliath," White said. "But rumors of our demise have been greatly exaggerated, I guess now for a second time."

Disclosure: I am long JMBA.