FEATURE-Starbucks goes upmarket with Seattle test cafe

Sun Apr 4, 2010 8:00am EDT

* Starbucks' experimental cafes may signal upmarket move

* Alcohol on the menu at the test cafes

* Pour-over brewing method exported to Starbucks cafes

By Lisa Baertlein

SEATTLE, April 4 (Reuters) - Heavy velvet curtains, indie movie nights, single-origin coffees, wine and beer, mouth-watering organic pastries and gourmet cheese and meat plates -- this is Starbucks?

Well, sort of. It's Roy Street Coffee & Tea by Starbucks Corp (SBUX.O), the result of Chief Executive Howard Schultz directing his store designers to break the mold and build a neighborhood coffee house from scratch.

The cafe is located in Seattle's eclectic Capitol Hill section, home to a vibrant gay community, grunge rockers, hipsters and mansion dwellers.

It and the similarly edgy 15th Avenue Coffee & Tea, also in Starbucks' hometown, have been dubbed "idea incubators" by the now mass-market coffee chain and operate in one of the most competitive cafe scenes in the country.

Some company watchers say the two cafes signal a plan by Starbucks to move its stores back into the top end of the market, a niche it essentially vacated when it went mainstream with its lattes and Frappuccinos -- now facing competition from McDonald's Corp's (MCD.N) even more mass-market McCafe drinks.

"The Starbucks brand has shifted over time from being a specialty brand to being more of a mass brand. There is a gap at the top of the market," said Harvard Business School marketing professor John Quelch. He added that smaller rivals like Peet's Coffee & Tea PEET.O and Caribou Coffee Co CBOU.O have seized the opportunity to fill that void.

"Obviously, Starbucks does not want to concede that top end of the brand pyramid to those competitors," said Quelch, who did a case study of Starbucks in 2006.

The test format could "re-energize" Starbucks' upmarket appeal and attract the kind of following originally drawn to the upstart brand 20-plus years ago, Quelch said.

The company debuted the test cafes last summer, shortly after it unveiled its new Starbucks store designs at University Village and 1st Avenue & Pike Street in Seattle.

Starbucks' new store designs focus on energy savings and "green" building materials. Like the test stores, they have an urban industrial aesthetic that incorporates recycled building materials ranging from salvaged wood to high school bleachers.

"A major objective of ours was to get back on the leading edge of retail design," said Arthur Rubinfeld, president of Starbucks global development. Rubinfeld returned to Starbucks to "reinvent the store experience" shortly after Schultz retook the helm of the flagging brand in early 2008.

Dan Geiman, an analyst at McAdams Wright Ragen in Seattle, said the new designs have more of a focus on coffee and a "more organic and less cookie-cutter feel".

While Starbucks has made no announcements about its plans for the test cafes, they already are exporting ideas.

If you are the rare bird at your local shop who likes a bold brew or a decaf in the afternoon, you may have had a coffee made with the "pour over" method, where hot water is poured into a cone filter that drains into a serving cup. The method, popularized in cutting-edge independent cafes, was perfected for use at most U.S. and Canada Starbucks' outlets by Roy Street and 15th Avenue staffers.

FULL RANGE OF ADULT BEVERAGES

During a Reuters visit to the Roy Street cafe one rainy work day afternoon, customers ran the gamut from toddler-toting moms to freelance workers and retirees.

Among them were University of Washington graduate students Nadine Maestas and Deborah Kimmey, who came for the ambience, the coffee and the alcohol.

"It's a much improved atmosphere over other versions of Starbucks," Maestas said of the decor, which is punctuated by locally crafted metalwork, reclaimed wood counters, industrial fixtures and richly upholstered chairs.

During their visit, they ordered coffee, beer and wine.

"We go through the whole process of drinks," joked Kimmey.

CEO Schultz took the inspiration for Starbucks from Italy's cafes, which offer espresso-based drinks and alcoholic beverages ranging from beer to wine to grappa. Starbucks has never embraced alcohol sales in the U.S. or abroad -- but it has tested sales of such "adult beverages".

In 2000, Starbucks offered beer and wine in three test "Cafe Starbucks" outlets in Seattle, which served breakfast, lunch and dinner. It also sold those alcoholic drinks in two "Circadia" soup, salad and sandwich shops located in San Francisco and Seattle. Those concept stores eventually closed, and some locations were turned into Starbucks stores.

Beyond that, Starbucks has conducted limited-time tests of beer and wine sales in Japan and Spain.

The Roy Street and 15th Avenue cafes debuts revived speculation that Starbucks could one day sell beer and wine at its 16,000-plus global cafes.

But, so far, the answer to that question is no.

"We have no plans at this time to offer these beverages in other locations," a Starbucks spokeswoman said. (Reporting by Lisa Baertlein; Editing by John Picinich)