World Class Faculty & Research / March 15, 2017

Why Starbucks Is Dipping into Ice Cream

SMITH BRAIN TRUST — Has Starbucks figured out a way to entice its devoted morning-coffee crowd to come back later in the day? The Seattle-based retail chain is rolling out a line of ice cream coffee treats — called affogatos — at 100 stores across the country, betting that a more decadent coffee treat will inspire an afternoon or evening splurge.

The treats — classically, ice cream topped with a shot or two of espresso — are the latest menu extension for the Seattle-based coffee giant, and show how Starbucks is using analytics data and its upscale Starbucks Roastery in Seattle to test potential new offerings before rolling them out en masse.

“It used to be that firms received standard reports and what you were getting was a description of what the market looked like in the not-so-distant past,” says Henry C. Boyd III, clinical professor of marketing at the University of Maryland’s Robert H. Smith School of Business.

Now, companies are collecting and interpreting vast amounts of consumer data in real time, allowing them to predict the preferences and needs to individual customers and store locations. “We are able to formulate models now that put us in the prediction game,” says Boyd, whose areas of expertise include market research and consumer behavior.

As a result, companies are able to innovate faster than ever before and with more confidence, says Boyd. That’s not to say datapoints know all, or that there won’t still be flops.

And Starbucks has had a few. The Evolution juice brand recently failed as a standalone store. In 2009, Starbucks explored a juice-infused tea that didn’t last long on the menu. The year before there was the Sorbetto, a fruity drink, and there was the Chantico, a more chocolatey, less milky hot chocolate. The company even experimented with a Starbucks-branded ice cream, sold in grocery stores, but it was discontinued in 2013.

The latest ice cream iteration, which became among the most popular items at the Seattle Roastery, comes after last summer’s debut across the chain of an affogato-style frappuccino.

“We are assuming it tastes good; it looks good,” says Rosellina Ferraro, associate professor of marketing at the Smith School.

“But on the logistics side, it has to work.”

A key to Starbucks success is its speed in delivery. Whenever the coffee chain adds a new item to the menu — breakfast and lunch options, for example — it’s important to test the effects on that turnover time, she says.

The chain’s extension of its breakfast menu, she says, has been well executed, with food options that can be turned around quickly. “As more and more people are just grabbing their breakfast on the go, getting the two things — your coffee and your breakfast sandwich — at the same place is great. Especially because we know that adults are moving away from cereals and more kid-like breakfasts.”

Despite its quick-serve position, Starbucks has maintained the consumption experience that has defined the brand. “It’s about the atmosphere and the ambience,” Boyd says. "You don’t feel like you are in a coffee shop, you feel like you are in someone’s living room.”

It’s that atmosphere, Boyd says, that makes an indulgent adult ice cream or an elite coffee offering appealing.

“It's a sophisticated option for adults,” Ferraro says. “Adults are not likely to go to Baskin Robbins together, but they might go for a coffee-based ice cream as a nice treat.”

At its Seattle Roastery, Starbucks is also experimenting with new barrel-aged coffees. The Starbucks Reserve Whiskey Barrel-Aged Sulawesi started selling earlier this month, with an 8-ounce serving costing $10.

It’s a steep price, about three times the cost of a traditional Starbucks coffee. But remember, Boyd says, when Starbucks entered the market with $3 and $4 cups of coffee, everyone thought the price would doom the business.

Consumers are willing to pay for "small indulgences," Boyd says.

“Ten dollars for a cup of coffee, that seems like a lot of money,” he says. “But if it’s not just a cup of coffee — it’s more like a drink at a bar and it’s part of this experience — you might say to yourself, yeah, I can do this. And then you take a picture and you post it on social media."



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About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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