SBUX Starbucks Corporation

By Julie Jargon 

Starbucks Corp. is partnering with a luxury Italian bakery in an effort to move more upscale.

The coffee giant has made an investment in high-end Italian bakery and pizzeria Princi that allows it to develop and operate all new Princi locations outside of Italy, including in the U.S., and to offer Princi baked goods in Starbucks' new specialty coffee stores.

Starbucks has been trying to overcome its reputation as a mass coffee brand and better compete with the likes of Stumptown and Intelligentsia by introducing single-origin coffees in supermarkets, improving its food offerings and opening a massive coffee shop in Seattle where coffee is roasted.

Starbucks Chief Executive Howard Schultz said that customers are increasingly seeking "a higher level of product."

Starbucks also plans to open a roastery store in Shanghai next year and in New York in 2018 as well as a separate chain of "reserve-only" stores that are twice the size of a traditional Starbucks and offer a manual espresso machine and four different methods of brewing its small-batch "reserve" coffees, instead of just the drip method available at most of its coffee shops. The company in 2014 said it planned to open 100 reserve-only stores, but on Wednesday declined to provide an updated number.

Mr. Schultz said that operating different stores beyond its Starbucks chain will allow the company to offer coffee at varying price points, much the way the company has done with its lower-end Seattle's Best brand.

The arrangement with Princi also will help Starbucks boost its revenue from food, which has been a big driver of its growth in recent years. Starbucks acquired Bay Bread LLC in 2012 so it could sell its La Boulange pastries, famous in San Francisco, in its coffee shops. Starbucks' food had drawn complaints about its quality and consistency, and since the rollout of products made with La Boulange recipes, food sales at Starbucks have grown at double-digit rates. Starbucks last year closed the 23 La Boulange shops in California and brought the brand entirely in-house. The La Boulange products will continue to be sold at traditional Starbucks cafes.

Baked goods made from Princi recipes will be sold at the new roastery stores as well as the reserve-only stores. Starbucks declined to disclose the size of its investment in Princi, but the agreement gives Starbucks the rights to open Princi locations around the world, except in its home country, in order, Mr. Schultz said, to respect its local heritage. Founder Rocco Princi operates five shops in Milan, as well as one in London.

Starbucks, which plans to open its first coffee shop in Italy next year, said it won't be a traditional Starbucks but rather a flagship store that will serve Princi food. Mr. Schultz wouldn't disclose how that store will be branded. Starbucks plans to open the first U.S. Princi store next year in Seattle.

Mr. Schultz, who was inspired to develop a coffee culture during a business trip to Milan and Verona 33 years ago said, "I've been dreaming of bringing Princi to Starbucks."

Write to Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

July 13, 2016 17:52 ET (21:52 GMT)

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