January 23, 2008
Starbucks (Nasdaq: SBUX ) is testing $1 cups of coffee and free refills at some stores in its home turf of Seattle. I'd say shareholders would be right to wonder whether that's really a step in the right direction for the coffee giant.
This price point is about $0.50 less than its "short" (and off-menu) cup of java. If this makes you think "dollar menu," who could blame you? It certainly brings to mind the competition Starbucks faces from lower-end rivals McDonald's (NYSE: MCD ) and Dunkin' Donuts (both of which, according to The Wall Street Journal article that broke the story, offer their regular coffees at prices a bit higher than a dollar).
I was optimistic about Howard Schultz's recent decision to return to Starbucks. He had voiced concern last year about the possibility that Starbucks could lose its soul and commoditize its brand. I can hardly see how cheaper cups of coffee and free refills will help shore up Starbucks' upscale, aspirational elements. The strategy doesn't sound great for margins, either.
I think Motley Fool Stock Advisor pick Starbucks would be better off focusing on how it's different from rivals like McDonald's and Dunkin'. It might be overreacting to investors' recent paranoia about stepped-up competition from cheaper rivals, not to mention a scary, but ultimately temporary, consumer-spending slowdown. Starbucks can't afford to lose its "affordable luxury" rep to companies like Peet's (Nasdaq: PEET ) and Caribou (Nasdaq: CBOU ) , since the java giant's brand is one of its greatest strengths.
I think Starbucks needs to buck up. It's bad to lose your soul, but worse to lose heart as well.