Starbucks Sweats the Excess

The most notable news from Starbucks' (Nasdaq: SBUX  ) annual meeting may have been Howard Schultz's indignation at the coffee champ's reputation as a purveyor of high-priced goods. Funny, that mystique worked so well for the company when its business looked perkier. But now, according to media reports, Starbucks wants to shed its image as the coffee equivalent of Tiffany (NYSE: TIF  ) or Nordstrom (Nasdaq: JWN  ) .

This move's not exactly surprising. Luxury's in a free fall these days, as consumers reject a lot of the brands and products that have become emblematic of past lush living. Clearly, Schultz recognizes that's a danger to his business now: "We've become the poster child for excess ... we are going to dispel this myth about a $4 cup of coffee," he said at the meeting.

True, $4 isn't the going rate for all coffee beverages at Starbucks; regular drip coffee isn't nearly that pricey. But judging by what I pay for my venti latte every day, you can indeed walk out of Starbucks having paid very close to $4 (without a tip for your friendly baristas) for a beverage. Just sayin'.

I've been concerned by Starbucks' new efforts to prove it can provide "values" and "deals." That strategy strikes me as a bit too envious of McDonald's (NYSE: MCD  ) , and I do worry that it may tarnish the java giant's brand forever. The company's already debuted value meals, and -- sacrilege! -- it's even launching instant coffee.

Whole Foods Market (Nasdaq: WFMI  ) also shifted strategy when the economy started to show signs of tanking, attempting to shed its "Whole Paycheck" image by emphasizing values in its stores. For some reason, that gambit seems less risky for Whole Foods than it does for Starbucks. Given the organic grocer's breadth of selection and specific merchandise mission, it never feels anywhere close to run-of-the-mill rivals such as Safeway (NYSE: SWY  ) and Kroger (NYSE: KR  ) , even if it is emphasizing good deals in its stores.

But Starbucks simply sells coffee, with a few additional items on the side. In the past, Schultz has talked about reigniting the romance of the coffee experience that originally distinguished Starbucks from its rivals. I'm not sure how well that approach will mesh with a bevy of lower-priced offerings.

In its zeal to prove that it can be a "value" in these tough times, I remain concerned that Starbucks could dilute the style and class that made it special. Given how many people like coffee from rivals like McDonald's and Dunkin' Donuts just fine, I fear Starbucks can ill-afford to surrender any competitive advantage. If its brand loses any of its luster, Starbucks could lose some of its former customers for keeps.

What do you think about Starbucks' strategy? Feel free to air your thoughts in the comment boxes below.

Starbucks and Whole Foods Market are Motley Fool Stock Advisor picks. Starbucks is also a Motley Fool Inside Value selection. The Fool owns shares of Starbucks. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Starbucks and Whole Foods Market. The Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 20, 2009, at 4:23 PM, BabyBlueAnglican wrote:

    Starbucks needs free wifi and replace the comfy chairs that are looking mighty threadbare of late with more places to plug in. Outlets! Outlets! Outlets!

    bb

  • Report this Comment On March 20, 2009, at 4:54 PM, juliehowe wrote:

    Actually Starbucks is on a collision course with disaster. Offering free Wi-Fi was perhaps the worst corporate decision this company has ever made. The second-worst decision is the cheapening of their brand name.

    People like me - who would spend $5 on a Frappuccino - have no place to sit and enjoy our purchases because of all the loafers drinking brew coffee with free refills and taking up all the seats with their laptops as they suck down the free wi-fi.

    I was a mega Starbucks consumer. No more. Seriously. The wi-fi sucking crowd turned me away. I've been in a Starbucks once this entire year, and that was to use a gift card someone gave me. I had the experience of standing there holding my $5 carmel frappuccino and realizing that even though it was free to me (since I'd used my gift card) there was still no value in being a consumer of a $5 cup of sugar, coffee, whipped cream and water.

    So being away from the gimmick for so long opened my eyes to realize how stupid it was to spend that much money on a beverage in the first place. I have the wi-fi loafers to thank for this revelation, as they were what drove me out of Starbucks in the first place.

  • Report this Comment On March 20, 2009, at 8:38 PM, 102971 wrote:

    I was also a mega Starbucks consumer - a vente latte every morning. No more. It's now a tall latte on Saturdays and Sundays only. I have also stopped buying any of the expensive pastries. I can buy a donut 100 yds away for 75 cents. I sold my Starbucks shares last year (fortunately) taking a loss but suspecting that they had further bto drop (they did) and that they weren't going to recover for some time - if at all!

  • Report this Comment On March 21, 2009, at 12:01 AM, Sheryldeer wrote:

    Starbucks lost its way quite some time ago. When I started seeing one on every block downtown, I thought there must be a Starbucks "bubble" that was going to pop, and there was. Starbucks was more special when it was...well, special! Before they were everywhere and people started relying on them every day, they were cozy little places with tasty coffee. They took a great concept and oversaturated the market. Their continued growth depended on customers who were willing to continue paying $4 for that cup o' joe and now that such clientele is cutting back, the oversized beast must scale down. I don't think it's a bad thing. Starbucks should close some shops, stop watering down its brand with all the tea/value meals/being all things to all people, and go back to being the cute little string of coffee houses it used to be. Maybe some of the old timers will come back and enjoy some quiet when that occurs.

  • Report this Comment On March 21, 2009, at 12:04 AM, grip66 wrote:

    I listened for awhile and watched the free fall, bought in at 9.?? and some change, All biz need to change with the times, I made almost 18% in a matter of days. I find it amusing when people see change in a company, Then whine about it, went to the football game and bottled water was three bucks, cold beer 7 and those people dont have any health care, 4.00 for a good cup my way In a clean enviroment relaxing in a comfy chair for aprox 20mins- priceless

  • Report this Comment On March 21, 2009, at 11:34 AM, gotdyer wrote:

    There was a point in time when it appeared starbucks was having an identity crisis. That is, employees were instructed to 'push' (sell) other products aside fr/ coffee. This was quite annoying to most loyal "buckniks' , but this has changed somewhat. The recession has wreaked havoc on most U.S. businesses, W/ Schultz’s actions the company will ride out the cycle of this current economic storm. People will return when their wallets are full, a drop about 10 usd every morning, profits will soar once again.

  • Report this Comment On March 21, 2009, at 11:42 AM, jabez1 wrote:

    I like the idea of offering lower priced options along with pricier items.

    One of my favorite restaurants does precisely that.

    I know that whatever my preference is for the day, I can go to the same pleasant atmosphere and exercise choice.

    Long SBUX

  • Report this Comment On March 22, 2009, at 12:43 AM, Nelson17 wrote:

    Starbucks expanded way to fast, and now they are paying for it. They offer a premium product, at a premium price, you don't see BMW dealerships on every corner, why should there be Starbucks on every corner? Cut the fat and focus on the most profitable stores while keeping the Starbucks name intact.

  • Report this Comment On March 23, 2009, at 3:34 PM, secretservice wrote:

    Drip vs. Latte. You can spend $2 or $4, just depends if you want the fancy whip and carmel drizzle at the top.

  • Report this Comment On April 13, 2009, at 5:57 PM, casyh wrote:

    why is it that when Mcdonalds offers a value meal it is good business but when starbucks does it is a comprimise? It just makes sence in these times to keep customer loyalty whatever it take. Sure i can't afford a 4$ drink everyday but i like going to a place where i am a name not a number.....next.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 856825, ~/Articles/ArticleHandler.aspx, 11/20/2014 9:55:03 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement