Don't read too much into the recent tactical retreat at Starbucks (Nasdaq: SBUX ) . According to this morning's Chicago Tribune, the faltering java giant is quietly expanding its smaller, franchisee-driven Seattle's Best Coffee concept.
Starbucks snapped up Seattle's Best Coffee six years ago. It has subjected the chain to what is essentially a death sentence, limiting expansion to primarily in-store locations inside Borders Group (NYSE: BGP ) bookstores. Are employees there covered for tumbleweed pokes and deafness resulting from chirping crickets?
However, given Seattle's Best Coffee's cheaper menu and wider food offering, it appears to be just the ticket for Starbucks to tackle both the recession and the proliferation of mainstream fast-food companies beefing up their bean-water brews.
The premium coffee marketplace is being altered during this recessionary downturn. McDonald's (NYSE: MCD ) is in the process of introducing espresso-based beverages throughout its chain. Burger King (NYSE: BKC ) jacked up the quality of its BK Joe and rolled out an iced version with chocolate syrup.
It doesn't get any easier for Starbucks once patrons pull out of the fast-food drive-thru windows. The premium java experience has also come home.
Green Mountain Coffee Roasters (Nasdaq: GMCR ) sold 711,000 of its Keurig at-home coffee brewers over the holidays, a 121% spike from the number of single-cup appliances it sold a year ago. How likely is someone to return to Starbucks when they know they have a $0.40 K-Cup refill just a push of the button away? Starbucks will continue to attract the occasional splurge, but it's being replaced as an everyday indulgence with many consumers.
Several quarters of freefalling comps bear that out. Unfortunately, I don't think jacking up the presence of Seattle's Best Coffee will help. Sure, franchisee revenue is a juicy high-margin commodity, but there seem to be as many potential pitfalls as there are ways to order coffee.
- Won't expansion of Seattle's Best Coffee cannibalize sales at nearby Starbucks locations?
- If the cheaper menu is the magnetic tug at Seattle's Best Coffee, won't it force Starbucks to slash prices? Is there anything nuttier than having an internal price war?
- Do you have to be a glutton for punishment to pay up as a franchisee to a company that owns the niche leader itself?
- If customers are attracted to the concept's hot sandwiches and ice creams, won't that force Starbucks to repeat its mistake of rolling out aroma-whacking meals?
One can argue that Seattle's Best Coffee caters to a different segment of the market with its milder brews. One can also suggest that it's better for Starbucks to profit from a competing concept than to simply let someone else fill the void. That may all very well be true, but what does it tell you if Starbucks is more comfortable growing Seattle's Best Coffee instead of its own namesake brand?
There are worse things than a temporary retreat. Shooting yourself in the foot as you backpedal is one of them.
How do you feel about Starbucks as a long-term investment?
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