Starbucks, We're Just Not That Into You … but We Could Be

Hey, Starbucks (Nasdaq: SBUX  ) , haven't you heard? Money can't buy you love -- and neither can advertising.

A brand that was built on word-of-mouth and ubiquity has now decided that mass marketing is the answer to its growth woes. An ad campaign entitled, "It's not just coffee. It's Starbucks." is supposed to awaken new customers, guilt old ones back, and make loyal drinkers spend more. According to the New York Times, the bean giant is even willing to climb into bed with MSNBC and pay an estimated $10M+ for the privilege of waking up every day with "Morning Joe."

Starbucks' promotional blitz is an admission of product failure. It's not that Starbucks makes a bad cup of coffee. Nor is brand recognition a problem -- if your street has a corner, you've passed a Starbucks. The real problem is that Howard Schultz and his team don't seem to know what their product is any more.

Coffee envy
Everybody has their eye on Starbucks' premium-coffee business. Dunkin' Donuts dared to combat the java juggernaut. Now, McDonald's (NYSE: MCD  ) is rolling out its McCafe initiative at breakneck speed, all in a quest to unseat the pre-eminent coffee purveyor. Nevertheless, Starbucks' primary competition might not even be from these two.

If Starbucks fears losing the everyday, premium-coffee drinker, it really needs to watch Green Mountain Coffee Roasters (Nasdaq: GMCR  ) and the K-Cup revolution. Green Mountain has been on a tear and has taken many coffee names with it. A $1,000 investment in Diedrich Coffee (Nasdaq: DDRX  ) , a K-cup licensee, as recently as March 16 would be worth over $59,000 today!

Oddly enough, while Starbucks has chosen not to address this market, it has decided to take on Kraft's (NYSE: KFT  ) Maxwell House and J.M. Smucker's Folgers with an instant coffee product -- Starbucks Via. Sure, instant is big overseas and offers a $17 billion market opportunity. But, if Starbucks is truly "more than coffee," why wade into the lowest end of the pool with a just-barely-coffee product? Jumping on the K-cup bandwagon seems like a much better brand strategy.

Slow down and smell the coffee
While coffee is one thing, ambiance is another. Fast-food competitors have nothing on Starbucks when it comes to environment. Try meeting a client or getting some work done at McDonald's or Dunkin Donuts. Imagine meeting a date there? Don't buy that ring just yet, big fella. Atmosphere has been a big competitive edge for Starbucks … until now.

Have you visited a Caribou Coffee (Nasdaq: CBOU  ) or Panera Bread (Nasdaq: PNRA  ) lately? These companies are indirectly benefiting from the culture of coworking -- a growing movement where independent professionals work in collaborative spaces, which tend to include comfortable seating, good coffee, and free wifi. While Caribou and Panera don't specifically offer the collaborative aspect of coworking, both are capitalizing on an increasing need for accommodating community environments.

Ironically, it was Starbucks which rode the initial wave of the mobile workforce, quenching their latent thirst for a third place outside of work and home -- liberating them from both their bosses and their bathrobes. Was this by design, or was Starbucks simply lucky? Seeing current customers hunt for power outlets or struggle with the store's not-really-free wifi policy makes me side with serendipity.

So, if Starbucks wants to remain a premium brand, they may want to avoid watering down the experience by cheapening their menu and inconveniencing sit-down sippers. Armed with a proven coffee franchise, Starbucks could view wifi, atmosphere, and community as loss leaders that build social capital and customer goodwill. Ironically, if Starbucks goes the fast-serve route, it risks becoming a full-fledged rest station, attracting more nomadic visitors who only come in for a cup of water, a warm chair, and possibly a quick shower in the bathroom sink.

Brew are you?
Starbucks needs to do some corporate soul searching. Take a look at American Express. It doesn't sell credit, it sells membership. Coca-Cola doesn't sell soft drinks, it sells refreshment. Starbucks, what do you sell … besides coffee? What do you stand for? Ambiance? Community? Social consciousness? Until you figure this out, count on losing both customers and shareholders. I hate to get all philosophical, but your biggest competition is yourself. To grind own self be brew.

Fool contributor Andy Louis-Charles does not own shares of any of the companies mentioned in this article. Andy is a coworking enthusiast and even hosts a weekly podcast on the topic where he moderates conversations on the growing collaborative movement. Share your thoughts on collaboration, coworking, and coffee with him on Twitter @OnCoworking. The Motley Fool is also on Twitter @TheMotleyFool.

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers selection. Starbucks and J.M. Smucker are Inside Value recommendations. Starbucks is also a Stock Advisor pick, and the Fool owns shares of it. Try any of our Foolish newsletters today, free for 30 days.


Read/Post Comments (3) | Recommend This Article (17)

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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 June 17, 2009, at 4:27 PM, gloryofarioch wrote:

    I registered an account after a long time of lurking to publicly condemn the use of such an atrocious pun. My coworkers are now staring at me because of the groan your pun elicited.

  • Report this Comment On June 17, 2009, at 5:08 PM, TMFTheDoctor wrote:

    Starbucks sells sophistication, which encompasses premium coffee, comfortable ambiance, and social responsibility. But yes, the value menu hurts this idea.

  • Report this Comment On June 18, 2009, at 4:33 AM, Babachrono wrote:

    Another problem they have is they built like krispy creme...they skyrocketed in popularity, everyone wanted a piece and they are on almost every street corner...I can walk from the taste of Chicago to my train stop and walk by no less than 4 of them...and that's just on 1 street.

    Their better bet is going to be to close locations and succomb to supply and demand. People that drink starbucks aren't going to mind walking a few extra blocks for their liquid crack.

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