This May Be Starbucks' Dumbest Move Ever

Let me see if I get this VIA challenge right.

Come Friday, Starbucks (Nasdaq: SBUX  ) is inviting Canadian coffee fans into its stores for a taste test. Through Monday, java junkies will be able to sip freshly brewed Pike Place Roast alongside its new VIA instant-coffee grounds that are stirred into hot water.

"We're so confident that you won't be able to tell the difference between Starbucks VIA and our brewed coffee, we're inviting customers into our stores to see if they can tell the difference," Starbucks CEO Howard Schultz notes in the event's press release.

Maybe I slept through business school when taste tests were being discussed, but I always thought side-by-side comparisons were more sadistic than masochistic. Why is Starbucks ripping itself? Why is it belittling its barista-brewed drinks in favor of a much cheaper solution that doesn't involve stepping into a Starbucks store?

The more I let it percolate in my noggin, the stupider this "Taste Challenge" becomes.

The fiend is caffeine
Marketing challenges pit Brand X against Brand Y, but usually they involve a gutsy upstart attacking an established rival. This year's collection of Coca-Cola (NYSE: KO  ) spots, where the soft-drink titan tries to establish that Coke Zero is comparable to Coke itself, is a rare exception.

However, no one took Coca-Cola to task for the campaign, even when it made a Super Bowl splash with a Coke Zero commercial that lampooned its classic Mean Joe Green spot.

Coca-Cola knows what it's doing, though. Coke Zero isn't cheaper than regular Coke. It broadens the market without diminishing the brand.

The same can't be said for VIA. Why didn't Starbucks go after the competition?

  • It could have targeted premium-coffee rivals Dunkin' Donuts or Peet's (Nasdaq: PEET  ) . 
  • It could have stacked up VIA against the fast-growing barista killer: Green Mountain's (Nasdaq: GMCR  ) Keurig single-cup brewers with the K-Cup portion packs.
  • Nestle (OTC BB: NSRGY.PK) is the global leader in instant coffee. It's also making a splash with its pod-based single-cup Nespresso machines. Starbucks could have aimed its comparative punches all over Nestle.

The first point would be a logistical mess for a nationwide taste test, though it would have delivered an effective fleet of television commercials. Aiming at the single-cup speedsters would be dangerous, since Starbucks is hoping to sell VIA packets for about a buck apiece. K-Cups can be purchased for less than half that amount, and Nestle is already running attack ads, claiming that Starbucks is four times as expensive as its Nescafe instant coffee. J.M. Smucker's (NYSE: SJM  ) Folgers also has instant coffee crystals and Arabica singles. Why would Starbucks give up its home-team luxuries for the crowded road?

Ventilate over venti lattes
Did Starbucks think this through?

Did you see Apple's (Nasdaq: AAPL  ) "I'm a MacBook, I'm a MacBook Pro" ad, showing that its entry-level laptops can do as much as its high-end machines? Of course not. That commercial doesn't exist. Apple isn't going to compete against itself, when the doughy "I'm a PC" guy is there for target practice.

It's a sad day for Starbucks when it sees its own bean-and-water business as the easiest VIA rival to vanquish. Unfortunately, it also leads one to wonder where Starbucks will be if the campaign works.

If the value proposition of VIA hits home, all it will do is thin out the already smarting coffeehouses. Cheapening the perceived cost of coffee can't be a good thing even for those VIA packets, especially since its single-cup competitors can beat it on price.

Starbucks may feel that its proprietary -- and patent-pending -- microgrind technology is enough to set VIA apart from Green Mountain and Nestle. I doubt it. Once you eliminate the persuasive scents and sounds of your local Starbucks, VIA will just be one more product on the shelf of your noisy neighborhood discount department store, where price is always a factor.

Let's take VIA for what it will ultimately be: a gateway drug. It will woo Starbucks loyalists to a world of K-Cups, instant coffee, and the end of expensive "Welcome to Starbucks" barista greetings.

If you think the "Taste Challenge" is nuts, just wait until Starbucks has to deal with the aftertaste of this weekend's questionable challenge.  

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers selection. Apple and Starbucks are Stock Advisor picks. Coca-Cola, Starbucks, and J.M. Smucker are Inside Value recommendations. Coca-Cola is an Income Investor pick. The Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz can walk to three Starbucks locations from his home, but he's still not much of a coffee sipper. He owns no shares in any of the companies in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (17)

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 September 30, 2009, at 2:04 PM, bgund wrote:

    Workplace coffee is a gigantic industry that Starbucks Via will own within a year. No need for monthly service on a K-Cup machine that serves a mediocre product. Instead, a hot water dispenser gets you the real deal.

    But that's not the biggest win for Starbucks. Check out how small those packets are. They are getting significantly more bang for their bucket out of coffee beans (which are expensive).

    I actually see this as an experiment for Starbucks. If it's as successful as they expect, I think they will stop using conventional ground coffee, and switch exclusively to micro ground coffee, save a fortune, and people will still shop there. Yep. We the consumers love their Starbucks printed paper cups, the atmosphere of the store, the familiar face behind the counter that knows our drink.

    This product MIGHT change coffee forever.

  • Report this Comment On September 30, 2009, at 3:18 PM, SFSF wrote:

    If Starbucks is trying to dominate the office coffee business, then VIA makes sense and I can see it happening.

    But that isn't what Starbucks' core business has been. They have always been about offering a quality coffee experience in a convenient location. If you eliminate the hand-made quality aspect of their business, where does that leave them? Starbucks' atmosphere - the ergonomics and design of the location and interior of the typical outlet - is no more or less appealing than that of a Panda Express. What is there about the "atmosphere" of Starbuck's that will give me a reason to go there if all they serve is instant powdered coffee? And with an all-instant coffee selection, how will my "familiar face" fill my order... pouring a packet into a paper cup and fill it with water while I watch?

    I can see some point to all this if Starbucks is planning to cannibalize their coffeehouse operations and shift the business model to one marketing branded instant coffee to supermarket consumers and businesses. But if they think this will enhance their brand with their retail customer base I think they're sadly mistaken.

    Finally, over the last two years I've had this new state-of-the-art powdered coffee in hotels and restaurants all over Europe. I hate to break it to all the efficiency experts out there, but it tastes like… powdered coffee.

    In the pursuit of profit margins, sometimes progress runs backwards.

  • Report this Comment On October 01, 2009, at 7:37 AM, TMFHelical wrote:

    Starbucks has never missed an opportunity to dilute its brand. Why people still associate Starbucks with quality is the real mystery, but one whose veil comes off a little more every day.

    TMFHelical

  • Report this Comment On October 01, 2009, at 10:58 PM, rlcato wrote:

    @ SFSF: I understand your last point and I do agree with. There something about instant coffee and freshly brewed coffee that's separates the two. If I did not wish to wait around, sure, a good tasting instant is fine. No trouble. But if I plant my seat down, I want fresh. It's the texture and the aroma that stands out.

    I think what they're doing is a good idea. Just a slow progression; not a forward thrust as TMF Munarriz wants and fears he'll get: he's a heathen. (I think they did try using a machine, instant, before with loads of complaints.) To do blind taste-test and free ads against competitors willy-nilly shows the competition has something that's worthy of a comparison (table-slap). You pay for 'quality' (?) but you know it was prepared by a known, accessible company that's in-your-face. Try that with DD's, GMCR's, Nestle, etc. Give them a call up front.

  • Report this Comment On October 02, 2009, at 9:15 AM, craigopapus wrote:

    Oh my goodness. Maybe Starbucks has an eye toward lowering its profits and moving away from the luxury market just before the economy starts to recover. A while ago, they were already losing out to Dunkin' Donuts in the branding wars - http://blog.marketingdoctor.tv/2008/10/26/brand-winners-and-...

    Maybe they're trying the "If you can't beat 'em, join 'em strategy." But what a painfully bad idea.

  • Report this Comment On October 05, 2009, at 12:27 PM, SFSF wrote:

    @ricato: Well stated about the experience of sitting in a location and enjoying the coffee. It's an intangible that is seemingly difficult for Starbuck's bean counters (pun slightly intended) to quantify.

    Also I should say that I was a bit harsh in my earlier post about Starbucks coffeehouses being "no more or less appealing than that of a Panda Express". Many of their locations are much more appealing than that. But no matter how nice you make them, the design and comfort of the shops are only part of the experience. Quality consumables have to be a part of the mix.

  • Report this Comment On October 05, 2009, at 12:46 PM, nottheSEC wrote:

    Another good article for Rick Aristotle Munarriz! When does your 10 for under $10 come out. Good points and a valuable business plan. If I may paraphrase.

    Starbucks 2011 Organic growth and Inorganic go after the competition growth.

    The targeted take over of Dunkin' Donuts giving them a a value and a premium brand( I prefer DD's myself.) Copies of Dunkin Donut sandwiches on Chibatta or Artisan bread (overused crap term)

    VIA Office 24 pack because its a busy world . no special Keurig brewers needed

    .

    Dunkin Donuts FreshBrew Instant in the Nescafe/Sanka isle.

    VIa in the specialty stores cross promotion possibilities with department stores for holiday season.

    Just IMHO and jus saying..J

  • Report this Comment On October 05, 2009, at 12:53 PM, nottheSEC wrote:

    oops isle=aisle

  • Report this Comment On October 05, 2009, at 1:21 PM, NURIVKID1 wrote:

    VIA IS THE BREAK THRU OF THIS CENTURY IN COFFEE,NO ONE CAN DISPUTE THIS. IT WAS NOT INTRODUCED TO TAKE AWAY FROM THE WONDERFUL IN STORE STARBUCKS EXPERINCE.BUT IT WAS FOR THOSE ON THE RUN ,I.E ON A PLANE IN A RESTRAUNT,IN A MEETING ETC,ETC,ETC,IT IS NOT INSTANT COFFEE BUT STARBUCKS INSTANTLY,ENJOY. ANYONE WHO THINKS THEY GET A GOOD CUP OF COFFEE AT D.D TRY ASKING ONE OF THEIR EMPLOYEES IF THEY EVEN KNOW WHERE THE BEANS COME FROM REMEMBER THIS STARBUCKS ONLY USES THE TOP 3%ARRABICA BEANS FOUND IN THE WORLD.

  • Report this Comment On October 05, 2009, at 7:17 PM, PCoulon wrote:

    Coffee has been around for hundreds of years, and to this day is cheaper to brew at home than going to any coffee shop to buy a cup. Via doesn't change this equation and won't stop those customers willing to pay more for a cup of coffee - and even more for the Starbucks Experience.

    Is what Via will change is the amount of market share that Starbucks has in the Instant Coffee industry... worth over 20 billion dollars a year. After all, this is an industry that - up until now - Starbucks has had no part of.

  • Report this Comment On October 19, 2009, at 9:59 AM, tamsavvy wrote:

    Re: the blind tastings.

    I agree whole-heartedly with this author's skepticism, and raise him one: the fact that they're testing it against "fresh-brewed" Pike Place roast is the true mistake. Pike is absolutely disgusting--the first attempt on the part of the company to adjust to the low common denominator of tasteless, acidic Latin American coffees that are used by Dunkies and McDonald's. I've worked off and on as a Starbucks barista for over five years, and I've never seen a coffee get the criticism of Pike Place--which is a staple of any store now. VIA was almost a relief: pick your poison, instant coffee that tastes like nothing (Starbucks, for shame, haven't you already trained your customers' palates to taste so much more deeply than this?), or the premium Starbucks brand that tastes like a cup of burnt acid? (and ask any barista how "fresh" that Pike's is also...)

    Of course, if they tested VIA against their earnestly good coffee (Sumatra, Sulawesi, Sanani, etc.) it would reveal how tasteless VIA actually is.

    It saddens me that Starbucks put so much work into their customers'--and baristas'--coffee knowledge once upon a time to then insult their palates like this.

  • Report this Comment On December 01, 2009, at 12:27 PM, nottheSEC wrote:

    tasteless, acidic Latin American coffees? Colombia coffee is one of the best in the world. I enjoy Kona and jamaican blue mountain but I do not find the need to insult a region.

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