The rise of Starbucks (NASDAQ:SBUX) has been bad news for independent coffee houses as the giant chain has driven many smaller chains and mom-and-pops out of business. A new app however might drive some customers back to independent cafes -- at least in places where they still exist.
The CUPS app offers a variety of packages tied to local coffee shops. The one that might entice java hounds to join (and ditch their Starbucks habit) is unlimited brew/drip/pour-over coffee and tea for $45 a month. The company also offers an unlimited espresso plan for $85 a month and packages of 5, 10, and 20 drinks with the 10-pack coming with an 11th free and the 20-drink deal offering three freebies.
The only catch on the unlimited offer is that customers must wait 30 minutes between drinks (which can be the length of time you wait in line at some New York coffee shops).
Created by a small team from Israel, the app is intended as an alternative to the smartphone loyalty cards offered by Starbucks and others, Bloomberg BusinessWeek reported. "It's a similar service," co-founder Gilad Rotem told the business publication. "We're offering a mobile app, prepaid plan, but it's for independent, higher-quality coffee."
With only 29 shops scattered around New York City's boroughs, according to the company website, CUPS is not yet a threat to Starbucks, Dunkin' Donuts, (NASDAQ:DNKN), or anyone else in the coffee gam But the idea is intriguing and it seems possible that heavy coffee consumers would purchase an all-you-can-drink plan if it would save them money.
It is worth noting that Starbucks gives free in-store refills on basic coffee and tea beverages during a visit to customers who attain the green level (purchase five eligible products in a year) or higher in its loyalty program. That makes a CUPS subscription less valuable to the wannabe writer crowd that can be found "working" at seemingly every Starbucks, but it's still potentially a good deal for people who buy a drink and then leave the store.
How CUPS works
The United States version of the app is only being offered in select parts of New York currently with the company planning to increase the number of shops in New York to around 200 (which Rotem said is around the number of Starbucks in New York) before expanding to other areas.
To use the service customers download the app from Apple's (NASDAQ: AAPL) app store or Google's (NASDAQ: GOOG) Android Play store. Then the user picks an available coffee shop from a list, chooses a drink, receives a code that the clerk/barista records. CUPS later reimburses the coffee shop for each drink sold at a pre-negotiated discount.
According to BusinessWeek, CUPS runs a version of the service in Israel with over 100 coffee shops participating, and Rotem said those stores say the app is bringing in more customers who not surprisingly drink more coffee.
"They say they're drinking more coffee than before, about 20% more," Rotem told BusinessWeek.
Is the CUPS deal worth it?
The price of a cup of coffee in New York can vary greatly (even between Starbucks locations) but let's assign $2 as an average price for a medium basic no-frills cup of coffee (the ones covered under CUPS's $45 plan). One cup of coffee per business day in an average 20-workday month gets you close to break-even and a second afternoon cup plus one each weekend day makes CUPS a tremendous value.
The $85 deal is intriguing as well but perhaps harder to determine the value of as prices for espresso drinks vary even more wildly than they do for straight coffee. Using the around $4.50 I paid this morning for a medium (grande in Starbucks parlance) latte, I would need to buy 19 espresso drinks to make a CUPS subscription a good deal. That's less than one per workday (and lower than my actual monthly coffee consumption).
CUPS may not be a threat but an opportunity
The value proposition for independent coffee shops joining up with CUPS is clear. They get customers steered their way who might have gone to Starbucks and there is always the possibility for an upsell (like a muffin or some other pastry treat). The deal is logical for heavy coffee drinkers as well -- by committing to the subscription coffee becomes a fixed rather than a variable monthly cost. There's a peace of mind in that, even in months where users don't take full advantage of their subscription.
For Starbucks CUPS is too small to be a threat yet but the model can be expanded to any cities that have a base of independent coffee shops. Starbucks might also consider offering a similar deal to some of its best customers -- specifically ones that not only purchase coffee but food items as well. Through its app Starbucks tracks individual customer purchases and could use that data to decide which customers to offer a premium subscription service.
For now CUPS is just an interesting experiment but the model could change the way frequent coffee drinkers buy the beverage.
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Daniel Kline has no position in any stocks mentioned. He drinks a reasonable amount of coffee but less than he used to. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.