The Motley Fool Previous Page

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

Andy Louis-Charles
June 17, 2009

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 strat