Don't read too much into the recent tactical retreat at Starbucks
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
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
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
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?
Green Mountain Coffee Roasters is a Motley Fool Rule Breakers pick. Starbucks is a pick of Stock Advisor and Inside Value, and the Fool owns shares of it. Try any of our Foolish newsletters today, free for 30 days.
Longtime Fool contributor Rick Munarriz can actually walk to three different Starbucks locations from his home, but he's still not much of a coffee sipper. He does not own shares in any of the companies in this story. He 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.