If you're betting on a traffic turnaround at Starbucks (NASDAQ:SBUX), don't place your chips on the month of May.
McDonald's (NYSE:MCD) is launching its McCafe marketing campaign today. Ads pitching the burger giant's spruced-up line of mochas, lattes, and cappuccinos -- hot or chilled -- are hitting the airwaves. The chain's iced mochas have overtaken the landing page of Google's (NASDAQ:GOOG) YouTube this morning.
Starbucks knows this is serious. It didn't have to wait for Sunday's newspaper circulars -- offering up coupons for free McCafe beverages -- to realize that it can't dismiss the threat. McDonald's is the country's largest restaurant chain, with drive-through convenience and mainstream pricing.
The Seattle-based premium java chain is taking out full-page ads in newspapers such as yesterday's The Wall Street Journal. The "It's not just coffee. It's Starbucks" ads make a lot of points that the company should have communicated sooner. For example:
- The company only buys the top 3% of available beans, and they're batch roasted until they pop twice.
- Starbucks buys more "Fair Trade" coffee than anyone on the planet.
- The chain offers full health-care benefits to all employees who work at least 20 hours a week.
- A "little bit" of the price also goes into creating the Starbucks experience, complete with comfy chairs and relaxed atmosphere.
Justifying the Starbucks premium is a strong marketing message, though it's an imperfect one. The chain is considered one of the best places to work, though that’s a hard sell at a time when the company has spent the past year closing stores and laying off thousands of baristas.
Selling the in-store experience is another gamble. If every Starbucks patron were to order a macchiato, fire up the laptop, and sink into a loveseat for an hour or two, there would clearly be either a lack of seating or a lack of customers. Justifying the cozy furnishings as an added expense also invites the question that Starbucks will never want to answer: Can I pay less for my Frappuccino if I have it to go?
Barnes & Noble (NYSE:BKS) may have no problem offering up inviting seats and tables, but it would be toast if it ever marketed its furniture as a reason to charge more than Amazon.com (NASDAQ:AMZN). Instead, the physical booksellers promote immediacy and convenience. Starbucks can't exactly go there now that the McCafe is around and home brewing remains as popular as ever.
Nestle's (OTC BB: NSRGY.PK) Nespresso posted a 34% spike in sales last year. Closer to home, Green Mountain Coffee Roasters (NASDAQ:GMCR) is doing even better. It has sold nearly 1.2 million single-cup Keurig brewers over the past six months. You don't make that kind of investment only to pay up for premium coffee the way you used to.
Don't get me wrong. Starbucks is doing what it has to do. It is in a lose-lose situation, in which it either discounts to be competitive or retreats to a thinner slice of the loyal upscale market. It can't go back to the way it was before, when premium coffee was a premium-priced novelty for the masses.
"It's not just what you're buying," the Starbucks full-page ad begins. "It's what you're buying into."
Let's hope that is only a vindicating statement for customers and not a warning for shareholders.
How do you feel about Starbucks as a long-term investment?
- Are you still shaking your head about the instant coffee move?
- The company's latest quarterly report wasn't very aromatic.
- Do You Still Own This Garbage?
