If you're betting on a traffic turnaround at Starbucks
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?
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Nestle's (OTC BB: NSRGY.PK) Nespresso posted a 34% spike in sales last year. Closer to home, Green Mountain Coffee Roasters
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?
Green Mountain Coffee Roasters and Google are Motley Fool Rule Breakers selections. Amazon.com and Starbucks are Stock Advisor recommendations. Starbucks is an Inside Value recommendation, and the Fool owns shares of it. Pour yourself a cup of 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.