Thursday, January 29, 2009

Starbucks is ill

In looking for images, I searched "sad Starbucks" - this woman's picture came up, and she does look pretty sad.

Starbucks is posting a 69% loss in their last quarter, closing 300 stores, and cutting 6,700 jobs. Pretty bad times. I've even started drinking McDonald's coffee (which is pretty good) because as much as I love Starbucks, I can't justify the $2.50ish for a venti coffee.

Starbucks is reacting by swinging again toward value. Value based breakfasts and discount snacks (coffee and muffins), and a greater focus on drip coffee as opposed to espresso coffee beverages.

Wise choice, considering that consumers associate Starbucks with cappuccinnos, lattes, and other premium beverages, not with plain coffee. The decision to buy from Starbucks is based on the consumer weighing a decadent, premium latte drink to basic drip coffee. When wallets are fat, consumers treat themselves.

So when times are rough, it's no surprise that the appeal of a $4.50 latte begins to wane.

I think maybe it's time to leverage some the data from those Starbucks Cards now and begin to incentivize repeat visits and customer loyalty. With thin margins and a business based on premium quality products sold quickly with friendly service in a nice ambiance, Starbucks cannot risk not capitalizing valuable consumer insights. Growth into the CPG business and franchising the Seattle's Best brand to more locations are steps in the right direction to diversify the business and sustain Starbucks through economic ups and downs.


Nicholas Fodor said...
This comment has been removed by the author.
Nicholas Fodor said...

(Other post removed due to work-induced brain fart)

I was reading the same thing today, and that christmas sales were down almost 75%.

A large part of starbucks' problem is waste. One of the initiatives is to stop brewing de-caffeinated coffee after noon when sales plummet. Starbucks standards require that they re-brew fresh coffee every 20 minutes or so. That equates to ALOT of waste. Now that the bottom line is coming down hard, it's not surprising that finding small places to cut is becoming top priority.

Starbucks also rolls out new offerings on a regular basis; and their pricing and menu reflects that. This includes a "decent" oatmeal and some other tea variations that don't break the bank.

One of the key concepts that will keep high-end staples like starbucks around is horizontal marketing; such as pushing new variations of products to new customer segments. For example; their new low-fat chocolate brownie reflects the health conscious consumer. Their new breakfast offerings follow a slew of other QFS (quick food service) establishments such as subway that are trying to squeeze more profits out of their fixed costs.

Overall, they can try to bring in as much diversity in their offerings as possible; but a 4$ latte every day (~1300$ a year) is becoming much less viable than before.

My girlfriend is a barista (the source of all my star$s propaganda). If I had McDonalds coffee; you'd have another associate position to fill as of immediately.

katie (: said...

So to correct Nick's obvious oblivion to Starbucks kool-aid talk:

1. Reduced Fat Chocolate Cake, not brownie.
This pastry, like all its "reduced fat" crap, is to make their less-than slender clientele feel better about spending $2.05 for a piece of cake. For the same reason, they call some of their drinks "Skinny". All that means is something made w/ skim milk and flavoured aspertame. Yum.

2. Coffee is brewed every half hour. (Or at least it should be. Sometimes we cheat and just reset the timer.) The timing makes a difference to the coffee's flavour. Whether one notices this flavour beyond the cream, sugar and half a spice shaker's worth of chocolate powder, is subjective. But that is no responsability of Starbucks as a brand. Consistency and integrity is key, kids. I take my coffee black, svp.

3. Tea is the new wine (says Adweek). Why not charge ~$3 for a teabag and hot water? I would (:

I'm not a fan of all the critique over Starbuck's recent downsizing and less than stellar results. But being one of the few companies embracing their flaws and taking initiative to change such, that's something to be admired, no? You can put a bandaid over the bullet hole for only so long (*coughbigthree*). But then the casing dissolves and lead seeps into your blood and then you have next week's episode of House. So why not just suck it up and rip it out before it gets reallygross?

The biggest misconception about Starbucks, imo anyway, is that, yes, it is QFS. But QFS does not have to translate into low margin, high volume, deep-fried starch. At $3.15 for a tall latte, it isn't cheap, nor is it meant to be. Espresso beverages are a niche and a luxury good. Luxury good does not have to mean a pair of $700 Bvlgari shades.

I cringed when Starbucks began to offer doughnuts in their pastry line up, and again when they introduced protein smoothies (the Vivano), and imploded when they said they have breakfast sandwiches and oatmeal. This isn't McD's. Do what you do best.

Howard Schultz's return broke my heart. He is taking his own brainchild and making him go to karate class, piano lessons, soccer practise and a math tutor. All it really wants to do is to make lattes and join a Broadway musical. So let it. Starbucks needs to do what Starbucks does best. Superb beans @ 500% markup, sunshine-happy baristas and a kick-ass latte.

(I am barista girlfriend, btw.)

Nicholas Fodor said...

I find myself disagreeing.

Starbucks has been too pie-in-the-sky for a long time. Just making latte doesn't pay the bills anymore. There are great margins in coffee; that's undeniable, but how many coffee shops offer just plain, vanilla coffee and nothing else?

Compare that 5$ latte to a 5$ breakfast at McDonalds that includes a coffee, breakfast item and breakfast burrito. If all Starbucks offers in a latte; it's not about the quality of the product anymore; it's about convenience. Would that suggest that I should spend 5$ on Starbucks then find food somewhere else? Or *gasp* make it before I leave?

You can't build EPS without leveraging other high-margin offerings like oatmeal, donuts and chocolate cake. The people getting venti lattes with extra whipped cream aren't going to go for the oat bar.

And at the end of the day, it's about EPS, not lattes.

katie (: said...

As Nick has so aptly demonstrated, Starbucks is a luxury brand. Its premise for promotion is, and never has been, price. Duly note the almost illegible prices on a Starbucks menu. Most people don't ask nor take note of the price when deciding what to order-they ask what tastes good.

The average ticket price for Starbucks in the GTA is ~$5. The customer that goes to McDonald's for an Egg McMuffin combo does so with a consumption mindset that differs greatly from when he goes to pick up his midday latte. Again, luxury, not staple. (Although some Sbux addicts would tell you otherwise...)

EPS and good lattes are one and the same. Long term sustainability isn't based solely on price competition. Again, they need to do what they do best. The point is not to steal McD's whales, but to make a coffee lover into a Starbucks lover.

Maybe it's my superiority complex, but I think the CPG are gimmicky and a detriment to the brand.