Their calls for latte austerity went unheeded through most of the decade, but as Americans slash budgets, it seems that Starbucks is finally falling prey. And trying to do something about it:
Starbucks Corp., which built a coffee empire on its premium image, wants to convince customers that its drinks aren't that expensive.
The company said Monday that it's selling discounted pairings of coffee and breakfast food for $3.95, a type of promotion long used at fast-food chains. It's the first move in an aggressive campaign to counter the widespread perception that Starbucks is the home of the $4 cup of coffee.
The Seattle-based company is training its baristas to tell customers that the average price of a Starbucks beverage is less than $3, and that 90% of Starbucks drinks cost under $4.
. . .
Few companies embody the consumer spending boom of the 1990s and 2000s like Starbucks. Mr. Schultz helped Starbucks grow from four stores to a global chain of nearly 17,000 outlets by transforming coffee from a commodity drink into what he billed as an affordable luxury. But Starbucks's sales have been in steep decline during the recessionary era of penny-pinching.
Color me skeptical that Starbucks can reverse its downward trajectory by getting baristas to pull some "Who you gonna believe--me, or your own lyin' receipt?" move. No matter how you slice it, Starbucks has a high cost delivery model for coffee that isn't very good. If I'm going to pay $3.50 for a barista to hand-pull me a cup of coffee, I want them to pull me a cup of good espresso, not throw some charcoal-fired mulch into an espresso machine and drown the resulting mess with milk. Otherwise, I'll brew my own, or hop down the street to Dunkin' Donuts, where an automatic machine delivers a very drinkable cappucino. About the only time I drink Starbucks is on long drives where they're the only game in town.
I give Starbucks full credit for revolutionizing America's coffee culture. In a way, they are the victims of their own success--the competition that grew up in the wake of their success has taught many Americans that burned != sophisticated. With money tight, they're looking for better value than that.
As a matter of fact, especially when fresh, the coffee served by the eeevvviiilll McDonald's is OK. Specifically, it's a lot better than nothing.
On just coffee, I agree completely- Starbucks' is actually worse than McDonalds and Dunkin Donuts by a pretty wide margin.
However, I prefer their Mocha Lattes.
Otherwise, I'll brew my own, or hop down the street to Dunkin' Donuts, where an automatic machine delivers a very drinkable cappucino.
This rhetoric has become commonplace, but the growth trajectory for Dunkin doesn't seem to be there. If you compare Starbucks' financial statements to what little Dunkin provides on its website, you can see that Starbucks generates about double the revenue, despite having about half the number of stores. This is despite the fact that Dunkin has been around a lot longer and should therefore have a better brand.
Starbucks is, on the whole, a well run business with a terrific brand that is destined to go the distance. The stores that I've seen are busy, with a diverse demographic that is willing to a pay a premium for the intangibles that accompany the purchase. If anything, the stock is a buying opportunity. I suspect that Dunkin is hoping to sell more franchises, even though its sales aren't nearly as impressive and there is no reason to believe that it is destined to take off.
And the food is outrageously expensive.
McDonald's coffee has been great for the past couple of years. Culver's is pretty good, too, for those of you lucky enough to live near one.
AFAIK, Dunkin Donuts works on a franchise model, so it's not surprising they show less revenue with more stores. They're also indisputably downmarket, which means they operate with lower margins.
But in a down market, generating a lot of revenue per-customer is not a place you want to be--it means that you're very vulnerable to competition. And the Starbucks labor/land model is extremely expensive, which limits their ability to cut prices. Or so I mote.
RW,
I wouldn't touch the stock with a ten foot pole. The company is fairly well run, but the management is not particularly outstanding. The margins have been in a constant state of compression for a number of years now. Closing down marginal outlets may help some, but at a 44 PE, the stock is priced to perfection, and then some. With the economic downturn, the profit margins are most likely going to continue to drop.
My office is across the street from a Bruegger's Bagels franchise location, and it made sense for me (an avid ice tea drinker) to shell out the $119 last November for a membership in their "Bottomless Mug Club", which provides me with all the coffee, ice tea, or (yuck) soda I can drink until the end of 2009.
Really not a bad deal at all, except I tend to also pick up a bagel when I go there, which isn't particularly cheap (or healthy).
What Starbucks brought me was a place, outside the apartment, that wasn't a bar, where I could hang out with friends. The $1.8 cup of coffee is sort of a "chair rental" fee.
But then Greenberry's opened in McLean. The covered patio is a real winner there. 9 months out of the year it's a great place to hang out, with free WiFi.
The company is fairly well run, but the management is not particularly outstanding.
Within a short amount of time, they invented a segment and proceeded to dominate it. They took what had been a commodity product and found a way to attach a premium price to it that many people are willing to pay. Those are signs of good management.
Those who insist that Starbucks is bound to fail because it sells a premium priced product miss the business model entirely. That's the model that all luxury goods use by definition. A well run luxury brand will achieve above average margins
The challenge for Starbucks is to maintain the perception of the brand, while managing its balance sheet in the short run so that it can survive the recession. If it can continue to maintain the brand and not run out of cash, then it is bound to be one of the enduring brands of the century. If it can't, it will fizzle out. I'm betting on the former.
By comparison, Dunkin's lower same-store sales are not a positive indicator. The fact that it is a franchise operator only means that the losses are passed on to the franchisees, which in and of itself is not a compelling model for the long haul or an indication of brand power. Dunking would have to quadruple its same store sales to be on equal per-store footing with Starbucks, and that just isn't going to happen.
But given their locations, Dunkin Donuts isn't paying the same per square foot as Starbucks.
Two questions about starbucks:
1. Of total store revenue - how much is spent on rent?
2. What is the length of their average lease?
I know in my neighborhood the cost of retail space is plunging. A number of stores that might well have gone out of business were able to renegotiate their lease and save upwards of 25%.
But given their locations, Dunkin Donuts isn't paying the same per square foot as Starbucks.
Dunkin has about twice the locations, so the total amount of money dedicated to paying rent is probably minimal.
And then, Dunkin is selling less product for less money, so the revenues needed to pay the rent aren't as good, either. The rent becomes next to irrelevant when your sales are double that of your competitor.
You can't cut your way to prosperity, particularly with a luxury brand. The Starbucks model is a much better generator of cash, which gives it a competitive advantage.
The smart thing for Starbucks to do would be to shut the least productive locations, which is precisely what it is doing. I don't know what Dunkin intends to do, given that it has a moribund brand with few opportunities to change its positioning or increase its share.
RW,
If you feel that way, then load up on the stock. I am sure the company will survive- there was never a real question about that- but the stock is very expensive any way you look at it, especially for a company that has reached the end of its exponential growth phase. It is now in that phase that all retailers reach eventually- trying to grow along with the economy- keeping new and old competitors at bay.
Of total store revenue - how much is spent on rent?
During FY 2008, Starbucks had $741 million in leasehold costs vs. $8.8 billion in store-generated revenues and $10.4 billion in total revenues. Rent is a relative drop in the bucket.
Meghan,
Another point - DD and Starbucks both get hit when their customers get laid-off, as most people get a coffee on their way to work in the morning. From what I hear, the DD demographic has been harder hit than the typical Starbucks customer i.e. those people in construction and manufacturing sector are hurting much worse than the more educated Starbucks habitué.
I suppose Starbucks can take some comfort from the stimulus bill being directed at the latte drinking liberals.
In any case, Starbucks in a status good, lord knows you don't go their for the quality of the coffee. Well, maybe if you like a little over-roasted coffee in your milk. Still, people go their for the aforementioned bar without alcohol environment but also for the logo on the cup.
Dunkin' Donuts hasn't been pushing the coffee all that long but are making progress. I suspect they are slowed down since they have to ease a lot of franchisees into upgrading stores and changing from the buy and go model they've had for decades.
"From what I hear, the DD demographic has been harder hit than the typical Starbucks customer i.e. those people in construction and manufacturing sector are hurting much worse than the more educated Starbucks habitué."
Well, I work in one of those industries populated with "the more educated Starbucks habitue," namely, finance, and I can tell you that the Starbucks I frequent on Wall St. have had their business decimated.
Infer from that what you will.
Dave,
Harder hit than residential and commerical construction?
RW makes some good points. IMHO Starbucks is suffering from reverse-snobbery. For the longest time Starbucks was cool. But now the pendulum has swung back. So everyone sniffs about how inferior Starbucks coffee is. But Dunkin Donuts? I wouldn't drink their shitty coffee even if it was free. I wouldn't drink Starbucks regular coffee as well (bitter and burnt... but I guess some people like that.) I agree that McDs is OK for regular coffee.
However in premium drinks, Starbucks has no equal (comparing to other chains). I drool for one of their no-water, no-foam, soy-chai. Mmmm.. Their quality is regrettably inconsistent from store-to-store (or even in the same store depending on the barista). They expanded too fast and became sloppy. They need to close unprofitable stores (as they are doing) and focus on quality. Starbucks offers a premium product priced low enough that ordinary folks can afford it (every now and then). If they can tide over the current economic conditions, they should bounce back just fine.
A previous commenter mentioned this. One of the main differences between Starbucks and Dunkin Donuts is people don't hang out in Dunkin Donuts when they want to leave the house or get work done in a public setting.
I personally hate Starbucks coffee, and am not a fan of the atmosphere, but when I'm in an unfamiliar town and I don't know where the local coffee shop or diner are, I go to Starbucks and buy something as my chair rental fee.
I also imagine that 7-11 is going to be fairly hard hit as the long 6am coffee lines of construction and maintenance workers start to dry up.
RW:"If it can continue to maintain the brand and not run out of cash, then it is bound to be one of the enduring brands of the century"
John Madden called ... did you know scoring lots of touchdowns and keeping the other team from scoring is how to win a football game?
Starbucks isn't really a luxury brand. It's a middle class chique brand - offering the illusion of luxury to those who don't know what real luxury means. They have announced the closure of 1200 stores over the last 6 months. Starbucks must reposition to the new middle class reality or they will continue to suffer.
IMO, giving their baristas a "This isn't REALLY expensive" speech is a stupid move. Pricing perception needs to be addressed before the customer comes through the door. Once in the shop, the last thing you want to do is get them thinking about money again - you want to create a cocoon of good feelings. The baristas should be accentuating the community/social aspects of their model.
I think Starbucks is going to have a rough year.
Starbucks has also been hammered for the new policy of not brewing decaf after, IIRC, 3 pm or so. Not the message you want to be sending when customer service and 'escape' are your prime selling points.
We don't have a local Starbucks but most of the people I work with, and this is not a blue-collar setting, bring in cups of Dunkin' Donuts coffee, if any at all, in the mornings. I don't think it's just construction workers. And I think if office workers are mentally 'downsizing' they may well hit DD or McDonald's rather than Starbucks in the mornings.
Whoever said DD has "shitty" coffee apparently hasn't been to one since the 1980s. DD's espresso drinks are far superior to Starbucks' (though that's faint praise, I know). I still wouldn't call DD's "great", but then a truly "great" espresso or cappuccino would cost roughly $700, since it'd have to include a flight to Italy.
I also have to say I don't know anyone who "hangs out" at a Starbucks, but then I don't really know any writers or unemployed 24-year-olds.
KR,
Where I work, everyone works from home from 2 to 4 days a week. Two of my vendors are competative because they are "virtual" companies - they have dozens of employees, but no offices, everyone works out of their home. A number of people will work out of a Starbucks for a few hours, just to get out of the house and break up the day.
KR -- Every cup of DD coffee I've had in Phila. has been pretty nasty. Apparently is varies by region for whatever reason. My friend swears by DD in Jersey and Mass, but also hates it here in SE PA. Go figure.
The "latte factor"??
I'm sorry, what about the "martini factor", or the "I need to lease this BMW factor"? People spend beyond their means on a lot more than coffee. Of course when times are hard people need to cut back, but in a country where cost-of-living is constantly rising, marketing and finance industries are the biggest manipulators, and people are duped into living beyond their means for the sake of image, how is the $4 latte company the biggest monster?
I spend $2 a day on a cup of coffee because I like the taste, the atmosphere, and it's part of my routine; but I also budget my money in other areas of my life.
The "latte factor" is getting old. This is NOT the reason people can't pay their mortgages.
As far as the company itself, they may be closing stores and cutting jobs, but lets not forget that for years they rapidly created jobs while offering amazing part-time benefits, and at least they built a strong enough company to make it through a bad economy, and not go belly-up like some other big-name companies have or will.
Starbucks isn't really a luxury brand. It's a middle class chique brand - offering the illusion of luxury to those who don't know what real luxury means.
Starbucks beat the odds by quadrupling the price point of a commodity product, and then by tiering it into even higher pricing levels that could extract a lot more margin for little to no additional cost. That's a dream home-run-hit of a luxury good if there ever was one.
IMO, giving their baristas a "This isn't REALLY expensive" speech is a stupid move. Pricing perception needs to be addressed before the customer comes through the door. Once in the shop, the last thing you want to do is get them thinking about money again - you want to create a cocoon of good feelings. The baristas should be accentuating the community/social aspects of their model.
With that, I completely agree. They should be pitching value, not absolute price, while adding a service element to justify the premium. The first 75 cents pays for the coffee; the rest of it pays for the vibe. Falling into the trap of emulating McDonald's would be a serious mistake.
As a working-class gal, I used to look down my nose at Starbucks, that is until I tried the hot chai latte...lord have mercy. I get mines non-fat with caramel sauce on top and I just love the foam part, even though I realize it's just expensive oxygen. I'm so crazy for it that I started buying the liquid concentrate Tazo tea from the grocery store to make it from home, but sadly I haven't yet figured out how to reproduce the foam texture. Anyhow, I have discovered that if you drink it cold(mixed with milk), it doesn't seem to require as much liquid concentrate for the same effect as it does when it's hot. So, Starbucks, listen up and learn!
Anyhow, I agree with Rum Raisin that there's a consistency problem and that they should send out a mystery shopper to make sure everyone's making the drinks the same way. Meanwhile, you know you're an addict when you have a particularly competent barista's schedule memorized!
My only other beef with Starbucks is that it isn't social enough. Other local coffee shops in my city have acoustic music and poetry reading on certain nights...and genuinely free Wi-Fi, unlike Starbucks. I wonder why Starbucks doesn't try to compete in this way? Hmm...I guess it works for them, for whatever reason.
For a cup of drip coffee, apples to apples, Starbucks is the same or cheaper than Dunkin. The magic of Starbucks is that they get you to want, and pay for, more.
My problem with Starbucks these days is that they are paying too much attention to those of you who complain about burnt and bitter coffee. 10 years ago, you could only get a dark roast there. Now you can't get dark roast after noon. I fail to see how chasing Dunkin Donuts is good for Starbuck's business.
Chill, Danielle. No one is claiming coffee is the "biggest monster". The "latte factor" refers to the fact that people often fail to realize how much they spend on "inexpensive" treats. Most people acknowledge their BMW or martini bar trips as expensive, but not necessarily other small cuts that are bleeding them dry.
Starbucks was a sinking ship long before the economy tanked. Remember: Schultz's memo lamenting the death of Starbucks came out Valentine's Day *2007*.
Saying their ills are merely macroeconomy-based is disingenuous.
@ Sara: If we're all supposed to worry about the 'latte factor', is there a "Oh,-maybe-I-shouldn't-have-married-that-Vegas-stripper-who-took-me-for-half" factor?
How come neither Ramsey nor Orman talk about that? Seems like lattes really are about sweating the small stuff.
Betty,
Think of is this way, as this is what Ramset preaches, write down all of your current expenses and use that to formulate a budget.
People easily write down:
-Mortgage/Rent
-Car notes
-Eating out / fast food lunches
-Alcohol
-Groceries
-Gas
-Utilities
Stuff that is either regular, large or both. And it is easier to do this, and cut back on those where possible.
People tend to overlook the morning coffee, the gas station purchases and impulse buys. They can be staggering over a quarter or a year, and can generally be eliminated, cut back or at least budgeted for once known.
Betty,
I agree - Ramsey and Orman were big fans of real estate, and to some degree still are. Ramsey for example encouraged folks to pay off their mortgages early just as soon as they built up a six month emergency fund.
That's all well and good until The Great Depression II/Real Estate Crunch hits. You have you 6 months in your emergency fund and have been paying off your place in Orlanda for 3 years. Turns out, you get laid off, burn through your emergency fund, have no equity to fall back on and loose the house. You would have been much better off making the payments on the 30 year note and banking the difference.
Starbuck's has been a 'latte factor' short for the masses for years now. So in a sense we're still seeing a saga of a Saba Rambo (retail style naturlich).
Phil's fdrip-coffee, apples to apples point is important. Starbucks *doesn't* really have expensive *coffee*, they have expensive coffee-flavored beverages like lattes.
"When Dunkin Donuts is selling for less"
Where are these Dunkin' Donuts stores that are cheaper than Starbucks? Around here, Dunkin' Donuts is often more expensive.
A couple of thoughts:
1) If Starbucks wanted to go downmarket, why did they just stop selling their gift cards for 20% off at Costco?
2) The coming Clover machines may be a game changer WRT coffee at Starbucks.
"People tend to overlook the morning coffee, the gas station purchases and impulse buys. They can be staggering over a quarter or a year, and can generally be eliminated, cut back or at least budgeted for once known."
They should overlook the morning coffee. The CW about lattes is penny-wise and pound-foolish. You want to save money? Look at the big two expenses, housing and cars.
Starbucks *doesn't* really have expensive *coffee*, they have expensive coffee-flavored beverages like lattes.
I'll do you one better: they sell the palate's two most enjoyable things -- sugar and fat -- made addictive by caffeine and at a crazy markup to boot. Now that's a business model. (Me? I take my coffee black. No sense getting poor and fat by feeding my habit.)
yeah, whatever..I got $70 worth of starbucks gift cards for xmass. You know where you can find me.
With regards to being penny wise and pound foolish and morning coffee I suspect its a matter of time scales. Right now what can you do to improve your financial situation? Your car is, for most people, cheaper to keep even if it was a bad financial choice at the time. Right at this moment you are better off focusing on changing habits, reducing small mindless impulse spending, and learning about how you can make better decisions later on concerning housing and transportation expenses.
intj,
It's not just penny-wise and pound-foolish, it's ignorant of human nature. People need some small pleasures, and better to have relatively inexpensive ones. Most people aren't starting from a position where Starbucks is their big extravagance -- maybe they go out to dinner or lunch several times a week. They can eat at home and then treat themselves to a Frapaccino or something. Any diet -- caloric or financial -- that's too abstemious is doomed to failure.
Does no one brew coffee at home? Do people know that Starbucks and Dunkin Donuts beans can be purchased at the grocery store?
Why is this option not discussed? I admit that the coffee tastes better when purchased at the stores themselves, primarily, as far as I can tell, because of the heat involved in brewing the coffee on site. Those industrial coffee machines brew the stuff much hotter, and the taste is better. That's my theory.
But if you want to save money without sacrificing Starbucks or DD altogether, buy the stuff and brew it at home.
Oh, one other thing. From the caffeine-content comparison at http://www.cspinet.org/new/cafchart.htm:
Coffee, generic brewed 8 oz. 133 (range: 102-200) (16 oz. = 266)
Starbucks Brewed Coffee (Grande) 16 oz. 320
Einstein Bros. regular coffee 16 oz. 300
Dunkin' Donuts regular coffee 16 oz. 206
--So Starbucks brew has more than half again the caffeine content of a cup of Dunkin Donuts. But it's the *environment* that keeps the Starbucks fans coming back. Sure.
Small pleasures are important. But if you are budgeting for the month $80 (20x$4) is generally something you want to include. Yet it seems that many people don't. If someone is currently living beyond their means they should be looking at ALL expenses. I've never said that everyone should give up Starbucks but I do feel it is important to make spending that $5 a conscious decision instead of just "part of my routine" that passes by under the financial radar. Personally I'd rather go out to eat once a month more and never have coffee out but that is my decision made knowing the costs.
BTW, this might be a regional and SES based division of viewpoints. As far as I know Starbucks drinks are around the same prices everywhere. Yet salaries vary tremendously. If you are in a high income, high cost of living area (Boston, NY, California) the Starbucks is comparatively cheaper. $80-$100 per month is significant to some people. I suspect that the comments from people like Dave Ramsey are directed at these people who have picked up unconscious habits of emulating the people who really can afford the latte every day.