Wednesday, January 30, 2008

Will Starbucks's $1 cup o' joe help or hurt?

So by now of course everyone has heard that after besting Starbucks in the taste category (according to Consumer Reports, at least), McDonald's is planning to bring barristas and high-end coffee machines to a good number of franchise locations this year and next. Gearing up for the new competition, Starbucks has decided on a decidedly low-tech approach: compete on price. While the company has always offered an off-menu "short" coffee (what everyone else would just call "small") for those who knew to ask, they'll now be pushing the product for a mere dollar or so as a test in a number of key locations. As Visual Store tells us:

"The test will be conducted in many of its Seattle-area stores, though the retailer did not say how many stores are part of it, whether it’s considering a similar promotion for any other products or whether any new test markets are on the horizon.

"A Starbucks spokeswoman said the test 'is not indicative of any new business strategy.' Among its rivals in the suddenly heated-up coffee wars, McDonald’s sells a 12-ounce cup of premium roast for $1.07 and Dunkin' Donuts sells a 10-ounce cup for $1.39. Starbucks' normal price for the 'short' cup had been $1.50.

"'Testing is a way of life for us, as we are constantly looking for new ways to connect with the customer and provide the best Starbucks experience,' the spokeswoman said."

Considering that McDonald's is known for low-cost fare (on top of having great-tasting coffee, apparently, I wonder if this approach is something that could actually work for Starbuck's. On the plus side, their product has virtually zero marginal cost -- I mean, how much can a few ounces of plain ol' coffee cost to make, especially when the company controls the entire supply chain and manufacturing process.

On the other hand, though, as many people go to Starbucks for the atmosphere and image as they do to feed their caffeine addictions. For them, making the shops extra-crowded with lines full of people waiting for their $1 cups might make the trip less enticing.

Having started out upmarket, my guess is that trying to grab a larger slice of the low-end market is at best not going to generate a lot of additional income, and at worst could alienate their core customer demographic or even sully their finely-honed brand image.

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