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First we had the “cola wars” as Coca-Cola and Pepsi sparred for market share in the 1980s, with many casualties on both sides of the corporate battle-front. By the 1990’s we moved from colas to the “burger wars.” Although I would note that the “burger war” is still being waged, as McDonald’s success and a sluggish economy has caused erosion in traffic trends. As a result, the dollar menu has legs. For the second half of this decade, get ready for the “coffee wars!”
Last October, I said, “Starbucks will be forming a new advertising strategy – they have no choice.” Starbucks is a great brand and is too big of a company not to be using the media to communicate with customers and to defend the brand against bold attack by its competitors.

Both McDonald’s and Dunkin Donuts are strong brands competing for their share of the breakfast day-part. Not long ago, Dunkin’ Donuts fired a shot at Starbucks by saying that it beat SBUX in a recent national blind taste test, and SBUX had no way of responding. Not good brand management!

Also, in May/June 2009, MCD will be on TV talking about its coffee initiative. Taken together, McDonald’s and Dunkin’ Donuts will be spending a significant amount of money promoting their respective brands.

At the recent Starbucks annual meeting, CEO Howard Schultz spent some time talking about advertising and how in the past the company did not feel the need to advertise outside its 4-walls. Mr. Schultz addressed head on the false claims competitors are making about SBUX and the myth of $4 coffee. Although Mr. Schultz did not comment specifically on McDonald’s billboard advertisement that stated “Four bucks is dumb”, he definitely was including McDonald’s among the competitors that he says have made false claims about SBUX when he talked about the myth of $4 coffee. As of today, SBUX has had no real way to respond to these types of claims so the company has been silent on the subject, but according to Mr. Schultz, that will not be the case going forward.

The CEO said that SBUX is ready to take its gloves off… There is something exciting about a good corporate battle! The Starbucks strategy has been primarily focused on the quality of coffee, while the competition has focused on price alone. Starbucks does not plan to compete on price alone as selling quality coffee will always be at the forefront of its strategy, but the company hopes to change consumer perception around the value of the brand. As Starbucks noted, half of its beverages cost under $3, 1/3 cost less than $2 and its brewed coffee represents strong relative value. Mr. Schultz stated, “We have allowed others to define us…stay tuned.” He also said the majority of the people not going to SBUX as often are not going to fast food restaurants for their coffee – but instead making it at home.

If Starbucks goes full throttle with a U.S. advertising strategy, and spends 4% of U.S. system-wide sales on advertising and promotion, based on FY08 numbers that would equal nearly $450 million. This compares to U.S. advertising spend of $1.1 billion for MCD, $364 million for Burger King, $404 million for Wendy’s and $1 billion for YUM (includes spending on KFC, Pizza Hut and Taco Bell), according to Advertising Age.

That being said, to be competitive, Starbucks needs to spend $300-$400 million. Although Starbucks will not get to this level of spending right away, the company will have to eventually allocate this amount of money to advertising in order to be offensive rather than defensive in its attempt to increase its share of voice. What I mean is that Starbucks will have to spend more in order for its advertising dollars to generate real returns for the company rather than just helping to stop further erosion of the brand. For reference, $300-$400 million would represent 60%-80% of the total cost savings the company has articulated it can achieve in FY09. This level of spending would eliminate the bulk of the company’s newfound earnings potential but is, nonetheless, necessary to the long-term strength of the brand and the company. It is encouraging to see that SBUX has finally admitted the need for advertising!