SBUX - Playing the Value Game

SBUX's Vice President of Customer Relationship Management Brad Stevens posted on the company's My Starbucks Idea website yesterday that a majority of the company's U.S. locations will be offering some sort of deal between now and early September. The promotions will vary by location but include among others reduced prices in the afternoon (with morning receipt) or free 12 oz. iced coffee on Wednesdays. Mr. Stevens said the company is responding to customers' request for everyday value, especially when money is tight.
  • These deals are being introduced to help stop declining traffic, which has been decelerating since 3Q06. In the most recently reported 2Q08, the company did not quantify the traffic decline, except to say that trends had significantly deteriorated from 1Q08's 3% decline.
  • Although I recognize that SBUX must take the necessary steps to improve its traffic trends, these new promotions bring us back to the traffic versus margin question. To that point, Mr. Stevens would not specify whether or how much the value offerings will impact SBUX's profits. Starbucks' FY07 U.S. operating margins were already down 90 basis points YOY and fell to 10% in 2Q08 so margins are already under pressure.
  • Additionally, despite Mr. Stevens saying in an interview the company has no plans to join the likes of McDonald's and Burger King by offering a dollar menu that could clash with Starbucks' luxury image, these types of promotions run the risk of changing the consumer's perception of the SBUX brand. Just as a company can alienate its customer base by abandoning its perceived value messaging, a company can also compromise its brand by trading its customers down as they begin to expect such promotions.


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