Starbucks Update

It’s funny how often we’re seeing additional information about the current events I wrote about four or five months ago, especially when you consider that these stories really have nothing in common except for the oddball writing about them. In today’s example, I will ask all of you who still can to remember a post I wrote back in California about Starbucks attempting to expand their business through the introduction of new product lines, new promotional angles, and even new business partners. I was dubious about how well any of it was going to work, and apparently I had good reason to be…

A story being reported on The “Cluster Stock” website last week indicates that the Starbucks empire is indeed coming into difficult times, with 600 locations closing in the U.S. alone, and a 60% drop in its stock price from the peak a few years ago. One would expect the company to do something about the weaknesses in its business model, the primary one being the relatively high cost. In a worsening economy, it’s getting harder and harder to persuade your customers that it’s actually worth paying $3 for a cup of coffee (or $4.50 for a specialty coffee drink), and new competitors (like the Biggby Coffee chain profiled in this space a few weeks back) are taking full advantage of that weakness. Starbucks might also be able to do something about their food options or convenience issues, but they’re already faster than most of the companies in the industry, and food isn’t really their core competency. But apparently the company is balking at the idea of lowering prices…

According to the story (originally carried by Reuters), the CEO of Starbucks is maintaining that the firm will not lower prices, but will instead “look for fun ways to offer value.” One wonders what, exactly, this will entail. Their new “everyday blend” of coffee (profiled in my last post about them) does not seem to have been the sales booster the company was hoping for, and their special $2 iced coffee deal (if you’d already bought a regular coffee at Starbucks that day and still had the receipt to prove it and came in during the specified hours the special was valid) was so confusing that most customers didn’t bother to try figuring it out, and so precious that most people wouldn’t have bothered with it even if they did understand it. Similar offers, as well as short-term sales on seasonal products, new products or discontinued merchandise are unlikely to do any better, either…

The curious part, at least from my perspective, is that the margin on a cup of coffee is already the best aspect of running a coffee house. As I noted last fall, in my post about starting such an operation, most of the food choices sold by businesses of this type are break-even propositions at best, with only a handful of companies (generally ones that bake their own food products for sale) actually turning a profit on anything other than coffee. Of all of the things they could possibly do to add value to the consumer, the one that is least likely to impact the bottom line in a Starbucks operation is a price reduction. So why aren’t they even considering it?

It’s possible that the company is adhering to an old salesman’s adage: never lower your asking price for something; it makes it look as if the thing was never worth what you were asking in the first place. You have to wonder if Starbucks is trying to avoid letting their customers find out that they’ve been paying $3 for a beverage product that actually costs between 40 and 60 cents (depending on the formula you use), or if they’re just worried that if they lower the price to $2.70 the public will expect them to keep it that way. But in either case, the company needs to stop fooling around with “fun ways to offer value” and come up with something that their customers will actually be willing to pay for…