Starbucks' Dismal Quarter Leads to 'Value' Offerings

Premium Coffee Retailer to Close More Locations, Tries to Reverse Consumer 'Misperceptions'

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CHICAGO (AdAge.com) -- Starbucks reported another dismal quarter today, with net earnings down 69%, to $74 million, due to restructuring costs and a cost-conscious consumer. Adding to the grim report, company also said it would close an additional 300 stores, which could eliminate up to 6,000 jobs, as well as 700 "non-store jobs," including 350 in its Seattle headquarters.

Through the new and previously announced cuts, Starbucks plans to save $500 million in fiscal 2009.
Through the new and previously announced cuts, Starbucks plans to save $500 million in fiscal 2009. Credit: AP
And in an effort to battle consumer "misperceptions" about the brand's premium reputation -- this is, after all, the company that helped wean America off cheap Joe -- Starbucks is going the "value" route with breakfast offerings. And the company said that after a spate of promotional activity last year, it will scale back on some of those efforts in '09.

Same-store sales, or sales for locations open at least a year, fell 10% in the U.S. alone.

Looks to save $500 million
The company is also trimming employee benefits, but store employees will still be eligible for health care. Through the new and previously announced cuts, Starbucks plans to save $500 million in fiscal 2009.

"These extremely difficult decisions were made even more so by the fact that they will have significant impact on many members for the Starbucks family, who have directly contributed to our success over the years," CEO Howard Schultz said during the company's earnings call. "And for that reason, if these decisions were only about getting through a tough period, we would likely have come out differently on them, but they were not."

Mr. Schultz cited the slow holiday season, all-time-low consumer confidence, soaring unemployment and rising home foreclosure rates as reasons for his company's deteriorating sales.

"Because Starbucks [same-store sales] started to deteriorate at the same time as the rest of the restaurant and retail started to fall apart, it's very difficult to sub-aggregate Starbucks from the broader economy and make a brand statement," said William Blair analyst Sharon Zackfia. "There is an obvious tendency for customers to trade down and not up, and Starbucks rightly or wrongly is seen as a premium-priced brand."

Ms. Zackfia speculated that the pairings may include a discount for consumers purchasing coffee with a muffin or scone. She added that Starbucks may see the value play as an opportunity to increase its share in the drip-coffee market, one of the company's long-time goals. She noted that rival Dunkin' Donuts offers some products priced higher than Starbucks.

But Mr. Schultz emphasized that the company will attempt to move forward "by combating misperceptions" that its products are expensive. A key element of this plan will be a breakfast "value pairing," beginning in March, although details of the offerings weren't disclosed.

Makes 'commitment' to value
"Research we've done strongly indicates that the appetite to respond strongly is there," he said of the value offers, adding that Starbucks is "making a commitment to this strategy because we think it is the right thing to do." Doing so, will display "sensitivity to what our customers are feeling."

Evidence of trading down seemed to be visible in the company's home-coffee business. Starbucks' consumer-package goods sales were up 14%, due in large part to Starbucks home-coffee sales, produced through a partnership with Kraft. Some of that increase was attributable to price increases due to rising commodity costs. However, a survey done for Advertising Age recently revealed that consumers were not only trading down on specialty coffee purchases but making more of it at home.

Mr. Schultz added that Starbucks' entire CPG business will be a greater point of focus moving forward.

The businesses, including ice cream, chocolates and bottled beverages, serve to bootstrap the brand among consumers the chain wouldn't normally have access to, Mr. Schultz said. He singled out the Tazo tea business, with Unilever, and Double Shot Energy & Coffee drinks, through a partnership with Pepsi, as particular growth opportunities.

Starbucks will also begin franchising its Seattle's Best Coffee brand. Mr. Schultz said that doing so will help the company take a bigger share of the specialty-coffee market. He also suggested that in working with "qualified franchisees," Starbucks may be able to retake real estate it is vacating as part of the company's 900 store closures. Seattle's Best Coffee is also now being tested at Subway stores that sell breakfast.

Simplifying promotional calendar
While Mr. Schultz credited recent promotions such as the Election Day giveaway, Thanksgiving's Product Red partnership and a community service tie-in with Inauguration Day as reasons why consumers will continue to stay loyal to the brand, he said that the 2009 promotional calendar has been simplified so that store operators can focus on the basics. In 2008, for instance, Starbucks closed stores for an "espresso training" session, and offered a variety of sampling around Pike Place roast, iced coffee and oatmeal, as well as a summer-long program offering discounts to consumers who visited twice in one day.

Starbucks will also back-burner product launches tangential to coffee. Last summer, the chain launched smoothies nationwide, and blended frozen yogurt-style treats in California. Mr. Schultz said that the company would instead focus on "consumer-facing initiatives that customers are going to respond to in this environment, and things we can own that really relate to the core of coffee."

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