Starbucks Hits No. 3 Despite Limited Ad Spending

How Coffee Chain Reversed Struggles and Stormed Past Fast-Feeder Rivals

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Starbucks' 'Tall' Tale chart

Last week starbucks blasted past Wendy's and Burger King to become the No. 3 restaurant chain, posting $9.07 billion in domestic restaurant sales last year, up 8.7% from 2009. For a company that 's outspent on advertising anywhere from two to eight times by rivals and just a few years ago faced 600 store closings and negative sales, that 's quite an achievement.

At the heart of that turnaround are menu and product innovations, and the ability to maintain steady price points—which tend to be higher than other chains—even through a recession. "They've done a nice job creating complementary food offerings to go along with their beverages," said Darren Tristano, exec VP at Technomic, referring to the company's menus expansions with breakfast sandwiches and the surprise hit oatmeal. "They've added products that are healthier with less artificial flavors, and more emphasis toward natural or organic food. They've really been able to increase price on a premium-coffee beverage that is on par with what younger consumers are looking for."

Mr. Tristano added that burger chains haven't been as able to increase prices because of the competitiveness in the burger category. Starbucks has offered some value combo meals—such as a coffee and breakfast-sandwich meal—but nothing on the dollar-menu level fast feeders such as McDonald's and Burger King offer.

And for Starbucks to be doing as well as it is , it's surprising that its measured-media budget is a fraction of what some of the other top chains shell out. Although Starbucks last year doubled its measured media spending, according to Kantar, it still only spent $94.4 million. Compare that measured-media spending of McDonald's, Wendy's and Burger King. McDonald's, perennially the top restaurant chain in U.S. sales, spent about $887.8 million on U.S. measured media spending in 2010, up from $872.8 million in 2010. Burger King, pulling back its outlay over the years, shelled out about $301 million on domestic measured media in 2010, down from $308 million in 2009 and $327 million in 2008. Wendy's in 2010 spent $283.4 million, down from $293.4 million in 2009, according to Kantar.

"It's more about just cultivating a brand than traditional advertising," said Morningstar analyst RJ Hottovy. "Once you've got a brand consumers' love, they're going to continue to visit the store. Plus , Starbucks has done its advertising more efficiently. It's been all over social media, mobile payments—stuff that elevates the image of brand."

Over the years, Starbucks has worked with agencies such as Omnicom's Goodby Silverstein & Partners, independent Wieden & Kennedy and Publicis Groupe 's Fallon , but the company has been working with Omnicom's BBDO since late 2008.

Starbucks has also been helped by missteps by rivals. Burger King, on top of recent marketing-management and ownership changes, is on the lookout for a new agency since it announced it was splitting with CP&B after a seven-year relationship. According to Technomic, Burger King, No. 4 on the top 500 list, had about $8.7 billion in U.S. sales, down 2.2% from 2009. In terms of the hamburger category, as well as restaurant chains overall, Burger King could potentially lose its spot to No. 5 restaurant Wendy's , a chain nipping at Burger King's heels with $8.3 billion in U.S. sales, according to Technomic.

"We're not concerned with being the largest chain," said Wendy's spokesman Denny Lynch in an email. "Our focus is on being the best restaurant in [the quick-service restaurant category]." Burger King declined to comment on this story.

By nature, Starbucks is poised to gain in one of the fastest-growing dayparts in restaurants: breakfast. "Breakfast is the final frontier of growth in this country, and coffee is growing as well," said UBS restaurant and packaged-food analyst David Palmer.

Starbucks is seeing its snack offerings payoff, too. Spokesman Alan Hilowitz said in an email to Ad Age that the launch of the company's petite-dessert program, which it rolled out globally in March, has helped drive more traffic into the store during the afternoon and evening dayparts.

The two restaurants who bring in more U.S. sales than Starbucks—McDonald's and Subway—aggressively market their breakfast offerings. Subway got into the breakfast game early in 2010, complete with a coffee offering from Starbucks sibling Seattle's Best. McDonald's has offered breakfast for years, and over the last couple years has been heavily marketing its McCafé lines of coffee drinks, all while continually rolling out new drinks of both the coffee and non-coffee variety, such as smoothies and frappes, McDonald's version of the Starbucks frappuccino.

Starbucks this week is rolling out advertising for customizable frappuccinos in preparation for summer. McDonald's May 9 is rolling out advertising for its new national product, frozen strawberry lemonade, a non-coffee beverage under the McCafé moniker. Wendy's has yet to roll out breakfast nationally, and Burger King introduced a revamped breakfast menu in September.

Of course, the Starbucks success didn't happen overnight. Founder Howard Schultz returned to Starbucks as CEO in January 2008, after serving as chairman from 2000 through the end of 2007 and CEO from 1987 to 2000, during which the chain went public and grew in the U.S. and internationally at an aggressive clip.

Mr. Schultz, upon reprising his role at the helm of Starbucks, laid out aggressive turnaround plans, including a renewed focus in the in-store customer experience, new design elements and new products—as well as cost-cutting measures like 100 store closings. Later in 2008, the company announced it would actually close 600 largely unprofitable stores in the U.S. and lay off 12,000 employees, the most in the company's history, to streamline and focus on what worked for the company. Subsequent moves included the launch of oatmeal, and the unveiling of the company's foray into instant coffee, Via. The quarter coinciding with Via's launch in February 2009, Starbucks posted its first same-store sales gain, 4%, in two years. Mr. Schultz credited innovation, cost-cutting and enhanced customer experience.

The company is back in expansion mode, though focused on another part of the world. "We have bold plans for China. I remain convinced that China will eventually be our largest market outside the U.S.," said Mr. Schultz during last week's second-quarter earnings call. "In the near term, we plan to more than triple our store base to over 1,500 stores on the Chinese mainland by 2015." On that call, Starbucks reported a comparable-store-sales increase of 7%, driven by a 6% increase in traffic to the stores for its second-quarter 2011.

It has previously announced expansion plans in packaged goods, including single-serve coffee products for Keurig machines. It severed its grocery distribution deal with Kraft earlier this year and took distribution in-house.

Although Technomic's 2010 estimate of $9.07 billion only accounts for its retail business, the company's availability in the grocery aisle can help drive more sales in the brick-and-mortar establishments. "Even though they're selling it in the grocery store, they're maintaining a high level of interest in the product among consumers," said Warren Solochek, VP-client development group for the food-service division at NPD Group. "It's bound to drive traffic into the retail stores."

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