Brian Niccol is getting rid of one of his predecessor’s more curious moves: Discounts.
The coffee shop giant has cut back on the number of offers it gives to both new and existing customers, which had become commonplace earlier this year under Laxman Narasimhan.
The company ditched the “Pairings” value menu last month. And offers to the chain’s loyalty users have been less generous and less frequent. The Wall Street Journal first reported on the shift, which Starbucks confirmed on Monday.
The move is hardly a surprise. Discounts were perhaps the most disconcerting of the strategies deployed by Niccol’s predecessor. They betrayed either a misunderstanding of Starbucks’ place in the world or what was driving the chain’s sales problems this year. Perhaps both.
As a reminder: Starbucks’ sales slumped at the end of last year, starting in mid-November. The sales slump has proven to be stubborn, ultimately costing Narasimhan his job after less than 18 months while the company brought in an expensive, big-name replacement in Niccol, the former CEO of Chipotle.
A handful of reasons have been given for the sales slump. But most, if not all, of the challenge rested with occasional customers, who typically visit the chain in the afternoons and are not members of the company’s loyalty program.
Under Narasimhan, Starbucks’ response was to get more people to use the company’s mobile app and get onto the loyalty program. The chain started pushing a lot more discounts, using various buy-one, get-one offers, particularly on certain days. And then it made the conscious decision to create the Pairings menu, featuring either a croissant or a breakfast sandwich and a small coffee for $5 to $7.
There is at least some evidence to suggest that Starbucks needed more value. Customers were far less likely to consider the brand affordable, for instance, than any of its competitors. And if customers were abandoning the chain in the afternoons, perhaps price was the reason.
Yet Starbucks has long been considered a more premium brand. It was built on the idea of a higher quality coffee than customers could get elsewhere. It opened fancy “Reserve” locations where the quality was upgraded further. It actively encouraged people to spend time inside its shops. It’s not supposed to be cheap.
The typical Starbucks customer has a higher income than those who patronize other restaurant chains. And they are usually getting one of the chain’s drinks before, during or after work.
Coffee is habitual. Price is less a consideration at the coffee shop than it is at, say, a pizza or fast-food burger restaurant. That is especially true when that coffee shop generally focuses on higher-income consumers.
Those higher-income consumers have been dining out like they always have this year, as evidenced by numbers from chains such as Sweetgreen, Cava or Chipotle. None of them have used discounts to get those numbers.
And much of the discounting was aimed at loyalty customers. But those loyalty customers weren’t the chain’s problem.
In theory, that’s what the value-focused Pairings menu was about. But that was largely geared toward breakfast customers. Again, if your sales problem is with occasional customers who visit in the afternoons, why target a discount that would mostly be used by morning customers?
Discounting is a fact of life for a wide swath of the restaurant business. But discounting at a premium concept removes that premium and turns that brand into a budget concept. That premium concept then has a tougher time getting customers in for full price later on.
As a side note, much of the fast-food sector should also remember not to discount their own premium items for largely the same reason.
In any event, Starbucks’ discounting potentially worsened what was likely the bigger reason for the chain’s sales challenges, the complexity of its menu and operations and the impact that had on its service inside stores. That complexity is well-known and has a long history of driving customers away from the chain.
That’s clearly what Niccol is thinking right now. The new CEO in the message he sent the second day in the job mostly focused on what made Starbucks special in the first place. “Our stores have always been more than a place to get a drink,” he wrote.
“We aren’t always delivering,” he added. “It can feel transactional, menus can feel overwhelming, product is inconsistent, the wait too long or the handoff too hectic.”
Ditching the discounts is a key step.