Starbucks has been talking a lot about value in recent weeks. Executives on the company’s latest earnings call, and in a succession of analyst presentations, talked routinely about improving the company’s value reputation.
But we were nevertheless surprised to see the company join the bundled value meal fray, with its $5 croissant-and-coffee offer, along with $6 and $7 sandwich-and-coffee deals. That move is a big risk, and maybe one that it shouldn’t take.
Value is all the rage these days. Several different restaurant chains have either announced some sort of discount offer or are planning to, including more than half of the 10 largest chains in the U.S.
The move is in many respects necessary for the industry to win over consumers frustrated by menu price inflation. I hear that frustration on a near daily basis either from friends, family or on social media. That frustration is real, and it’s having a clear impact on traffic.
Starbucks is theoretically in the same boat. The coffee chain’s same-store sales fell 3% in the U.S. last quarter, with traffic down 7%. Not even an apparently otherworldly introduction of lavender drinks could save the company’s sales and traffic.
But it’s not entirely clear that price is the reason for that decline. Starbucks’ value scores, according to data from Technomic, haven’t really changed since before the pandemic.
More to the point, its sales and traffic began falling in mid-November, which as we’ve said before appears more likely to be rooted in a social media-fueled boycott over the chain’s alleged stance on the Middle East war. Starbucks itself has acknowledged this issue.
Rival Dutch Bros just reported a 10% same-store sales increase. If value was the problem, we’d see the impact across the coffee segment, much like we’re seeing it in the fast-food sector.
Starbucks is losing occasional customers, which may be frustrated over prices. But those are also the exact types of customers that would boycott a coffee chain over political reasons. Loyal customers don’t do that, as they are too addicted to routine.
And they’re also a lot less likely to be persuaded to change their mind because they can get a croissant and a small coffee for $5.
The morning is also not Starbucks’ problem. And more value in the morning may actually worsen that issue.
“We currently have a challenge meeting our peak morning demand in the U.S.,” CEO Laxman Narasimhan told analysts in April.
“We have a very busy morning daypart,” CFO Rachel Ruggeri said last week, according to a transcript on the financial services site AlphaSense. “Almost 50% of our volume comes by 10 a.m., and that’s up a couple of points even from a few years ago.”
The occasional customers who have abandoned Starbucks are more likely to visit the chain in the afternoons.
Running a breakfast value offer when your problem is in the afternoon is akin to putting out a fire by pointing the hose at the overflowing pool in the back yard. It makes no sense.
And it just makes another problem worse. Because if you have a tough time meeting demand in the morning, why create more demand?
Discounting a premium brand is also risky. Starbucks is the premium brand. If it is having a tough time meeting demand, as many people say, then it should focus on that, to ensure people paying the premium price for the chain’s coffee will continue to do so.
It’s one thing to push value-oriented customers toward the mobile app, where customers typically spend more and Starbucks can push one-to-one marketing. But Starbucks introduced broad-based offers available to anybody.
And the offer isn’t an introductory deal designed to get people to try something. This is a discount on a breakfast bundle.
The Starbucks offer is for a limited time. But the company shouldn’t get into the habit of trying to discount its way out of its issues. The chain has become one of the industry’s most successful companies by convincing customers to pay a premium for its beverages.
Its customer base has higher incomes and not that much time. They appreciate the convenience and the customization and are willing to pay for it.
Offering a discount on that experience could attract a different type of customer that is less willing to pay for this sort of thing.
That different customer could also crowd the chain’s coffee shops and drive-thrus at its busiest time, which could frustrate those loyal customers who opt to get their beverages from one of the growing number of competitors in the business. Exchanging high-paying customers for low-paying customers is not a great strategy.
Yes, consumers need value. But this is not the way to go about it.