Starbucks is pursuing the wrong target market
Feb 14th 2009 11:00AM
Updated Dec 4th 2009 10:54AM
I shake my head at him, and my husband's grandmother, who profess to love coffee but can never be found at Starbucks. My dad's frugal, and my grandma-in-law subscribes to the "Starbucks tastes burnt!" school of coffee drinkers. She'd much prefer instant crystals, which she'll serve when church friends come to visit her brother for brunch.
It is these two unlikely consumers, and scores more like them, that Starbucks Corp. (NASDAQ: SBUX) is now targeting. The recent announcements by CEO Howard Schultz confound employees as well as analysts, leaving coffee investors wondering if caffeine is, indeed, a brain-altering drug, and if Schultz has had one 'Venti' too many.
The announcement yesterday -- one that Schultz had been hyping with progressive excitement for weeks -- that Starbucks was about to unveil an instant coffee product known as "Via" was the proverbial straw. Not only does the mere concept of instant coffee devalue the brand's mystique, but the product seems marketed to a nonexistent niche. Starbucks' loyal core consumers were hoping a fulfillment of Schultz' promise from Valentine's Day 2007 to ". . . get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. We source and buy the highest quality coffee." Instead they're given a product which promises none of the well-crafted principles of his memo, no "romance and theatre," no "intimate experience," no "tradition . . . and heritage," no "aroma." Soluble coffee. Flavor crystals.
It is not just that loyalists and coffee snobs will refuse to be associated with the Via instant coffee beverage. It is that the product is without a market. It is richly priced -- $2.95 for a pack of three, $9.95 for a dozen (there were no details as to how much coffee a "pack" makes, but I'll assume for comparison that it's 16 ounces) -- about a dollar for a serving of coffee with a taste most instant coffee drinkers don't prefer. A container of Folger's instant coffee selected at random is about 5.6 cents per six-ounce serving, or about 17 cents for 16 ounces; less than 20% of the anticipated cost of Starbucks Via. If Schultz thinks his phantom consumers will spend more for the Starbucks brand, he's wrong; that brand has been dragged through the drive-through window and punched in the nose. If a year littered with layoffs and store closings weren't already enough, last week's announcement that Starbucks was introducing "breakfast pairings" had everyone (including me, of course) comparing the company to McDonald's. And not in a flattering way.
What's more, the target customer buys instant coffee, not only for its convenience, because it is cheap. Schultz has ballyhoo-ed the February 17th unveiling of Via as an announcement of "innovation, competition and value." Value is not an absolute; it's comparative. Schultz is foolish to think that his consumers will assess the value of Via instant coffee in relation to Starbucks' brewed coffee; the vast majority of Starbucks customers will now be ever-fearful they'll be the next victim of "we secretly switched your regular Starbucks coffee with our soluble beverage."
Investors, already querulous, seem content to wait and watch the story unfold, sending the stock down five cents today to $10.13 on below-average volume. I was looking for a buying opportunity here but have lost all faith in Schultz' (bipolar?) vision and am avoiding the stock for the foreseeable future.