Starbucks and the $1 cup of coffee


Sometimes business decisions defy reason. And marketing decisions don’t even make the tiniest bit of sense to a marketing hobbyist. I’ve got to tell you that this move by SBUX to sell shorts for $1 each (with free refills, no less), seems like a dumb move. Maybe someone from Starbucks can tell me I am wrong. Here’s what I think:


In the stare-down between Starbucks and McDonalds, Starbucks just blinked. It’s like the nerd challenging the linebacker to a fist fight. And the linebacker running away.Here’s the deal with McDonalds putting coffee bars or whatever they call them in their stores; they are going to make money off the people that went in there for a greasy Egg McMuffin (and I’m not hating…love them, just don’t really eat them). But the idea that they could be taking any kind of market share away from Starbucks? Well, that is just silly. Why? Because it’s about the experience. And the McDonalds experience and the Starbucks experience have very little in common.I go to McDonalds when I am hungover or am in a town in the middle of nowhere. This really makes me more of a Starbucks customer than a McDonalds customer. So McDonalds is obviously selling to their established customer base and driving up prices for their coffee by branding it as more of a premium product. OK, fine. Not really hurting Starbucks much. So I can’t imagine that Starbucks needed to go down-market with their coffee.


And for the Starbucks customer that’s likely to over-think things a bit more than the next, a $1 cup of Starbucks coffee makes me ask this: “if you can sell it to me for $1 now, how badly were you ripping me off before?” Technically, I guess coffee is a commodity, but SBUX positioned themselves as the upscale coffee retailer. I know that as they have become more ubiquitous there has been some back-sliding on the whole high-end vibe, especially as mom-and-pop retailers have come on the scene with more of an individual personality. Anyway, selling that coffee for $1 places Starbucks closer to Folgers then the smaller stores/chains that are stealing away their business. Again, this could be a strategy but it’s a little inconsistent with how SBUX has branded themselves.And by the way, Folger’s isn’t bad. For some reason, the Folgers at my grandparents house always tasted great.


I would imagine that there’s some kind of POS up-sell play that could be going on here. Get them in for the $1 cup, ask them if they want syrup, maybe they’ll buy a muffin, etc. I mean, maybe it’s all really about selling muffins. And while that could potentially (and still this is a bit of a stretch) build a new customer base, the damage to the brand image could out-weigh the potential benefit. This seems like a very short term strategy. Is Starbucks hard-up for cash?


In my opinion (as a consumer…I just play a marketer on my blog), Starbucks is about 3 things: ubiquity, customer experience and brand (the third potentially being mostly about the first two). As far as the ubiquity, it is what it is and the $1 cup of java isn’t going to change that. Personally, I go to Starbucks when it’s nearby but prefer Peet’s or Victors (our local place). I don’t have to drive out of my way to go to SBUX to get my $1 coffee because they are already everywhere. What gains are made in bringing new customers in may be to the detriment of the existing customers and so I’m going to call customer experience a mild loss. Brand is where they really mess this up. Am I feeling the same way about Starbucks knowing that they are going down-market? Not so much. Will my grande,nonfat, sugar free vanilla latte taste the same? Yeah, probably. But as I drink it, I’ll be wondering if I paid by the word.


Is there some target market out there that I don’t understand? The people that want to buy coffee is crispy white cups with brown sleeves but will only pay $1 for it? Will that person actually drive into a Starbucks and wait in line instead of making coffee at home? Or sucking up the free coffee at work like we do? Do these people want the SBUX experience so much?  And does it dilute the experience for the people that have to wait in longer lines? Has this ever been about price before? Do you want ALL customers? I’m not sure. And I’m not judging. Working from home, I’m all about brewing my own. It’s just that on some level, it becomes more expensive to acquire new customers and so competing on price under those circumstances is confusing. Seems to me that you do that when you have established competitors with little perceived product differentiation. Isn’t Starbucks already the 500 pound gorilla?  Can’t they diversify their business instead and sell something like pony rides?


So what it’s really got me wondering is whether this is Starbucks worrying about the economy. Have you heard all the talk about a recession lately? Interest rates, NYSE, etc. I’ve been through it before though at the time nobody knew what Starbucks was and my coffee came from AM/PM (you know the kind of coffee where you are acutely aware that it was made out of some kind of bean, you just aren’t sure what kind). It makes me think about all of the discussions about the Millenials and I have to wonder if the $1 Starbucks coffee to them (having never really experienced a real recession) feels like a sign of the apocalypse.


 

Comments (13)

  1. RB says:

    <em>So what it’s really got me wondering is whether this is Starbucks worrying about the economy.</em>

    You hit the nail on the head. When the economy hits the shitter Starbucks will already have a plan laid out.

  2. Toby Getsch says:

    First, nice post.  You made it sound like a 60 Mnutes commentary by Andy Rooney.

    Second, I think you missed the point.  It’s remarkable.  (I know you read Seth Godin.)  I heard about it from a co-worker.  Then I heard about it again from this post.  Neither would normally be sources that I would associate with this topic.  (Although, lately, you’ve had a knack for making me wonder, “What’s next?  She’s usually got something to say that gets me to think differently.”)  So, back to the point, about you missing the point…  When it’s remarkable, it’s good marketing and and an excellent part of branding, especially when it’s a calculated move, trying to do something different.  I think Starbucks is trying to gain McDonald’s customers AND trying to branch out more to gain more of the rest of the market that’s not coffee.  Starbucks is huge, but they are not “McDonald’s huge” yet.  We’re also tainted by a hugemongous presence in the Seattle area.  Sure, they are a 500 pound gorilla.  That’s not an 800 or 1,000 pound gorilla yet.  And, I also heard both of those figures mentioned today… remarked on… in separate conversations, not related to this topic.  So, your mention of guerilla weight for a marketing analogy, being my third time hearing it today, yeah, that also sucked me in.

    Third, and because I really want to focus on your good post, and not my enumeration of a three part comment, Folgers is not good coffee.  That just has to be said for the record.

    I could go on.  And, this was kind of fun.  But, let’s focus on your fun post and somehow finding a way to start with $1 coffee at the beginning and end with the apocalypse.  Kudos and Cheers!

    ~The Charles Barkley Role Model Guy 😀

  3. thom singer says:

    The thing here is that it is their short cup of regular coffee they sell for a dollar, which they discontinued years ago cuz nobody liked having such a small cup of coffee.  The tall, (which is currently the small… and confuses the heck out of my 93 year old father who just wants the smallest size they offer … and has to argue with them every time because they tell him he got a "tall") is only $1.70…. they make their big money on the espresso drinks anyway.

    Thus from a marketing stand point this Seattle only experiment of $1 coffee is a success…as people all over the country are talking about this on blogs.  SBUX, SBUX, SBUX,…etc….  Marketing bloggers are putting them front and center on an issue that nobody cares about anyway.  I am not going to get the tiny cup even with free refills.  But I am not offended that they offer the small discount size.  Win win.  customers say, "wow I can get coffee for a dollar here" as they order a $5 specialty drink and then spend $3 more on some blah muffin.

    And those cheap sakes out there can meet a friend at Starbucks for a meeting and not feel ripped off.

    That is my 2 cents.

  4. HeatherLeigh says:

    RB – really? Hmph. It’s almost like I know about strategery.

    Hey Toby – thanks for the reply. The point of MY post was that I don’t get the point. Not getting the point was my point first. Yeah, I get what you say about them trying to gain those new customers. I just don’t think the McDonald’s goer will forego their mcmuffin and coffee for starbucks. And I do have concerns about cannibalizing the existing customer base. If you could just market to the customers that you don’t yet have, it would be different. But the $3.83 spending customers see the marketing too. There’s no positive impact to that customer at all. Can’t market in a vacuum.

    And I am telling you; it may be the water, but the Folgers was good. Perhaps it was the love that was added 🙂

    Anyway, nice cheeky retort. That’s why I blog…makes it fun.

    Thom – interesting perspective. So it’s a viral marketing thing. Hmph.  I don’t think that all blog coverage is good coverage.

    And think about this…those cheap skates that want their meeting without feeling ripped off will be clogging up the lines, contributing to the mess in the store and taking up parking spots. Just saying. Get your point though. Just not sure it’s a smart strategy.

  5. Michael - Marketing Manager Media Las Vegas, NV says:

    There are a couple of points that I want to make:

    1. No one seems to be talking about the implications of the wifi users who frequent Starbucks because they are aspiring writers or just want a cool, safe environment to work on their laptop, but the implication is this: NOW they can sip on a Starbucks Coffee ALL day for a buck! Hmmmm

    2. We also need to be cognizant of the fact the Starbucks is not JUST going after McDonalds, rather the innumerable "other" coffee outlets, say Coffee Bean & Tea Leaf, It’s A Grind, Saxby’s and the countless others that HAVE cannibalized a portion of the proverbial 500 lb gorilla.

    Cheers…

    Michael – Las Vegas

  6. HeatherLeigh says:

    1. I think that’s been addressed. They are the ones clogging up the store for the rest of us 😉

    2. Still not sure that going down-scale is going to win back that business. People go to those places because they get something premium/trendy/ with all the bells and whistles. Not really any relation to the $1 cup.

  7. Rick says:

    I actually think it’s a great idea.  

    Starbucks is not doing as well as they hoped.  They haven’t met internal profit goals, their stock was stagnate, and they are going to be closing stores.

    Most people that go to Starbucks go there, get their coffee, and leave.  These people won’t buy the 1 dollar short because they won’t get the refills and the cup isn’t big enough. The 1 dollar short appeals to those people who want the "Starbucks experience" and want to sit in a coffee shop all day and read, do homework, etc.  They’re using free refills and a 1 dollar cup of coffee to keep people in the store so that they can sell them other things.

    Starbucks recently started its own music brand.  You go into a Starbucks, and guess whats playing?  Music that you can find available at Starbucks!  You hear a song you like?  Well, you can look at the handy video monitors they have all around and see the artist’s name, CD Title, and availability.  Some of the CDs you can buy directly at the store for those impulse purchases while others you can order from the Starbucks website (with the WiFi access they provide).  If you get hungry, you can always grab a muffin or a sandwich.  Tired of coffee?  Grab a soda or water from the cooler.

    I would think this is BS, but I saw it happen just the other day.  I was waiting in line, and a person came up to the barista and asked about the album that was playing.  She pointed to the screen, showed him the CD, and then he bought it.  Starbucks leveraged a 4 dollar cup of coffee (this was before the 1 dollar thing) into a 16 dollar CD purchase.

    While the branding may be hurt a bit, they are still the most recognized name in coffee (coming soon: Starbucks in Timbuktu), and the people who are peeved about the 1 dollar cup o joe will still be in there buying their 5 dollar designer coffees for their starbucks branded insulated cups while buying a 10 dollar gift card for the office christmas party (because it has become the default gift when you don’t know what to get).  Meanwhile, the other aspects of Starbucks get a nice boost.

  8. HeatherLeigh says:

    Eh, Rich, you make it sound so reasonable. Their brand is still cool-1 to me now.

  9. CaraAnn says:

    Do I perceive the pompous yuppies who are afraid their precious Starbucks "experience" may be tainted by the presence of (oh my) the lower classes who are looking for a bargain and who actually go to MacDonald’s?  People who don’t give a hoot about this "experience?" and just want a reasonably priced cup of coffee.  Be sure you don’t brush against us waiting in line as you may have your cewell clothes tarnished.

  10. HeatherLeigh says:

    Nope, it’s not about classism. The point is that the experience becomes less pleasant when lines are longer and stores are more crowded. Couldn’t really care less about the income level of who is in there (if that is what is meant by "class").

  11. KW says:

    Agree with Toby, Thom and Rick.

    I think Starbucks has a good strategy on this. I would think it’s an offensive strategy than a defensive one.

    1) Grab McD, Dunkin D & other mom and pop cafe market share. Don’t forget Starbucks is already selling some warm breakfast that competes with McD’s sausage egg mcmuffin (at a higher price point).

    2) Up sell.

    3) Cross sell. Starbucks has tons of other stuff in the store. By keeping someone in the store longer means higher chance of selling them those stuff.

    4) Who says $1 can’t get good coffee? Well, I’m sure Starbucks is making that statement very clear. They want to stick the Starbucks brand into everyone’s mind….anyone that could never thot they can afford starbucks coffee (coffee….not espresso). Much like MS selling windows at a very very low price ($3 vs $100) in some developing countries.

    http://www.engadget.com/2007/04/20/microsoft-will-sell-3-software-to-developing-countries/

    All in all, I think this is a good strategy for Starbucks.

    kw

  12. HeatherLeigh says:

    Well, at the very least, it will be interesting to see how this plays out. Won’t have an impact on me on a dily basis but I’ll  make a mental note topay attention next time I am in one of their stores.