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[23 comments]

Starbucks Takes Coffee to a Whole New, Expensive Level

November 30, 2012

It's been pretty well documented since the beginning of the Great Recession that while consumers may have cut back spending on big-ticket items, they have often found smaller luxuries to reward themselves in the course of their ordinary lives. It's also known that there is value to scarcity for driving sales, with the McRib sandwich and Hostess Twinkies coming immediately to mind. Now, Starbucks, the company that convinced consumers to pay more for coffee drinks than they had ever done before, is appealing to the small luxury mindset along with the allure of limited supply to get consumers to pay $7 for a 16-ounce cup of coffee.

The coffee, which Starbucks will also sell for $40 for a half-pound bag, is Costa Rica Finca Palmilera grown from rare Geisha trees. The coffee will only be available in 46 locations in Portland and Seattle, the chain's Roy Street Coffee & Tea in Washington as well as a licensed store in Idaho. An online offering has already sold out. Starbucks has said it will not expand distribution of the coffee beyond its present locations.

"We have loyal reserve customers who are interested in any opportunity to try something as rare and exquisite as the Geisha varietal," Lisa Passe, a Starbucks spokesperson, told Bloomberg News. "We are now offering more reserve coffees than ever before because of customer demand."

Late night talk show host and comedian Jimmy Kimmel has a different take on Starbucks' new coffee. According to a Los Angeles Times report, Mr. Kimmel said on his show, "I feel like this is a test to find out just how stupid we are. Although, while it's ridiculous to spend $7 on a cup of coffee, it's actually not that much more ridiculous to spend $4 on a cup of coffee."

FINANCIALS:     [NASDAQ:SBUX] [ ]

Discussion Questions:

What do you think of Starbucks' marketing of Costa Rica Finca Palmilera coffee? Why don't more retailers seem to take advantage of scarcity as a marketing tactic?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How effectively, on the whole, have retailers used scarcity as a means to differentiate from competitors?

Comments:

Short version—I agree with Jimmy Kimmel.

Long (well not too long) version—whether I agree or not there will always be people who are willing to spend a foolish amount of money for what is perceived as a scarce item. As a marketing effort, it is very smart and effective as evidenced by the online offering already being sold out. I can't wait for the soon to be announced $10 cup.

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Steve Montgomery, President, b2b Solutions, LLC

Good for Starbucks. Why not offer one of the world's rarest coffees at a price that reflects its limited availability? It gives their customers in a handful of stores the opportunity to sample this coffee, while generating millions of dollars in publicity around the world and reinforcing its brand image.

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Max Goldberg, President, Max Goldberg & Associates

Ah the miracle of marketing! You just can't beat it.

So let's see. I can't count how many times I've paid $6 for a 12 ounce beer in a restaurant. So for 16 ounces that'd be about what - $7.50? A small glass of very ordinary wine can easily be ten bucks. In a hotel room a bottle of water can be $6 or $7 too. All of which with zero "scarcity." Where's the outrage? Of course a couple hours later all these investments end up in the same place.

On the other hand 16 ounces of gasoline around here is about 41 cents which actually gets you somewhere.

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Ian Percy, President, The Ian Percy Corporation

Starbucks has the reputation, and the perception of being the place to go for fine coffee, and this is just an extension of their great marketing skills.
Well to do people don't mind paying for this stuff, as it makes great conversation at their fancy dinner parties. Who wouldn't want that edge in this crazy business environment?  I'd love to charge $29.99 a lb. for my gourmet Braciole Lasagna, but I can't, as the marketplace will not pay me for it. Starbucks will continue to push the envelope to see what they can accomplish in the high end valued coffees.
Good for you Starbucks, as your reputation is solid with the crowd you are serving, and all of us would like to be in your shoes.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

There are few retailers who have built the image of quality and exceptionalism of Starbucks. Marketing a rare and delicious beverage to the devoted seems like a walk in the park. It's been done for Johnnie Walker, Evian and other brands. And that's the point. Brands that can leverage their strong equity benefit. Those brands that have not developed the same equity have to rely on other strategies.

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Joan Treistman, President, The Treistman Group LLC

Other coffee houses should follow suit. To brew by the cup means there is no waste and it call open the door to beverages that fall between that high point and just drip. As much as I've fought them in the past, you have to hand it to Starbucks, it's been a whole new animal when Howard returned.

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Bob Phibbs, President/CEO, The Retail Doctor

Oh ... I think it worked.

By introducing the coffee Starbucks received millions of dollars in free publicity ... all without having to roll out the product nationally. And, if they do happen to sell any, I assume it will be at eye-popping margins.

As to why more retailers don't market scarcity, I'd say it was a function of CIDD (Chronic Imagination Deficit Disorder).

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Ryan Mathews, Founder, ceo, Black Monk Consulting

Marketing on scarcity is usually offering a true premium, best-of-class flagship product such as BMW offering the Rolls Royce as their ultimate line of automobiles.

The marketing goal of the flagship product is to drive sales of the high volume products and demonstrate commitment to excellence and quality. Retailers may want to promote they offer a $100 omelet as a gimmick to sell the $6 breakfast combo.

Ed Dunn, Founder, (Stealth Operation)

Do companies have loyal consumers demanding the best quality at a high price? Might they be likely to pay more or a low demand, high quality product? Then supply and demand seems appropriate. Free publicity makes the approach work even better!

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

It reminds me of "The Bucket List," Jack Nicholson, Morgan Freeman and Kopi Luwak.

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Ben Ball, Senior Vice President, Dechert-Hampe

What is the secret to their success? As an avid coffee consumer, it is not the "taste" of Starbucks coffee. Many of my friends who are coffee aficionados think their coffee when served plain and black is burnt tasting and overly acidic.

Now a few years ago I tried New Guinea Peaberry at a local Starbucks—coffee of the week—only offered one month out of the year and perhaps it was $16/lb. More or less 2x what I traditionally pay for whole bean coffee at my favorite roasterie by bulk order via mail.
Starbucks satisfied my taste buds through trial but I am loathe to spend $7 for a Venti coffee at retail.

Exclusive demand generating interest, trial and buzz—brilliant. Catering to the indulgent excesses of our luxury oriented society—absolutely. Peaking interest in anticipation of the next rare find brought to market so you can show off to your friends or create a special coffee event for friends and neighbors.

Placing unique items in store with limited supply has its drawbacks when that supply runs out and brand loyalists are left out in the cold. Recall the negative press/consumer reaction when Target ran a campaign for a month introducing a new line of apparel and the goods went out the door/no re-stock in a matter of days.

David Slavick, Director, Loyalty & Retention, FTD.com

Forget the coffee...I want some of Tony's gourmet Braciole Lasagna!

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Ian Percy, President, The Ian Percy Corporation

The is no attribution in the Starbucks addiction.

Today it's Costa Rice Finca Palmilera coffee for $7 for 16 oz., tomorrow Starbucks will bring forth a $10 cup from some exotic plants elsewhere in the world.

Will the devotional craze for the golden cup expand? Other retailers haven't found the marketing skill to peddle high-priced coffee to coffee-addicted Americans.

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Gene Hoffman, President/CEO, Corporate Strategies International

Know anybody who has made a purchase of the "rare" vodka at $75 a bottle/the superb single malt at $200+, and then put a fruit salad in it? How about folks who have to have the designer jacket for $500, that we see 6 months later at TJ Maxx for $75? Does it amuse you to see someone buying a branded can of vegetables vs. generic can that is going into their homemade soup?

Viva la difference. And, good for Starbucks for extending their product line via exclusivity and a unique selling proposition.

As long as some government agency doesn't come along and rewrite the rules about how much they can charge, or have to pass out calorie instructions for those who might be challenged to figure things out, GO FOR IT !

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Roger Saunders, Managing Director, Prosper Business Development

Props to RyMat for calling this one correctly: Costa Rica Finca Palmilera is a brilliant publicity stroke by Starbucks, generating tons of press and maybe a few dollars in profits on the side. PR that pays for itself.

You've gotta love the elements they have put into play here. First, the nearly unpronounceable varietal name. (What? You've never heard of it? Philistines...) Second, minimal distribution, making the product completely unobtainable for most people. Third, a price that is laughably high but is explained as evidence of superior quality.

This sets up the "Is it worth it?" debate for a substance-starved 24-hour news cycle. Not to mention discussion in forums like this one. Priceless.

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James Tenser, Principal, VSN Strategies

What we have here is a company that has a very thorough understanding and is practiced at sales and marketing. Even in the previous depression there were consumers with the willingness and ability to indulge in a higher standard of living. Finding out what they want and getting it for them is what many call customer service.

Developing an interest in something new for those that can afford it differentiates the company as something more than another "whatever" kind of company by creating or enhancing a market through sales and marketing. This is a daring approach in a land where only the strongest sales & marketing departments survive.

'gjarnoldjr'

I don't like it, but I understand it. Starbucks is implicitly acknowledging that while the economy overall is in a weak and shaky recovery from the Great Recession, the top 1% of the American population is doing very well, indeed. $7 for a cup of coffee? Why not, the people who could ever have afforded it can, in fact, afford it more than ever.

Mark Gardiner, Communications Strategist, revolutionaryoldidea.com

Not that I will be running up to buy a cup, but good for them. If a cup of Starbucks coffee is worth $7 to some people, why not give them the opportunity to pay that for it. I would guess that this is an in-market test for Starbucks and if it proves successful, then we can probably expect high-end coffees to find their way into a store near you.

Kurt Seemar, President, Analytic Marketing Innovations

That is so great! I wish my SBUX had that top-end stuff. Retailers in general don't do enough of this type of product placement. We used to call this technique a 'pyramid assortment', where you actually deliver top of the pyramid goods in your category to differentiate yourself from the competition and to elevate your expertise in the customer's mind—even if they don't buy it. Think Victoria's Secret's Diamond Bra.

As long as you know your customer by store (they must know the ones in 'my' SBUX), it's a terrific move and will most likely sell well. If you think about it, liquor stores, with the high-end vodkas/whiskies, probably do the best job with pyramid assortments and have been doing it for years. Takes guts, but works.

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Lee Peterson, EVP Creative Services, WD Partners

I think this is more than a marketing tactic around scarcity—it's a comprehensive strategy to go with the flow in a market Starbucks created. It's an attempt to execute a mass customization strategy that involves delivering the total customer solution to high end customers who, if locked in, will help Starbucks own what they created for another cycle. Very few retailers ever make it past one generation of culture—Gap/Baby Gap was an example of evolving with customers—it's tough but I think this is an opportunity to learn. Since I just had a cup of Blue Mountain, here is some more.

Starbucks created the mass high-end coffee category and then began to lose coffee aficionados to mom and pops as the market evolved. To regain it, they executed on a variety of strategies including: 1. The acquisition of the makers of the Clover Machine. 2. The pursuit of premium distribution relationships and processes to bring fresh and properly roasted beans to their stores. 3. Adding high-end water filtering systems at stores with Clover machines.

Clover machines are $11,000 dollar machines that combine the benefits of French Press and Vacuum Press at the same time while regulating the temperature (key). The grinding is appropriate as well.

Not to get into the details of how to make great coffee, it seems to me that most of what folks drink is not coffee, its dishwater with caffeine. That's what it tastes like to me after having killer coffee done right. The Clover Machine adds to the cost of the coffee—the taste is in another league.

But forget the coffee—consider the big picture. If we are going to help retailers escape low margin hell, we need to expand our filters—what Starbucks has done is a classic sustainable strategy to win over and lock in an audience they were losing through a series of decisions, relationships, systems and know how that is text book.

Vahe Katros, Consultant, Plan B

This of course has little to do with coffee, per se. I think it's only a matter of time before they offer an empty cup and charge $23.50 for it.

I have to get a laugh though, at the thought that consumers are battling the (not so) Great Recession with thimblefuls of overpriced java. With thinking like this, it's no surprise we're still in the recession. Nobody ever went broke overestimating the intelligence of the public (except, of course, for Fannie Mae, several large banks...).

'notcom'

This is going to be a huge hit with the Porsche and Jimmy Choo crowd....

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Cathy Hotka, Principal, Cathy Hotka & Associates

This is, of course, just an example of the most basic aspect of luxury product marketing: scarcity. I am only surprised by the panel's average score for the effectiveness of scarcity marketing. Somewhat effectively? Please. Scarcity marketing is always very effective—assuming, of course, that the scarce product is desired. Delicious, rare coffee is certainly a desired product for those who love coffee and have the financial capacity to enjoy this offer.
Scarcity marketing. Simple brilliance.

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Mike Osorio, Senior VP Organizational Change Management, DFS Group

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