Starbucks Takes on the Egg McMuffin
By Tom Ryan
While Starbucks last
week announced another round of job cuts, a bigger surprise to many was
that the upscale coffee chain was entering the breakfast value-meal race.
Using uniform national pricing, Starbucks in March will begin offering
“several breakfast pairings” at “attractive price points.”
The move represents an
about-face for Starbucks. Last July, chief executive Howard Schultz said
the company was “not going to go down the fast-food lane” in
offering combo-meal discounts. He argued that Starbucks’ customers were
willing to pay a premium for the Starbucks
“experience.”
But last Wednesday, Mr.
Schultz indicated that more of a value-proposition would be added to its
breakfast offerings starting in March “to correct misperceptions and
drive stronger offers into the market.”
A
shift to national pricing from a market-to-market approach in particular
represented a “significant strategic shift,”
said Mr. Schultz. But he said consumers are looking for more value.
Said
Mr. Schultz, “This is an attempt that we think
is a very strong sign of the things that we need to do around value and
the research that we’ve done strongly indicates that the appetite from
our customers to respond positively is there.”
Mr. Schultz lamented, “The
question of value often gets tied to the competition. How are we competing
with traditional QSRs who are offering cheap coffee in dollar menus? How
can a premium brand like Starbucks be competitive when customers are trading
down on everything from houses and travel to clothing and lunches out?”
But he said that Starbucks
has a number of “differentiating factors” outside price. These
include its long positioning as an “experienced (sic) oriented brand and
retailer,” its Starbucks Shared Planet initiative, and the ways it
connects with customers at a local level.
“What all of these
efforts have in common is their relevancy to the values and lives of our
customers and that is what we believe will help us remain resilient both
during challenging times and long into the future,” said Mr. Schultz.
News of breakfast-value
offerings came on the same day Starbucks announced it would layoff 6,700
employees, close 300 more doors, and scale back store openings for 2009
on the heels of weak earnings in its quarter ended Dec. 28. Same-store
sales were down 9 percent in the period.
Discussion Questions:
What do you think of Starbucks’ plans to offer value
breakfast deals? How can Starbucks offer a better value-proposition
without affecting its premium positioning?
Starbucks reminds me of Target. Target tries to convince everyone they are low priced and until they really do lower their prices and will price toe to toe with Walmart, no one is going to believe them. Same with Starbucks. Unless they come out with a program that guarantees they will be lower priced than McDonald’s, they will always be considered high priced. Starbucks is sounding more like Sears and A&P. They come up with a new business direction about every six months with the result always ending up with closed stores and layoffs.
Looks like they are using Kmart math: “attractive price points” + “to correct misperceptions and drive stronger offers into the market” + “market-to-market approach” = closed stores and layoffs. Using confusing buzz words and adjectives is an obvious sign the company is in deep trouble.
Starbucks is really struggling with trying to find an answer to the economy. They are very badly positioned as a high-priced, elite place to indulge one’s self. Introducing low-priced breakfast items may just confuse their customers, slow down the service times, give them an “eggy, breakfast odor,” and further alienate existing customers. I find it hard to see them competing with McDonald’s at breakfast time, especially in this economy. They could sell some new items to current customers but drive away others in the process, due to slower service times.
Overall, Starbucks lately seems disparate and lacking their former focus. Let’s hope they can find themselves and correct things.
Starbucks needs to be careful not to venture too far away from its core base of customer appeal. If Starbucks wants to compete with McDonald’s then it needs to lower its prices, downgrade its quality, hire less caring, dumber employees, build playgrounds, change the seating with plastic chairs and tables, and get a clown for a mascot.
Gotta love the complicated and wordy reasons that SBUX offers on why they need to discount. Can’t they just say sales on these products are bad and we have to mark them down? I’ve tried their breakfast sandwiches (too many for sure) and they are the best fast food breakfast sandwich out there. But the pricing is so out of whack compared to McDonald’s that there is no question as to why they are slow sellers. The average combo price at Canadian McD’s is $3.99 and that is for your sandwich, coffee and hash browns. The sandwiches at Starbucks are $3.99 by themselves. At 3 for a coffee and 2 for some sort of starch and now you are at the $10 range. Even for a premium product upcharge, the difference is too outrageous to stomach. Throw in a bad economy and bad press from closing stores, and now the issue is compounded. Bravo for realizing this now when everyone has decided to brown-bag it.
High time that Starbucks took a serious approach to food offerings! With its premium positioning and consumers’ hunger for savings, Starbucks can’t help but succeed with value meals, as long as they deliver on quality. I’m secretly hoping that Starbucks, through its value offerings, can undo some of the backlash from McDonald’s (“all the coffee, hold the attitude”).
It seems like Mr. Schultz is trying to egg us on. The tide is turning against SB as McDonald’s has pilfered the yolk of the caffeine-and-egg value experience. Now Mr. Schultz has to do something to sell the fading yet potent Starbucks experience and copying successful McDonald’s is a good plan for tracing. But the dye is cast until our new national President “stimulates” vibrancy back into the economy. Today, lower-cost McCafe is showing the way. Meanwhile, Dunkin’ Donuts also lurks in the shadow of the great Seattle peculator.
Unfortunately, part of the Starbucks experience is slow service. If they put food into the equation–especially breakfast–they’re in danger of slowing it down even further.
Consumer value is not only quality and price–it is convenience.
Starbucks has done a great job in positioning itself as an “experienced oriented brand and retailer” however as part of that positioning came a price image in the mind of the consumers. The higher price was part of its appeal. It allowed its customers to say we know it’s not cheap, but hey we can afford it. Those that were able (and willing) to pay the price got to have the Starbucks experience. Those that were not purchased their coffee and other drinks elsewhere.
It now appears that they would like to be a little of both–a shipping experience and a place for value. This is an extremely difficult position to maintain. I noted the article did not expand on what “value” meant to Starbucks. If it is a $7.50 sandwich and a grandé for $5.99 that is one thing, but is another if they are going to offer a breakfast bundle for $3.99.
It will be interesting to see how Starbucks communicates this new offer to its existing and potential customers. Too much stress on value will changes the price expectations of the new customers and may alienate the remaining experience shoppers Starbucks has.
While the sales may be down 9%, most Starbucks locations still have a very steady stream of morning customers, so the idea of re-introducing breakfast foods is really not too crazy. Consumers calculate value in very individual ways. To many, making the Starbucks run more convenient by adding breakfast options can save time, as well as provide justification for the visit in total.
This might be considered by some to be too tactical, but what retail operation doesn’t use tactics to get shoppers in the door?
Personally, I’m a Dunkin’ fan, and I like the idea of the breakfast flatbread and coffee combo. It has made me increase my visits again, knowing a healthier option can be available quickly in addition to a great cup of coffee.
Starbucks’ competition isn’t McDonald’s. It’s awareness. A $4 cup of coffee from Starbucks every workday works out to over $1,000 a year. Making a 48-oz. pot every morning with a French press and Lavazza coffee delivered to my home via Amazon costs me $150 a year. That works out to roughly twice as much coffee for less than one-sixth the price. Are atmosphere, experience or convenience worth over $850 a year to me? Absolutely not. That is Starbucks’ problem and an egg sandwich isn’t going to solve it.
Dunkin’ Donuts franchisees make all their profit from coffee. Many dinner restaurants make all their profit from the bar. Think Applebee’s is in the restaurant business? They’re in the bar business. Starbucks won’t make any money from selling sandwiches. All the money’s in the coffee. If SBUX needs to carry some breakfast, snack, and lunch items to push coffee, OK.
The folks I know, and see, in my local Starbucks aren’t the type likely to be visiting a McDonald’s any time soon. Same goes for my observations during my rare trips to McD’s.
David Biernbaum’s comments above echo my own thoughts (with the exception of the ‘dumber employees’ point). Does Starbucks need to offer value and continually evolve its concept? Yes, but so does every other merchant. But, to suggest they need to mirror McD’s is foolish. Two different concepts, two different target customer groups. The term ‘affordable luxury’ surely still applies and has leverage with consumers during these tougher times.
Perhaps Starbucks will upsell a few customers on their egg sandwiches. However, I don’t believe this move will pull new customers (from McDonald’s or Dunkin’ Donuts) into their stores. Nor will the move significantly advance their profits, as this is a flanker product at best.
As the first commentator mentioned, Starbucks took egg products off their menu. Now it is adding them back. In another move, very recently, they added the tea offering in the afternoon (with free coupons distributed in the mail). They are trying to appeal to tea drinkers and create another consumption occasion.
All of these sudden moves make Starbucks look a little desperate in their search for sales and a competitive position in the market. Signaling distress in this way isn’t premium and distracts from the indulgent experience at Starbucks.
Instead, I believe they could do a much better job at loyalty programs with earned points for loyal customers.
Is this really about offering more to the market place, or trying to just survive? I would be inclined to say the latter. With the closing of hundreds of stores and laying off thousands of employees, I have to wonder what the primary focus of Starbucks really is. If sales of core products were still strong, would they be going into the breakfast food market? I don’t think so.
But that’s not to say it’s a bad idea. Done right, if could provide a great new income stream. That means understanding what really motivates their clients. And if the Starbucks experience can really make a fried egg and a Kraft single on an English muffin taste better for a buck more than McDonald’s….
Maybe the question should be, “Why would Starbucks ever worry about value?” Two concepts you would never expect to hear together are Starbucks and Value. If I want value and a decent cup of coffee, I’ll go to McDonald’s. If I want a really good cup of coffee and some atmosphere, I’ll go to Starbucks. I think this will end up hurting Starbucks’ image, not enhancing it.
Starbucks hit it out of the park with their oatmeal program. Easy to deliver at a price and without inconveniencing their long lines. I imagine their new food options will also increase ticket. I think it is a bit early to say how it will affect their premium image. The question is not how they compete with McDonald’s but how much they can capture that they’ve been leaving on their own counters.
The news from Starbucks indicates that they are in a strategic bind, and they’re weaving from tactic to tactic to compensate. It wasn’t too long ago that Howard Schultz retook the reins at his company and quickly decided (among other things) to remove egg sandwiches from the menu because they made Starbucks smell like eggs instead of coffee! And they were also perceived as a distraction for the barristas, who went through a well-publicized round of re-training on how to produce the perfect (if overpriced) cup of coffee.
So the re-emergence of the breakfast sandwiches indicates that Starbucks clearly has a problem driving its average ticket compared to McDonald’s, which is thriving in today’s environment. The emphasis on “better value” only underscores consumers’ perception that Starbucks coffee is a luxury, not a necessity, right now.
Like David, I have been drawing comparisons to Target lately as Starbucks desperately tries to recast itself as a value player (see my blog at www.nmbblog.com). What I don’t care for is the way both retailers are framing the shift. Instead of just owning that they are changing strategy in order to be in closer alignment with customer’s needs, they are instead talking about consumers’ “misperceptions” of each brand…. If that were truly the case, Target wouldn’t feel the need to give pricing a starring role in its commercials for the first time and Starbucks’ value pairings wouldn’t exist! Misperception or misfire?
No one can out-McDonald’s McDonald’s. Starbucks is making a huge mistake in trying to do so. The consumer who normally frequents McDonald’s is not the same consumer who visits Starbucks for a $2.00 cup of coffee. Focus on the consumers that want the Starbucks experience. Clean up the stores; they are a mess. Have the baristas stop talking to each other, and instead focus on the customer service. Offer customers the variety of coffees when they want it, not when it is convenient to the company.
In essence don’t focus on price, focus on the customer. The business will come back if the company focuses on the values that brought them to this point in the first place.
The warning bells should have started ringing when personal financial management self-help books and coaches started to name Starbucks’ product as a discretionary expense that could be cut down as one of the steps towards financial independence. (Remember, “the Latte factor” in your monthly expenses?)
In an economy that’s looking down, it may not just be a good idea for Starbucks to bring prices down, but also to have a menu that sounds reasonable and starts with a small-size drink rather than a Tall.
Starbucks is in danger of severely muddying its brand image. The Starbucks customer is willing to pay a premium when they have the funds available to do so. Luxuries will be cut more and more, but Starbucks’ move to play in the ‘value’ market will have minor short-term benefits and larger long-term ramifications. It’s easy to lower your brand profile, but very difficult to rebuild it. Starbucks may forfeit that premium for its ‘experience’ permanently.
The discussion here isn’t whether or not Starbucks can compete with McDonald’s–that’s not an apples to apples comparison: totally different customers. The question is whether or not this will work for their customers and thereby increase revenue for an average store.
Execution on the food side has always been an issue for Starbucks, but their problems have never been unsolvable. So, to be more ‘brand right’; if they offer healthier choices at a fair price and can deliver quality, I think they’ll do well.
The audience is there, the idea that value will work for anyone right now (no matter how ‘premium’), so it comes down to whether or not they can deliver on a mass scale. I’m betting yes.
Lately, Starbucks is less and less about coffee and this isn’t ultimately going to help them regain the coffee habits from customers that have defected. Anne is right about Dunkin’ Donuts and their breakfast offering–it is hard to beat an egg white flatbread sandwich and medium coffee for under US $4.
It is well documented that ever since last summer, customers have been increasingly conscious of their spending on “affordable luxuries” like SBUX. That is going to continue long beyond introducing value breakfast combos and means that SBUX really needs to figure things out beyond tactical reactions such as this one.
The move to value-priced breakfasts suits Starbucks. Their stores are open and doing strong business in the morning. Why not serve breakfast? A national pricing model will allow them to advertise across the country. This will not kill the ambiance of visiting a Starbucks and will not bring Starbucks to the level of their QSR competition.
In this economy, nothing is written in stone. Starbucks should be saluted for their flexibility.
I find this announcement disheartening. I have long enjoyed the Starbucks breakfast (and lunch) food offerings–high quality, consistent, tasty and reasonable for what it is. In fact, when I moved to Hong Kong last year I was happy to find even more offerings in the stores here. I am more than willing to pay more for a quality quick-service meal in the Starbucks environment than a cheaper meal at McDonald’s.
Of course McDonald’s is doing well. Their strategy to upscale their offering hit at just the right time. The bottom of the Starbucks customer base is certain to give Mickey D’s a try. However, most will return to Starbucks when the economy improves–but only if Starbucks is still perceived as a premium aspirational experience.
This ongoing search for a vision is scary for a brand that had strayed little from its core message until times got tough. You always find out what a company’s character truly is when sales slump. I guess we’re finding out.