Starbuck's Latest Turnaround Strategy

This weekend's Wall Street Journal's "Heard On The Street" column discussed Starbuck's turnaround strategy.

For the second time in a few days, I read an article about Starbucks in which the word "segmentation" is used in quotes?

What's with that?

The context is that, according to this piece,

"Mr. Schultz is looking at "segmentation." strategies that would provide an entry point for new customers amid a weak economy."

Now, it was news to me that the Seattle's Best Coffee brand is owned by Starbucks. I think that's fantastic, because I like that brand much better than their flagship one. And as I've written here, about Les Wexner's Limited Brands, it's can be a very smart way to market different product lines.

However, only a few months ago, I wrote this post, which noted, from another Wall Street Journal article of that timeframe,

" 'Much of that may not be Starbucks's fault. Pressures on consumer spending haven't made it any easier for Starbucks to increase sales, particularly because Starbucks's customer base has gradually broadened to include Americans with lower average incomes, a group more likely to cut back. This summer, a spike in dairy costs caused the company to implement its second price increase in less than a year.'

To me, the most telling sentences are those in the fourth paragraph which I have quoted from the article. The company, in order to sustain growth over the past few years, headed down market. Now, those less-wealthy customers are being more affected by recent economic events, including prices of gasoline and food, while even Starbucks' ingredients' price rises are driving them to increase prices, too."

So Starbucks is, in fact, looking to reposition itself with its lower-income, newer customers. Apparently through the provision of inexpensive, simple brewed coffee. The Journal piece suggests,

"...and adding a lower-priced tier inside its own stores would be tricky for a brand that built its reputation on upscale cachet."

No kidding. Mr. Schultz, have you taken a look at Wal-Mart's failed 'upmarket' retail strategy of a few years past? It flopped. In their case, new, upscale customers wouldn't rub elbows with lower ones, and Wal-Mart's merchandising was not credible.

In the Starbucks case, you can imagine hordes of teenagers fleeing Starbucks as lower-priced, un-chiche, lower-priced coffees are shoehorned into the stores.

Schultz is also ditching the breakfast sandwich menu. Surprisingly, according to the article, this accounts for about $35,000 of revenue per location per year. That equates to something like $100/day. Isn't that only about 20 breakfasts/day?

Perhaps what's surprising is that they even kept this offering for so long. And that, with McDonalds revving up their coffee offerings, along with the constant pressure from Dunkin' Donuts, anyone wanting food won't visit Starbucks at all now, when they can just buy the same thing, for less money, at either of the other two purveyors.

Schultz holds out hope for Starbucks' line of summer drinks to help it out in the second half of the year. But isn't that a seasonal effect? Don't they already have a summer drink menu?

As the article suggests,

"Starbucks was one of the first major consumer brands to be built using word of mouth- and there are few precedents for how to resurrect a tarnished brand that was built that way."

As the nearby, Yahoo-sourced price chart of Starbucks and the S&P, for the last three months, demonstrates, the coffee roaster's stock is essentially in free-fall.

Schultz has one heck of a job to try to rescue this firm. Personally, I think he's fighting the force of Schumpeterian dynamics. Competition and consumer tastes have altered the competitive and market landscapes since the firm's heyday of some years ago. It's unlikely that Schultz can regain its long term, consistently outperforming total return record anytime soon, if ever.