Starbucks' Value Enhancement Strategy

You see it everywhere now: Free Grand Slam Breakfasts - Denny's (DENN), Superbowl Ad, $.15 or $.75 Steakburgers - Steak N Shake, (SNS), KFC Value Meals from $1 up (YUM), $1 value menu at Sonic (SONC) and more.

Last week, Starbucks (SBUX) announced its "pairings" strategy. Drip coffee and various new breakfast sandwiches and snacks are being introduced March 3, for $3.95. This is part of the value enhancement strategy SBUX announced on its January 28th earnings call.

With Starbucks' average ticket per customer somewhere around $4.00, I'm not sure if a $3.95 value offering does enough to scream value, particularly with what the rest of the restaurant sector is doing. Starbucks in the past wasn't (and said it wasn't) a restaurant, but now it really is.

I would be very surprised if the SBUX pairings didnt have a gross margin as low as $2.00 or around 50-55%. This is far lower than its drink blended product margin structure (70s), meaning that SBUX will have to generate a ton of incremental traffic to offset the margin decline. If they are all new customers...great. The only way to tell for sure if sales and profits zoom up. Don't look for that.

The mix of "value meal offerings" sold is important. For example, some Subway franchises report lower profits despite the reported 65% of mix that the $5 subs is generating in some units.

Amazingly, McDonald's (MCD) value menu mix has remained constant, at about 14% of sales, as CEO Jim Skinner noted in their January earnings call. Could it be because their menu is more developed, more tiered?

I hope Starbucks can develop a permanent value band on its menu - different products and serving sizes that busts the $4 perception.

Disclosure: no positions