Free Coffee at Starbuck: a Taste of Things to Come

In a move to halt declining sales Starbucks May Push Loyalty Cards.

Starbucks (SBUX) Corp. Chief Executive Officer Howard Schultz may introduce a plan for a loyalty program to stanch declining U.S. sales at a shareholders meeting tomorrow.

Schultz will probably offer free coffees or discounts to customers using prepaid Starbucks Cards to entice the chain's most frequent customers to visit more and avoid competitors led by McDonald's Corp., said Joseph Buckley, an analyst at Bear Stearns & Co. who recommends holding the stock.

The company may also say it will lower prices on food and drink combinations to win back customers hurt by the slowing economy. Starbucks has already begun using the prepaid card to offer deals to customers, saying last month that it will give out two hours of free AT&T Inc. wireless Internet access a day to Starbucks Card holders.

No Pricing Power

It does not matter what the price of coffee beans or cream is doing. Consumers are tired of paying $4 or more for a cup of coffee. Instead they are looking for "recession specials" if indeed they are willing to spend at all.

Starbucks Now Competes With McDonalds (MCD)

• Lower Prices
• Free Refills
• Free Internet Service
• Loyalty Discount Cards

Consumer attitudes towards frivolous spending will force more cutting, and not just at Starbucks.

"Frugality is in, extravagance is out" says David Rosenberg, North American economist at Merrill Lynch.

Indeed, it's important to notice how consumer attitudes towards spending are putting downward pressure on all nonessential spending even though the US dollar has been falling like a rock.

Such attitudes are certainly not indicative of the inflation fears expressed by two dissenting Fed Governors on Tuesday. See Broker Dealers Fly, Gold Falls as Fed Cuts 75 Basis Points for more on dissenting opinions and the reasons for Tuesday's rally.

For a look at the CPI as a lagging indicator and more comments from David Rosenberg and others on the new wave of frugality please see Attitudes Lead, The CPI Lags.

As frugality sets in look for the CPI to peak. It's a taste of things to come.

Comments

[swag]

The death of any elite brand value is when it is forced to compete at the super-saver end of the consumer spectrum.

[SingHash]

I agree with swag (post on 4:54pm): the value of Starbucks lies not in being a reasonably cheap cup o', but rather in the entire experience.

My suggestion: Raise the price, grind the beans, and get rid of the kids' stuff. Throw out the schoolkids and the suits-with-laptops -- they just take up space and don't feed the till. And give me a nice biscuit with my cup of coffee.

I have THI for my cheap (though truly tasty) fix, and SBUX for the deluxe experience. Different days, different dates.

Ultimately, SBUX is about drinking coffee; HS & co would do well to jettison anything that doesn't contribute to the coffee drinking experience.