Rafi Mohammed

Starbucks...Offering Early Bird Specials Are the Key to Growth

Posted on November 20th, 2007 (1 Comments)

Last week Starbucks announced great quarterly earnings. Courtesy of an average 9 cent per menu item price increase (about 3% overall) implemented in July, it reported a 35% quarterly profit increase. Pretty impressive. So why did Starbucks’ stock decline by 7% on this news? The Seattle based coffee maker also announced that for the first time in its history, customer visits had declined. Analysts attribute this drop to the fact that both McDonald’s and Dunkin Donuts are selling cups of coffee for $1 less. In other words, while many are willing to pay higher prices for their favorite Starbucks’ beverage, some are saying “I’ve had enough” and seeking cheaper alternatives.

So, what should Starbucks do? I believe it all goes back to offering early bird, regular, and chef’s table options. Starbucks definitely has premium priced products like $4.15 Java Chip Frapuccinos, but it needs to offer discounted early bird special products to compete with McDonald’s and Dunkin Donuts lower priced coffees. Starbucks needs to offer a Value Menu.

Richard Gibson recently wrote an article on Value Menus in the Wall Street Journal (“Franchises balk at Dollar Menu”) filled with interesting data. One McDonald’s franchisee complained that he didn’t make money from the Double Cheeseburger item on McDonald’s Dollar Menu after paying for food, labor, overhead, rent, and the 4% franchise royalty. Many restaurants have either taken the Double Cheeseburger off their menus or increased its price (to as high as $2 in Manhattan). Franchises are not contractually required to offer a Dollar Menu and can set any price they want for food items.

Here’s what I found so interesting about Richard’s article. I talk about offering early bird options often, but how many people actually take advantage of these early bird specials? Burger King claims that 13% of its revenues come from its value priced items. Both McDonald’s and Wendy’s confirm that “well over 20%” of their sales come from value menu items. One franchisee claims that the average McDonald’s in his area sells between 8,000 to 10,000 dollar priced Double Cheeseburgers every month. Starbucks is missing out on significant revenues and new customers by not offering a Value Menu.

Starbucks is definitely doing a great job of pricing to their upscale coffee drinkers. But offering lower priced early bird options is the key to future growth and pleasing Wall Street.

Have a Great Thanksgiving!

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Readers' Comments on This Blog Entry

From Colin on December 3th, 2007
I agree that introducing dynamic pricing would increase Revenue at Starbucks, but I'm not sure I agree with your conclusion. The decline is customer visits is an irrefutable metric, I grant, but what is the cause? From what I hear, most Starbuck's locations generate an overwhelming % of revenue before 9am. The issue is more one of yield management, as I see it. The most expensive drinks are the drinks that take the longest to assemble......how many people can we move through a Starbucks before 0900? I could see a value menu in off peak hours, coupled with an ongoing effort to increase revenue per visit. Clearly Starbucks is seeking to be the leader provider of digitial music sales. I'll pay what it takes at Starbucks, but if I have to wait too long for my drink, I won't go at all. We've got market segmentation and pricing segmentation issues here, to be sure. Are we paying for coffee, or the experience? I don't consider Dunkin Donuts a competitor for my Starbucks $, but Panera Bread is another story.