Starbucks Moves Way Down Market With Flavored Coffee

On May 12th, Starbucks (NASDAQ: SBUX) announced it would strengthen its Seattle’s best brand by building relationships that would get the brew into 30,000 locations by the end of the year. Here is how Starbucks described the initiative: “From cafes and cruise ships to bookstores and grocery aisles, Seattle’s Best Coffee’s diverse distribution network is rapidly expanding.” The coffee company’s initial partners in the distribution included movie chain AMC and Burger King .

Starbucks is now expanding out of its stores even more aggressively.

Starbucks said on May 17 that it would launch yet another product line ” Coffee made with real ingredients, such as vanilla, cinnamon and nutmeg, ground and blended in with the coffee.” In other words it intends to compete with Nescafe and Maxwell House for the mid-priced part of the market. The new product “will be available in 11 oz. packages for the suggested retail price of $8.99 in the U.S. where groceries are sold starting in June.” Starbucks’ reasoning for entering the market is that 11% of Americans buy flavored coffee to brew at home

The Seattle’s Best move can be defended because it does not carry the Starbucks name and the parent company can wall off the effects that the new product will have on the Starbucks image. The new flavored coffees carry the Starbucks brand, a sign to both the investment community and consumers that the firm is willing to risk sales at its flagship retail stores in the hopes that it could quickly pick up market share and profits in the grocery store business.

Starbucks does not reveal the margins of its stores, but the cost of a place that is several hundred square feet and has expensive equipment and half a dozen employees is likely to be high. Starbucks may figure that if some of the sales in its own stores suffer, it can more than make up for them with the new flavored and Seattle’s Best initiatives.

And, if sales at Starbucks locations do move to its grocery stores and its partners like AMC, the company can always shutter the stores that are most affected. Starbucks has practice. Almost two years ago, it closed several hundred stores and laid off 12.000 people. Without saying so, Starbucks may simply reducing its cost of goods sold.

Douglas A. McIntyre