The Destruction of the Starbucks Brand

• ToddSullivan
• April 29th, 2009

Hat tip reader Chris for alerting me to this. Can you imagine Coke (KO) saying is was shifting its focus to the Sprite brand OR Anheuser-Busch (AHBI) saying that Busch Beer was going to be its focus this year? If not, then read this:

From Yahoo Finance

Starbucks Corp. is hoping its Seattle’s Best Coffee chain will be its growth engine during the recession.

Even as Starbucks shutters hundreds of namesake locations, cuts jobs and shaves other costs, it is seeking franchisees to open new cafes and kiosks of Seattle’s Best Coffee nationwide.

Since Starbucks took over the chain in 2003, most new Seattle’s Best Coffee cafes have opened inside Borders (BGP) bookstores and kept a relatively low profile. Many consumers don’t know there’s a connection: Seattle’s Best Coffee’s logo is red, Starbucks’ is green, and there is no mention of Starbucks inside Seattle’s Best Coffee stores.

Not only could opening more franchised cafes help Starbucks — which reports its second-quarter earnings Wednesday — expand without increasing its operating costs. Promoting Seattle’s Best Coffee also could help Starbucks pursue two distinct streams of the coffee market simultaneously.

Seattle’s Best Coffee’s food, including ice cream and hot sandwiches, targets a broader market than the pastries and sandwiches and high-end juices and protein drinks at most Starbucks. And its much milder beans have been available since January in more than 2,800 Subway restaurants.

“It gives them an opportunity to reach out to a different audience,” analyst Darren Tristano of Technomic Inc., a food industry consulting firm, said of the plan to open more Seattle’s Best Coffees.

Starbucks says the slightly lower prices and milder taste of Seattle’s Best Coffee make it an especially viable vehicle for growth now, though the company declined to say how many new stores it hopes to open or where.

“We believe that the Seattle’s Best Coffee brand can play a unique role in helping capture a larger share of the coffee segment by providing options and a variety to a broader spectrum of customers,” Starbucks Chief Executive Howard Schultz said in January when he announced the plan.

Relying on growth from Seattle’s Best while at the same time closing thousands of Starbucks location is the closest thing you’ll ever see to an admission from Schultz that the Starbucks brand has been catastrophically mismanaged to the point it is now a negative.

Offering breakfast sandwiches did not work. Promotion that offer discounted drinks failed. Spending millions on new coffee machines? Nope. Bringing back Howard Schultz? Fail. “Gold cards” for frequent customers? Nada.

On a side note. Did anyone think the promotions were really going to work? Remember? “buy a coffee in the morning, save the receipt and come back between 2:17 and 2:28 and get a $2 something”. Of course I am being sarcastic but the reality of the promotion was not much different.

The result? Management has finally thrown in the towel and decided to go with the secondary brand. This is not a slap at Seattle’s best, I think they do a fine job at what they do. This is a slap at management that is forced to do one at the expense of the other.

The Starbucks brand has been so possibly irreparably harmed that folks in Seattle are slowly moving the company is a different direction. Sad.

For investors, if you think there has been a fundamental change in consumer behavior and “cheap is chic” then do not expect any rebound or significant improvement anytime soon…

Disclosure (“none” means no position):

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