Starbucks goes downmarket as recession bites

Starbucks Corp, better known for its complicated fancy coffees than for bargain breakfasts, will start selling coffee and breakfast foods together for $3.95 next month in its first combination discount, as the recession takes its bite.

From 3 March, the gourmet coffee chain will introduce value-meal type options for $3.95 in its US company-owned stores. The discounted combinations at Starbucks include a tall latte served with oatmeal or reduced-fat cinnamon swirl coffee cake. Customers can also combine a tall brewed coffee with one of four egg sandwiches.

After its domestic traffic started slowing more than a year ago, Starbucks introduced a $25 annual 'gold' membership that entitles users to 10-per cent off purchases, and began selling prepaid cards with a face value of $100 for $80 at club store Costco Wholesale Corp.

Regular prices for the drinks and food items vary depending on the location of the store, but a tall latte and oatmeal can cost as much as $5. Starbucks said the pairings will provide customers with an average savings of as much as $1.20. Starbucks said it will also launch two new breakfast sandwiches - a bacon sandwich with egg, and a gouda cheese sandwich, and ham sandwich made with egg and cheddar.

The Seattle-based Starbucks first mentioned the pairings last month after it released fiscal first-quarter results that showed same-store sales - or sales at stores open at least a year - fell 10 per cent in the US. The sales drop was the biggest yet for the company.

Starbucks reported a profit of nine cents per share in the last quarter of 2008, compared to a profit of 28 cents per share a year earlier. The company announced last month it was slashing 6,700 jobs and closing 300 stores, following on the 600 stores it shut down in 2008.

The company has been revamping its breakfast menu as it fights to compete with McDonald's Corp, which has dominated the US breakfast business with a steady offering of combinations such as coffee and egg sandwiches. Another sharp competitor is Dunkin' Donuts. Michelle King, a spokesperson for Dunkin' Donuts, told CNN the company still believes it is "the faster and more affordable alternative".

McDonald's said on Monday that its January sales at established US restaurants rose 5.4 per cent due to demand for its main menu and breakfast items, while global sales were up 7.1 per cent. McDonald's has also introduced espresso-based coffee drinks in its US stores.

Research done by William Blair & Co suggests Starbucks' price premium "has nearly evaporated over the past 18 months, with pricing now largely on par with Dunkin' Donuts". The survey found that when adjusted for size differences, some varieties of Starbucks coffee were cheaper than Dunkin' Donuts. According to the research, McDonald's is still cheaper, but the price gap has narrowed since 2007.

In an interview with The Wall Street Journal, Starbucks chief executive officer Howard Schultz said the economic environment "is a reset of both economic and social behaviour".

However, some analysts believe that the move may be limited in its appeal as it requires prescribed combinations, and may also encourage 'trading down' among customers who had been buying the items separately or those who had been buying larger-sized drinks and combining those with other full-priced food items.