Upscale brands positioned as less luxury, more valuable

As the lingering recession puts “affordable luxury” restaurant brands into the “unaffordable” category for many budget-cutting consumers, such operators are being forced to spin the notion of value to reposition their products as indulgences to weather tough times.

Particularly in the once hotter-than-hot categories of gourmet coffee, frozen yogurt and upscale cupcakes, the playing field is rapidly shifting as consumers rethink how much they’re willing or able to pay for premium products they desire but don’t really need.

For some, like Starbucks Coffee [3], the approach has been to convince consumers that its premium coffee is affordable for every day. Others, like the Red Mango [4] frozen-yogurt chain, are promoting added value by focusing on the health benefits of its product. Meanwhile, Sprinkles [5] cupcakes has zeroed in on the continuing need to celebrate special occasions despite the pervasive gloom.

“There’s absolutely no doubt this economy has made consumers much more cautious about all expenditures; even the 99-cent burger is being questioned,” said Bob Goldin, executive vice president of market research and consulting firm Technomic Inc. in Chicago. “Operators are going to have to try selling value.”

Starbucks Coffee was once king of the affordable-luxury world, growing to a globally dominant 16,000-unit chain by convincing consumers they should treat themselves to a cup of coffee that costs around $4 or more.

After reporting a drop in profit of nearly 70 percent during its most recent quarter ended Dec. 28 and announcing plans to shutter more than 1,000 stores, officials with the company acknowledged that consumers are facing economic pressures that may be forcing them to break their latte habits.

Analysts note that Starbucks’ more-expensive Frappuccino products have been hit the hardest.

On March 3, Starbucks debuted $3.95 “breakfast pairings,” including popular breakfast items paired with a coffee, in an attempt to shatter the notion that the brand is a luxury many can’t afford anymore.

In addition, the menus in stores are changing to highlight $2 brewed coffees instead of the more expensive specialty drinks, and staff members are reportedly being trained to point out to price-skittish consumers that most drinks are priced under $3. Officials say more value strategies are in the pipeline for Starbucks.

Repositioning itself as an affordable option is “a first step in Starbucks taking back the definition of its image to consumers, an area where we believe the company has underexecuted over the past year,” wrote analyst Sharon Zackfia of William Blair & Co. LLC. “We believe Starbucks will begin to do more marketing in coming months, with the goal of enhancing the brand’s relevance in challenging times.”

David Morris, senior analyst with research firm Mintel International in Chicago, said there is “certainly room for affordable luxuries today, but it’s relative to positioning.”

Starbucks is more vulnerable than some brands in a recession because it’s so easy to trade down to less expensive coffee or for consumers to even make coffee at home, though analysts like Zackfia maintain that Starbucks’ customers are not trading down so much as simply visiting their coffeehouses less frequently.

Former Starbucks regulars like Dan Kim, founder, president and chief executive of the Red Mango USA frozen-yogurt chain, based in Los Angeles, knows all about trying to communicate the value of a premium brand beyond price. But even Kim admits that he skips his once-routine visits to Starbucks, instead buying less expensive coffee at 7-Eleven convenience stores.

Coffee, on the other hand, is something many consumers feel they need every day, and frozen yogurt is more of an occasional treat, he argued.

Both Red Mango and frozen-yogurt rival Pinkberry [6], also based in Los Angeles, have seen franchise units close this winter: four for Red Mango, two for Pinkberry.

Both chains say the closures were the result of poor location choices, and both plan to continue growing, primarily outside the Los Angeles area, in cities less saturated with yogurt shops.

Around Los Angeles, however, several independent yogurt shops have failed, indicating that consumers’ passion for paying $5 to $8 for the frozen treat is waning.

Kim disagrees, saying sales trends remain strong at Red Mango’s 43 stores, though because the company franchises, he declined to give average unit volumes. About 40 Red Mango stores are scheduled to open in 2009, the same as the previous year, he said.

“We aren’t seeing people not buying because they think it’s too expensive,” Kim said.

Still, in part to build traffic, Red Mango earlier this month launched a loyalty program allowing frequent customers to earn points toward free yogurt.

Kim contends that part of Red Mango’s premium appeal is its healthful profile, including live-and-active cultures that can be beneficial for digestive health.

Perhaps best of all, he added, the chain sees little competition from less-expensive yogurt vendors.

Goldin at Technomic contended that there is a saturation point for cash-strapped consumers when the novelty of new products is gone and budget realities take over.

“Four-dollar cups of coffee and $5 cups of yogurt, those are things you give up,” he said.

Other affordable luxuries, such as gourmet cupcakes, are still enough of a novelty that the trend may still have life, though probably not for long, he predicted.

No one is more grateful for continuing interest in cupcakes than Charles and Candace Nelson, former investment bankers who, about four years ago, launched Sprinkles, now a five-unit chain of stores selling gourmet cupcakes in a changing daily line-up of flavors, such as ginger lemon, chocolate marshmallow or chai latte.

In addition to the original unit in Beverly Hills, where the line routinely is out the door, Sprinkles has units in the upscale markets of Newport Beach and Palo Alto, Calif., Dallas, and Scottsdale, Ariz. Stores are scheduled to open this year in Houston and possibly Chicago. All are corporate-owned. The Nelsons are the sole owners.

Charles Nelson said he envisions a global chain with one store in each of the top 30 markets in the United States, as well as international expansion.

Sprinkles cupcakes, each elegantly decorated with the brand’s signature candy dot, are priced at $3.25 each, or a dozen for $36.

Like Pinkberry and Red Mango, the brand has been fueled by celebrity endorsements and the gushing coverage by glossy magazines and television talk shows.

Sales and traffic counts so far this year have been flat, Charles Nelson said, but those results are very positive in today’s economy.

“Our belief is that people still have birthdays and special celebrations,” he said, “and we’re so grateful that people have spent their discretionary income with us.”

Other cupcake players are tinkering with the formula to offer added value.

Connie Barham, daughter-in-law of the founder of the 103-unit Hot Dog on a Stick [7] chain, launched CB’s Cupcakes last fall, just as the economy took a nosedive. Within just a few months, Barham has opened three locations in the Southern California towns of La Jolla, Temecula and Glendale.

CB’s Cupcakes are in mall or shopping center locations. Cupcake options range from $1.75 mini cupcakes to oversized muffin-style cupcakes for $3.50. The cupcakes are made-to-order, allowing guests to choose their cake flavor, icing and decorations.

The company also offers “cupcake parties,” either in stores or in homes, during which guests can frost and decorate their own cupcakes for one hour at $15 per person.

Barham said she is “almost breaking even” in one location and expects to make a profit within two or three months.

“Unfortunately, we pursued this right when the economy tanked, but I think if we can hold on, I think we can do it,” Barham said.

“I think people are cautious [about spending] but no one is saying it’s too expensive,” she added. “A cupcake is happy food. It’s comforting. They may not be buying larger ticket items, but they’ll still buy a cupcake.”