SEATTLE Starbucks Corp. next week will lower pricing on some items in some markets to better convey the brand’s value message at a time when the coffeehouse chain has struggled against slowed sales and competitor forays into specialty coffee. While prices will drop on some popular items, prices also will increase on others, the company said.
Howard Schultz, Starbucks chairman, chief executive and president, said Wednesday the pricing changes will be accompanied by a multimillion-dollar advertising campaign that begins May 5. The campaign will combat the notion that the coffeehouse chain offers only expensive lattes and that fast-food rivals, such as McDonald’s, are stealing market share. McDonald’s has said it would complete the systemwide rollout of its specialty beverage offerings this summer.
“Speculation that Starbucks is losing retail market share to competitors has been grossly exaggerated,” Schultz said. “Our customers are not trading down.”
Starbucks reported a 77-percent decline in earnings for the quarter ended March 29. The Seattle-based chain recorded a profit of $25 million, or 3 cents per share, compared with $108.7 million, or 15 cents per share, for the same quarter a year ago.
Same-store sales fell 8 percent during the quarter, as the number of customer transactions dropped 5 percent and the average value per transaction declined 3 percent, the company said. Still, the same-store sales decline showed some improvement over the 9-percent slide reported during Starbucks’ first quarter this year.
Schultz said the weak economy is continuing and customers remain focused on value.
“But customers are looking for meaningful value,” he said, “not just a lower price, but quality.”
Starting Tuesday, prices will be “fine tuned” in some markets to make some popular items more affordable, he said. A grande iced coffee, for example, will be priced under $2, reportedly a 45-cent savings in some markets.
On the other hand, however, Schultz said pricing will slightly increase on some more complex specialty beverages.
Schultz said the company will continue to enhance customer experience, with a streamlined menu board and more focused product offerings, particularly more healthful items, in response to customer demand.
The oatmeal item added last year was a “home run,” Schultz said, because it offered the combined aspects of health, value and good taste.
Starbucks is planning to expand the Vivanno smoothie line this summer, he added. And the company also is expanding the availability of its new Via Ready Brew instant coffee, which debuted about two months ago.
Schultz predicted Via would be the forerunner in a new category of “super premium instant coffee” that would make the Starbucks brand accessible at a price less than $1 per cup. “You’re going to see us do something significant with Via in coming weeks,” he said.
The talk of pricing comes at a time when McDonald’s is readying its national advertising launch for its new line of gourmet espresso-based McCafe coffees, which are rolling out nationally and are reportedly available in many markets for less than $3.
Schultz said he was aware that “the noise level will be increasing” about McDonald’s stealing Starbucks’ customers. Many Starbucks drinkers will likely try the offerings of fast-food competitors, he said, but will “reject what doesn’t meet their expectations.”
Earlier this year, Starbucks launched a value-positioned “breakfast pairings” offer that combined a coffee with food for less than $4. The initiative has increased “food attachments” to transactions, and improved the perception of value among customers, Schultz said.
The company’s foray into hot tea drinks over the winter, however, was disappointing, Schultz said. Still, Starbucks isn’t giving up on tea and will be expanding on iced versions over the summer.
The company’s profit drop also was hurt by the negative impact of its ongoing restructuring efforts for the 16,000-unit chain, which have included the closure of more than 800 underperforming stores in the United States since last year, as well as the shedding of roughly 1,700 jobs. The closings of 123 domestic stores, lower real estate values and the reduction in positions resulted in restructuring charges of $152.1 million during the quarter, officials said.
In the United States, where Starbucks operates 7,035 stores, net revenues were down 6.8 percent, to $1.8 billion. Total revenues for the company’s second quarter fell 7.6 percent to $2.3 billion.
During the second quarter, the company booked $120 million in cost savings, it said, exceeding the goal of savings of $100 million, and bringing year-to-date savings to $195 million.
Schultz has pledged to reduce costs by $500 million by the end of the fiscal year. On Wednesday, the company estimated cost savings would reach about $150 million in the third quarter and another $175 million in the fourth quarter.
Contact Lisa Jennings at [email protected].