Starbucks - an "affordable luxury" during a recession?

We’ve all heard about the economic turmoil that is sweeping the United States. The subprime fiasco and resulting credit crunch bodes rather poorly for the American economy. The possibility of a looming recession can’t spell good news for U.S. businesses… including retailers. However, it should be mentioned that some retailers are feeling the squeeze much more so than others.

Take Starbucks, for example. The coffee giant has been put under considerable pressure as consumers are forced to tighten their wallets and become more price-sensitive. Recently, its CEO announced plans to turn around its ailing business by making a number of tweaks to the firm’s retail value proposition. The company intends to close a number of underperforming stores. While this is probably an intelligent move from an overall financial perspective, it will serve to decrease convenience for customers living in areas affected by store closures. Abroad, the company plans to increase the number of new store openings. With any luck, this will increase convenience to overseas customers and help to drive brand awareness and adoption.

Other modifications to the RVP will be attempts to broaden the selection while enhancing the customer experience. The firm announced that it will be introducing a number of new beverage flavours, as well as making a foray into the lucrative energy drink market. The company hopes that an increased selection will be sufficient to bring customers into the store during an economic downturn. On the experience side, Starbucks aims to create a personal connection between the customer and the Barista by lowering coffee machines to permit the parties to see each other face-to-face.

Personally, I’m sceptical that the changes Starbucks is making are sufficient to keep it profitable during a recession. The capital markets seem to agree with me, as the company’s stock dropped 4% following the announcement of the revised strategy. I believe that Starbucks is refusing to address the root of the problem – price. Increasing the numerator of the RVP is definitely a step in the right direction, but without addressing price, Starbucks is heading for choppy waters. The company maintains that its products are “affordable luxuries”. However, the facts indicate consumers think otherwise – store traffic has plummeted in recent months. Frankly, I think they need to drop their prices. It’s true they’ll take a hit on product margins, but hopefully they’ll be able to keep volume stable enough to make some coin when all is said and done.

Reference:

http://www.reuters.com/article/newsOne/idUSN1932070520080319?rpc=92&pageNumber=2&virtualBrandChannel=10150