Why Starbucks is Ditching Discounts for Premium Drinks

People were coming in to take advantage of the discount. So discount shoppers were low margin? They were, because they were low margin, but they were high frequency. It was creating a lot of fulfillment issues for the staff and they weren't coming back. So you're talking about people. They were only coming for the discounts.

Hey, everybody. Welcome to Business lunch with me, Roland Frazier, one of your hosts, and Ryan Dice, your other host. Ryan, how are you doing today?

I'm doing so great. Have you heard the news?

What news?

Big news. Turns out Starbucks. Are you ready for this?

I thought you were going to tell me a lucky man had made the grade, but okay, good. Yes.

Turns out Starbucks wants to be a coffee shop again.

Isn't Starbucks a coffee shop?

Well, so apparently this is. So I was reading this this morning. I thought this was kind of interesting. This was in an article posted on cnn, so I didn't realize this. I think we talked about it before, but I don't know the exact number. But like a significant chunk of Starbucks revenue is essentially going through the app and online. Like Starbucks has basically shifted from being a coffee shop to essentially being an online retailer. People going in and just grabbing beverages. And apparently their new CEO, Brian, Brian Nichol is like, we've lost our way.

Is it mostly coffee, though, that they're buying online? Like they're just ordering in advance so they don't have to wait in line for it?

Yeah, that's, yeah, they're basically going in. It's a grab and go. It's a go through, the drive through. I mean, he doesn't like it.

I initially, one might ask why. Seems great. Seems like better experience for everybody than those long, long lines that I used to see out the door.

So I don't think he minds people necessarily like ordering online. The big thing that he's talking about that they're moving away from, he said that they're ditching the discounts, so they're no longer doing discounts, which. That'll be interesting by the way, that the.

I've like, I'm not a coffee guy. So the only time I'm ever in Starbucks is to get you or somebody at an event a coffee and that's it. So, so talk to me. Explain like I was five, because I definitely, I don't know anything about discounts they offer or anything.

Yeah. So I mean, and they didn't, they used to not do this, but apparently they've been pushing a lot of discounts through the, through the app to, you know, to, to juice sales. So it'd be a 50% off, it'd be a two for one. You know, come on in and you.

Could get a coffee for as little as $20 then.

Yeah, right. Crazy. And to call it coffee is ridiculous. I mean, these things are functionally like milkshakes at this point. Right. So, but what they were finding, according this, according to the new CEO, the people who are coming in for the discounts, they weren't necessarily coming back to buy more coffee. They were only coming in to do these discounts. And it was creating just a massive, massive hassle for the people. There was like locking down all of their systems because they were having to make so many drinks so quickly that it was just locking down, locking down their stores. So he, he basically said, no more. We're not going to be doing any more discounts. What we're going to be doing instead is just rolling out new drinks and we're going to get people to come in to have our seasonal drinks.

So explain what the problem was though, because I still don't understand. They were coming in to take advantage of the discounts that they were offered.

People were coming in to take advantage of the discount. So discount shoppers were low margin. They were. Because they were low margin, but they were high frequency. It was creating a lot of fulfillment issues for the staff and they weren't coming back. So you're talking about.

So they would only come for the discount.

They were only coming for the discounts.

It was like Groupon. The same, the Groupon problem.

They were basically creating their own, like Groupon cycle and it would create a surge of revenue that wasn't dropping to the bottom line. And all in all, they were seeing sales decline.

That makes sense.

And so what. And essentially like the, the argument that he's making is that we have unwittingly changed our positioning from this premium coffee house brand. You know, Starbucks was the firm. What do we think when you think like you said, you don't, you're not a coffee guy.

But what you said about writing a novel with an expensive not coffee, coffee drink.

Right. Well, but what you think about Starbucks is they were the first ones that, that you would go and buy like a $6 cup of coffee. Right. They were the premium coffee brand and now they have unwittingly, according to their CEO, transformed into. Yeah, into essentially the discount coffee coffee house because it's all buy through the app on discounts. You know, come in, come into the drive through, we're done, we're Dunkin donuts, we're, we're McDonald's. And so he wants to pivot it back. And so he wants to get. And the other thing that they did was they started pulling out. When you would walk into Starbucks, it used to be his like, big, comfy, cozy lounge things. And they, because they would encourage you to come in and actually stay because you'd stay and you'd order multiple things. Well, they pulled all that stuff out and they made the furniture all really, really hard. They didn't want you to stay. So he's going to come in and he wants to put in soft furniture again to bring back that coffee house vibe so that people do stay again, hoping to bring back the type of consumers who appreciate good coffee, who order more expensive coffee, and who buy hopefully multiple cups of coffee.

Yeah.

So this is the strategy. Okay. Right. And, and that's the hope. So we're gonna come out with more seasonal drinks. No more, no more discounts to juice it. We're gonna try to get people to come in and to stay, not just buying the app grabbing, you know, go. And we really want to be seen again as that community coffee house. The third place, you know, that's what they've. There was. You had your home, you, you had your work, and then you had Starbucks. The third place, we want to go back to being this. That is their strategy. We want to reclaim the brand that we were. And so my question to you, Roland Frazier, you are, you're pretty good at this strategy thing. If you are consulting with Brian Nicol, who is the new CEO, what do you think? Good strategy, bad strategy?

I mean, I honestly, I like the idea. I think the Groupon strategy is a. Is a flawed strategy because you attract not your ideal customer profile. You attract a discount shopper who is harder to take care of, more complainy. In all of the experiences that I've seen with it and is a. Is a bottom, you know, a bottom feeder, a discount hound, not a good customer. So it's not really good for generating the ICP that you're looking for. And it's not good for retention, repeat business. I think that what I would probably lean harder into would be take the discount dollars and reapply them to a loyalty program. I like, I like the idea of having people come in and stay and, you know, they're already there and stay all day and drink coffee all day. And let's reward those people for staying, not for coming in the first time to get the cheapest cup, but for staying with the loyalty program. So maybe you're, you know, every 10th coffee cup that we punch, you get another one free or something like that, or, you know, although I don't know many things that would be higher margin than coffee, you know, or some other high margin thing. I actually like this strategy as a change with a loyalty bent. What are your thoughts?

I think if you're going to do it, then needs to be somewhat performative. Like you need to make a show of it. I think if all they do is take away the discounts and just put in comfy comfier cushions, but they don't tell anybody they're doing it, they're going to wind up spending a lot of.

Money on it, how to launch it. What do you think of the strategy?

I kind of think it's the only option they got because I agree the, the, the discounting is, it's just a race to the bottom. And I just, you know, if you are the, if you're the discount brand, I don't know that, that you necessarily want to, want to be that because you're always still going to be a little bit more expensive. And so people are going to happily go to plenty of other, you know, options. Like I don't, I don't know that you want to be the little more expensive discount brand.

What do you think about.

Yeah, what do you think?

That sounds terrible, right?

Well, that's, that's where they are right now.

Yeah, it is. So what do you think about premium positioning for them and then also like, I guess is it possible for them to gain premium positioning again? Having kind of given it up is my first question. And my second one is if given that there are so many competitors now that have created the cushy seat coffee house vibe that they didn't, that Starbucks didn't have back in the good old days when they were first bringing the European concept to America, is it possible or are they effectively a leader that's now a. Me too.

I, I would worry so if, if I'm a public market investor and I'm not really, you know, certainly not when it comes to individual sock stocks, but this is probably one that I'm selling because I don't know that it is. I think it's the only hand that they have to play. But man, I don't know that they can pull it off. I don't know that you can take a brand that was premium that went discounted, try to push it back premium because I just don't know that the consumer is there anymore at the scale that they're at right now. They Were premium at a niche level. But when you think about true premium brands, like true luxury brands, they exist in a sliver of the marketplace. Right. Hermes is not for the masses. But the whole concept of Starbucks is. They're everywhere. They open them everywhere. And you can. I don't believe that you can be both premium and all over the place. Like, I just don't know that you can have both of those things. And that's what they went for. They went for both premium and all over the place. And I think that that ultimately was the issue with the strategy in pursuit of scale. They kind of lost their way. And I think this happens with businesses all the time. And so I think where they are right now is the logical extension of their actual strategy, which was scale at all cost. Just scale just grow. So I don't know that they really can go back.

I wonder.

If I think about Target.

Target, really, when I was growing up, Target was discount. And then Target went upscale. Upscale, discount, upscale. By aligning with stars and influencers and know things like that. And really did a good job of that. I don't know how they're doing today, but generally, you know, I still.

Still doing well.

Yeah. And then you have Kmart that didn't do that forever. Then tried a little bit to do it, but didn't have the capital to invest in their store. So everything was all run down. And it just kind of repelled the people that wanted to check it out. Sears also tried to do that. Tried to do a kind of a Target thing. Sears was kind of premium back in the catalog days, then went mass market, then tried to upscale. And I think that put them under.

I don't.

Has anybody done it that you can think of?

The, The. The Target is a great example. The example that I was thinking of, that if they were going to. If they were going to, you know, pull a play from anybody's playbook, it would be Domino's Pizza.

Yeah.

And what Domino's Pizza did was the damaging admission. And this goes back to, like, I think it was 2009, they did pizza turnaround.

Yeah.

And it, like, if you can still look at it, it's a pizza turnaround.com and what they basically did, they were never premium. But I mean, I think. I think it still applies a little bit where they. They essentially came out and admitted, our pizza sucks. We'll admit it. Our pizza is terrible. It tastes like cardboard. Okay, fine, we admit it. But we've been working behind the scenes to produce a pizza that is hot, that will be Delivered to you fast and wait for it, is finally delicious. And so we invite you to try the new Domino's Pizza. And they were very performative about it. I mean, they made a whole literal production, a documentary about pizza turnaround. And that did work to drive up Domino's Pizza. The challenge that I think Starbucks have is they tried this before. Like, Howard Schultz was. Went and shut down every Starbucks for like a day to retrain all the baristas once. Now, my guess is most people have forgotten about that. So can you do it again? Maybe. I think the alignment with influencers and celebrities, if you could get them to kind of like hang out in Starbucks again and make that cool with this. I mean, look, you know what's cool right now among the younger generation, that just shocks the crap out of me.

What's that?

Cigarettes.

Yeah, I know.

Cigarettes are making a freaking comeback. What the hell with that, man? So if cigarettes can make a comeback and can start getting cool with the. With the kids again, then I gotta think that Starbucks, like, has. Has a shot and that sitting in a coffee house could be cool. Cause I think. I really think that Starbucks biggest competitor isn't actually Dunkin Donuts and the other discounter. I think it's people making coffee at home again. Because what has gotten a lot better is the Nespresso machine, where you can make a perfectly great cup of coffee, you know, at home that's as good or better than what you get it, you know, at Starbucks. And at the end of the day, if what I'm getting at Starbucks is a milkshake, now I'll just go to McDonald's for that.

Yeah, I kind of wonder, because it was the mall for a while and then it was Starbucks. I wonder what. What is the third place now? Is it the gym? Like, what. Where do people find. Because home is not for everyone, a peaceful place or it's not. It's a place they need a break from, and work is work. So I think that it's still. There is still the desire to have a third place.

It's a great point.

I don't think anything has stepped in to fill that void. And so perhaps it is there. But if I'm. If I'm Brian Nicol, if you're listening to this, and we know you are, I would make a big deal out of it. I would say I would go in there with a wrecking ball, a literal wrecking ball and a sledgehammer, and. And I would beat up the crappy wooden furniture and I would show how you're making it plush and soft again. I would show how, you know, you're actually brewing real coffee again, how it's a true coffee bar. You know, again, to create that, that third place that's, I would maybe even have it be a separate area from where the people are coming to pick up their to gos so that you're not having the crowd of people hovering around waiting for their, you know, for their drinks and things. Because you're right, they, they, they do have it. But I think so, I think that's interesting for Starbucks. I think the bigger question that, that is worth broaching for, you know, for our listeners who are not Starbucks, is how do, how can we keep our brands from losing their way? Right, because I would argue that, and that's, that's, that's, that's exactly what Brian Nichols saying here. He's saying that we lost our way. Yeah, we need to, he said we need to return to our roots as the community coffee house.

But you're right, he's echoing Schultz's announcement several years ago. And so how many reboots do you get? That's a good question. I thought of one other damaging admission, which was Dell.

Right.

Dell was a premium provider of custom built computer solutions and then they outsourced their customer service to someplace and it got abysmal ratings and then they had the damaging emission. Yeah, we really screwed that up and now we're back and we're doing it at better and it seems like it has done okay for them. But yeah, so, so he's, he's reading from a playbook that multiple people, including his predecessor have used. It's just, where's the differentiation? That that's going to be tough for him? Right?

Yeah, so, yeah, I think, I think it's going to be tough. I think, I think you're, you're, you're banking on people not remembering that it's happened before, which I do think is actually a fair assumption to make because memories are short and most people probably weren't paying attention the first time. You know, we do because we're looking at these things as business case studies, you know, when they're happening and geeking out about it. But I think most people just don't care.

So, so you were not losing your way. Is there a monitoring system for that? How do you do that? How do you not lose your way like they did?

Yeah, I mean, so I just, I think it is important that you do as a company need to define who are we? What are those things? That what makes us us. And we do this when we're working with clients. We create what we call a clarity compass. And so at the north, it's like these are our goals. So this is where we're headed at the south. This is the company purpose. Right. So this is what we do and this is the impact that what we do makes. That's kind of the, these are our activities, you know, and this is the impact. And I think that company purpose statement can be really, really important. Like Southwest Airlines, for example, is connecting people to what matters through friendly air travel. So if they were to ever, you know, decide that they're going to do something that, you know, makes air travel no longer friendly, well, that would be in violation of what they do, of who they are. Right. I think if, if what they were, if their, if their purpose had been clearly stated as to bring the community coffee house to every community in America, then at some point maybe, just maybe somebody at that company would have had the, the, the standing to say, hey, by introducing all of these things that we're doing with the discounts and with the drive thru and all this, we are really pulling away from our purpose. So are we changing our purpose? Because you're allowed to change your purpose. Yeah, you're just not allowed to blatantly violate your purpose. And I think that that is the thing that keeps you slip away, you.

Know, incrementally into a completely different one. Unintentionally and unaware that you're doing that right.

And that, and so you've got that at the south on the, you know, we call it a clarity compass because again you're, you're putting the, you're putting these, these elements at the point of the compass. And on the east you have your, your core values and so that makes sure that you stay in alignment as a team. And then on the west you have your strategic anchors and so those are your clear competitive advantages. What are we particularly good at? Are we playing to our strengths? That's where you're making the competitive case like can we do we expect to win in the marketplace? And so your core values and your strategic anchors, they're kind of what keep you on track and your company purpose or what the fuel that gives you that, that push. And if you run all of the decisions through those four filters right, is this going to get us close to our goals? Is this aligned with our company purpose? Is this, is this aligned with our core values? Is this aligned with our strategic anchors? Can we actually pull it off? You'd Be surprised how easy and simple decision making becomes. I think the issue is that most businesses are not willing to write this stuff down because they want to have the freedom to just do whatever the heck they want to do in the moment and they don't want to have to have any pushback from anybody. I think when you do that, you open the door to losing your way.

Yeah. Interesting.

Interesting.

Well, I think. I like that. I think that it'll be interesting to see what happens. What's your call? What are you putting up for their results that they get from this?

I think it's. I predict that within three or four quarters they're going to be back to offering discounts again.

Yeah.

Yeah. I just, I don't think that the consumers are going to be hanging out in any coffee houses anytime soon. And so I think they're going to be. I think sales are going to dip. I think they're going to need to juice. Juice sales and juice revenues. And I think they're going to be back to that. And that is going to put them on a path that will have them starting to close more stores very, very soon. And they'll just be kind of another. You know, they'll be one of those legacy brands that was a really great brand at one point in time, but they'll just kind of slowly start to peter out. The good news, though, they'll start to peter out over the next 20 or 30 years. Right. I think they'll still be around for a very long time as a value brand, but I think their best days are behind them.

But we're putting a sell recommendation on that stock.

Yeah, I would.

I like that. I kind of like. I like doing that analysis and then giving a completely non financial analyst view of we're issuing a sell on this.

We're issuing a sell as people who are not financial analysts, not stock investors at all.

Yeah. Yes. And by the way, I have no Starbucks stock and of any kind. And I don't think you do either. So if either of us do, then don't listen to us at all, please. Because, please. But that's really cool. I thought that was fun. Hopefully you guys enjoyed that. If you did, please share this episode with somebody that you like. If you didn't like it, share it with somebody that you hate and make them listen to it. And we'll see you next time on Business Lunch.

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