BATTLE of the BARISTAS As McDonald's muscles in, Starbucks is fighting back May 29, 2009 By WENDY STUECK AND MARINA STRAUSS
VANCOUVER, TORONTO -- When Howard Schultz visited Vancouver this week, he reminisced to employees about the city's special place in Starbucks' history, as the site of the company's first foray outside of the United States in 1987 and the testing ground for what would become a global business.
"We had no clue what we were doing," Mr. Schultz, Starbucks Corp.'s SBUX-Q chief executive officer, said in an interview at a downtown outlet, a five-minute walk from that original store at Vancouver's waterfront SeaBus terminal.
"[Vancouver] seemed close, we had some good real estate. But in those days, none of us had any international experience. It was just passion and will," he recalled. "And you know what? That's what we have today."
It's vintage Howard Schultz inspiration - and he, and the company he founded, will need it. Since its birth in Seattle nearly 40 years ago, Starbucks has built an iconic brand with relatively little advertising, thanks to the power of a once-novel concept and customers' embrace of a "third place" between work and home. But now Starbucks is up against a competitor, McDonald's Corp., MCD-N with a gargantuan marketing budget and a bottomless thirst to win coffee drinkers' business.
In the U.S., Starbucks is fighting back with an unprecedented advertising campaign that reminds customers, "It's not just coffee. It's Starbucks," and other tactics, such as sending out Mr. Schultz to talk up lower-cost drinks.
Starbucks is investing heavily in digital media (Sheryl Sandberg, the chief operating officer of Facebook, joined the board in March), with campaigns on networks such as Twitter.
The fight is about to come to Canada, where fast-food giant McDonald's is spending millions to woo customers with cheap coffee combos and Starbucks intends to expand its advertising campaign.
In terms of financial muscle, it's no contest. Last year, McDonald's spent more than $820-million (U.S.) on advertising in the United States alone - more than 30 times as much as Starbucks spent on ads in 2008.
Mr. Schultz knows that no matter how much he adds to the marketing budget, he can't afford to outspend the competition.
"We don't have to," he said, sipping from a cup of black coffee in a Starbucks mug and munching on a scone after spending the previous few hours talking to some 250 employees at a nearby hotel. "That's not our game. We need to play our game our way, and focus on our strengths."
For Starbucks, that means emphasizing matters such as support for coffee growers, the African AIDS-related Red campaign - and, oh yes, affordable drinks. Half the beverages the company sells are less than $3 and a third are under $2, Mr. Schultz said. Specialty drinks can cost more, he concedes, but the blanket "four-bucks" tag is unwarranted.
McDonald's, which has rolled out its McCafé products at about 11,000 of its U.S. restaurants over the past few years, recently launched a test of the concept in a "handful" of its restaurants in Atlantic Canada, and plans to have 70 pilot stores by the summer, said John Betts, president of McDonald's Canada.
The McCafé offering includes cappuccinos and lattes; mochas and espressos, topped with chocolate drizzle or powder.
As part of McDonald's coffee push in Canada, the burger giant handed out free brewed coffees for two weeks in late April, a campaign that was so successful that Mr. Betts said the chain will run a similar promotion some time soon.
The strategy seems to be working. In its latest fiscal quarter ended March 29, Starbucks' same-store sales fell 8 per cent in North America while those at McDonald's rose 4.7 per cent.
Starbucks remains highly profitable, has an "impeccable" balance sheet and is still opening stores throughout the world, including 60 this year in Canada, Mr. Schultz says. (Fifteen underperforming stores are being closed here as part of the company's global overhaul.) Starbucks has also introduced Via, an instant coffee product.
But by carrying less expensive products in its stores and selling such things as instant coffee, Starbucks is in danger of losing its luxury identity, said Jenny Darroch, a professor of marketing at Claremont Graduate University's Drucker School of Management in Claremont, Calif.
Bryant Simon, a professor of history at Temple University in Philadelphia who has written a soon-to-be-released book on Starbucks called Everything but the Coffee, questions the wisdom of the company's emphasis on ethics and values.
"I would make myself people's definition of coffee and give up the other stuff. That's already gone. Nobody thinks of Starbucks as authentic any more, do they?"
Well, Mr. Schultz does.
Asked whether anybody really cares about fair-trade beans when they just want a cup of joe, Mr. Schultz says he believes some will.
"Not every customer is going to think it's relevant, or believe it's true, or think 'This is why I come to Starbucks.' But I still want to tell the story. Because at the end of the day, the quality of coffee will tell its own story, coupled with what we do around it."
He speaks over the hiss of an espresso machine, in a store in the city where Starbucks has been a fixture for more than 20 years, then heads out the door, on his way to meet some "premium customers" who warranted the invitation by being daily customers for years at a time. He can't wait to meet them.
STARBUCKS (SBUX-Q)
Close: $13.71, up 31¢
MCDONALD'S (MCD-N)
Close: $58.13, up 31¢
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Coffee wars
ADVERTISING
$26-million
Amount in U.S. dollars spent by Starbucks on advertising in the United States in 2008.
$820-million
Amount McDonald's spent on
advertising in the United States last year.
PRICE
$3.10
Price for a 12-ounce caffe mocha at Starbucks. A 20-ounce cup costs $3.95.
$2.29
Price of a 12-ounce espresso-based coffee at McDonald's.
A 22-ounce cup costs $3.25.
SALES
-8 per cent
Starbucks' latest quarter same-store sales in North America.
4.7 per cent
Latest quarter North American same-store sales at McDonald's.
Sources: TNS Media Intelligence, Desjardins Securities, company reports
