Starbucks Goes Further Down Market To Protect Its Turf

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Starbucks Corp (NASDAQ: SBUX), the home of the $4 latte, has moved down market for some time to defend its turf against firms like McDonald’s (NYSE: MCD) which offer less expensive “designer” coffee. The world’s largest fast food chain effectively undercut Starbucks in the latte business by offering similar brew at half the price.

Last year, Starbucks moved more deeply into the lower end of the market by offering instant coffee, Via, which it began to sell as an inexpensive product that customers could make in their homes or offices.

Starbucks is not finished competing with McDonald’s and mid-tier brands sold in retail outlets.

Starbucks bought a rival called Seattle’s Best in 2003, and the smaller company was effectively rolled into the larger company.  The company is continuing to revive the Seattle’s Best brand as a way to attack the coffee mass market. Seattle’s Best will now have its own logo and branding,  decoupling it from the Starbucks brand.

Starbucks claims that “Seattle’s Best Coffee’s brand transformation is being fueled by significant, high-profile retail relationships and expanded franchising efforts that will increase from 3,000 points of distribution earlier this year to more than 30,000 by the end of Starbucks fiscal year.”

The new brand has already established distribution relationships with AMC Theaters and several airlines. The company announced a deal with Burger King (NYSE:BKC) late last year. As it enters the broad retail market Seattle’s Best says it will make high quality coffee “more accessible than ever before.” In other words, the price of the product will be well below that of a Starbucks latte.

The move is strategically sound. It allows Starbucks to expand its base of sales without sullying the company’s core high-end name. Starbucks coffee can continue to be sold at high prices at its own stores and select retail outlets. Seattle’s Best creates a new brand that stands on its own. Its success or failure, particularly a failure, will not change the public’s perception of Starbucks flagship products.

Douglas A. McIntyre

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