Price Points

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January 30, 2008
Starbucks Looks at New Price Points After Posting Weak Sales Results
By JANET ADAMY

Starbucks Corp. cut by 350 the net number of locations it plans toadd this year after reporting its worst quarterly same-store salesresults in the company's history. CEO Howard Schultz says thecompany is looking more closely at how it can appeal to price-conscious customers by using a strategy he calls segmentation.

The moves are some of the first details of Mr. Schultz's turnaround plan for the struggling coffeegiant since he retook the CEO position earlier this month. Starbucks stock has fallen more than 40% in the past year.

"The fact is the consumer is in a recession," Mr.Schultz said in an interview. The chain is testing a $1cup of brewed coffee at some locations in Seattle andtesting free brewed coffee refills.

"We're not going to get into any price valuediscounting that would dilute the premium place weoccupy," Mr. Schultz said. However, he said thecompany is looking at creating "segmentation" thatwould allow an entry point for new customers the waythat Mercedes-Benz has done with its C-Class andRalph Lauren has done with its Chaps brand.

"There are many entry points that we believe we canleverage that we have not leveraged before," Mr.Schultz said.

Mr. Schultz also said Starbucks plans to stop selling hot breakfast sandwiches by the end of thisyear. The decision was driven by the fact that the scent of the warming sandwiches interfered withthe smell of the coffee, he said.

Starbucks plans to open a net of 1,175 new stores in the U.S. this year, down from the company'searlier forecast of 1,600. The company will close 100 U.S. locations. Instead, Starbucks will openmore stores overseas, a net of 975 this year, where the company faces fewer issues withsaturation. It originally was planning to open 900 locations overseas. In 2009, the company will for the first time open more locations abroad than it does domestically.

The store opening reduction may not be enough to satisfy investors, who were looking for a sharppullback. Mr. Schultz said he believes the reduction is "significant."

Starbucks weak holiday results, released after market close, show just how deep the company's problems are. Same-store sales – a key measure of retailers' success that includes sales at stores open at least 13 months – rose just 1% during the fiscal first quarter that ended Dec. 31. That's the lowest same-store sales number that Starbucks has reported since going public in 1992. In the U.S., same-store sales fell 1%, the first decline for that market since the company began breaking that number out in 2004. Investors, however, are likely to pay more attention to Mr. Schultz'splans for fixing Starbucks since Wall Street had been expecting a weak fiscal first quarter.

During the quarter, net income rose 1.5% to $208.1 million, or 28 cents a share, compared with $205 million, or 26 cents a share, a year earlier. Revenue rose 17% to $2.76 billion.

Several years of rapid expansion caught up with Starbucks last year as U.S. store traffic slowed,the shelves inside stores became cluttered and two price increases drove away some customers. Starbucks launched its first national television advertising campaign during the holiday season butthat wasn't enough to help the Seattle chain lure more customers into the stores. At U.S. locations,store traffic, which is measured by average transactions per store, fell 3% during the most recent quarter. That's the second consecutive monthly decline.

Mr. Schultz said he has spend the past few weeks meeting with management and real estatepersonnel, as well as "spending more time than I've spent in many, many years on the customerexperience." Mr. Schultz also reshuffled several top management positions earlier this month.

//online.wsj.com/article_print/SB120171787350829257.html
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