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Starbucks Focusing on Seattle’s Best Brand (SBUX, MCD, GMCR, PEET, CBOU, BKC)


Starbucks Corp. (NASDAQ: SBUX) is on the rise in 2010 – the stock is up 16%, almost five times better than the Dow Jones Industrial Average, and a Starbucks dividend was offered to shareholders for the first time in the company’s history. But to maintain this growth SBUX will have to fend off coffee rivals that include McDonald’s Corp. (NYSE: MCD) with its lower-priced cappuccinos, gourmet home brewers like Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) and Peet’s Coffee & Tea, Inc. (NASDAQ: PEET) — not to mention smaller rivals like Caribou Coffee Company, Inc. (NASDAQ: CBOU) and local community coffee shops.

That’s a tall order! But Starbucks Corp. seems to have arrived at an idea with big potential: Use its wholly-owned Seatle’s Best Coffee brand to establish a lower priced alternative to its premium Starbucks offerings.

That includes partnerships with fast-food joints, retailers — and even cafeteria-style vending machines!

According to the Wall Street Journal, in a presentation last week to the Starbucks board the company unveiled a new logo for Seattle’s Best along with a new motto: “Great Coffee Everywhere.” The motto is admittedly a bunch of marketing jingoism, but it’s important as an indicator of what SBUX stock execs are trying to achieve: Mass-market appeal with a brand that can be in supermarkets and retail locations everywhere.

Tom Ehlers, a Starbucks vet now in charge of retail for the Seattle’s Best unit, told the WSJ that the move was akin to The Gap, Inc. (NYSE: GPS) establishing Old Navy as a discount chain instead of a similar store. Old Navy now rivals it’s “parent” Gap chain in size, since it caters to a much bigger audience of regular folks who may not be willing to spend $100 on a pair of jeans.

If the goal of widespread expansion sounds like Starbuck’s old strategy before the stock stumbled from a peak of about $38 in late 2006 to single digits in late 2008, think again. Though the company did indeed grow to big to quickly, consider that the company’s recent success is actually from cost-cutting and downsizing. In early 2009, as the economic downturn turned off consumers from pricey SBUX beverages, the company announced plans to lay off up to 6,000 employees and close hundreds of stores. This is about the time SBUX stock turned around.

Starbuck’s is a premium brand, and with that distinction comes a certain consumer base. What Seattle’s best would allow is a broad appeal to the “bottom of the pyramid.” Currently, Seattle’s Best coffee and coffee beans are sold in the chain’s own shops inside nearly 500 Borders bookstores, as well as in about 2,500 supermarkets and SBUX has plans to roll out an ambitious growth plan to bring the coffee to more retail locations and restaurants across the U.S. Seattle’s Best is already in the middle of plans to sell its brew at Burger King Holdings Inc. (NYSE: BKC) restaurants and at AMC Entertainment Inc. movie theaters.

If you know a caffeine junkie, you’ll agree that coffee sales are always going to be brisk. The only question is how much they’re willing to pay and where they get their fix from.

Seattle’s best will allow Starbucks Corp. to serve a broader audience and achieve growth it could not under its premium masthead alone.

As of this writing, Jeff Reeves did not own positions in any of the stocks named here.

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