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The Wall Street Journal reports this morning that Starbucks, best known for virtually creating the market for a $4 cup of coffee, now is testing a $1 cup of coffee with free refills.

“The eight-ounce short size isn't on Starbucks's menu but has long been ordered by in the-know patrons,” the Journal writes. “Typically, a short, brewed coffee would sell for around $1.50, although that can vary by several cents depending on the store. Starbucks is also testing the offer of free refills for traditional-brewed coffee in the Seattle area … The $1 test undercuts even low-cost coffee purveyors, including McDonald's Corp. and Dunkin' Donuts, a unit of Dunkin' Brands Inc., whose coffees generally start in the low $1-plus range. Although most sit-down restaurants top off customers' coffee free of charge, specialty cafes have largely stayed away from the practice. Starbucks will face increasing competition this year from McDonald's, which plans to start adding a line of espresso drinks at its U.S. restaurants.”

Starbucks management says that the test does not reflect a long-term shift in business strategy.

The coffee retailer has been experiencing a number of problems of late, with a slowdown in consumer traffic that seems to correspond to a tightening economy and an increase in commodity prices. At the same time, Starbucks’ share price dropped 48 percent in six months, resulting in the decision to reinstall Howard Schultz, who had engineered the chain’s worldwide expansion, as CEO.

KC's View:
It is an interesting business problem. Is Starbucks better off creating a value item for its menu, or by improving the experience and the product so it can better dominate the high end of the coffee marketplace?

I’m honestly not sure. But what I am sure of is this: Starbucks should be what it wants to be, and not overreact to competition.