Starbucks (SBUX) is near all-time lows. ~50% off its all time high. What’s up?
With Wall Street freaking out over a looming recession, the ‘smart’ people think that the first thing impacted is discretionary spending, i.e. items like expensive coffee. This may be true, but something else more significant is going on.
McDonalds is launching a new line of premium coffees that beat Strabucks’ in taste tests — and McD’s is starting to offer FREE wifi. This matters because the analysts worry that if McDonalds has “as goodâ€� coffee and offers free wifi, then people will opt for coffee breaks at the Golden Arches. These analysts assume that Starbucks and McDonalds should be competing on price once their offerings are closer in quality.
However, what the analysts are overlooking is the power of brands. Starbucks has done a fantastic job of branding itself as a community and as a place for the ‘cultured.’ My friends go to Starbucks to meet like-minded people and to work on significant things like writing, thinking and homework. I know people who get dressed up to go to Starbucks. It has an aura of sophistication. As Howard says, “It’s a great brand. The best brand.”
McDonald’s branding on the other hand, has until recently been pretty much the opposite. Traditionally McD’s has marketed low prices with an appeal to middle America and the Walmart crowd. Fast Food Nation didn’t help.
Here is a telling difference: For years McDonald’s seats were purposely made to be uncomfortable, encouraging turnover and discouraging loitering. Contrast that with Starbucks’ plush leather chairs and couches. To many, it doesn’t matter if McDonald’s was giving away the coffee for free because it’s simply a brand persona many people reject.
I understand the reason why Starbucks might take a hit if/when people decide to cut back on $4 mocha frappachinos. What I cannot rationalize however is that Starbucks’ clientele will suddenly jump ship for McDonalds en masse. Starbucks sells an experience and an image. Mickey D’s sells cheap, unhealthy food.
Brands matter and the strongest brands always win.