Premium cafes and value meals? Starbucks strategy on the table

On Wednesday, at its annual meeting in Seattle, Starbucks Corp. (SBUX) will evaluate the effectiveness of its most recent initiatives and opine on whether its current course is the best one for weathering the recession. Amid worries about brand dilution and reduced discretionary income, it promises to be an exciting event.

Starbucks is, after all, a product of serendipity and the regular American's unprecedented spending power. The latest economic boom fueled hundreds of businesses that were designed to help the newly affluent dispose of their wealth. From botox to pet massages, premium jeans to miracle berries, fresh discoveries seemed to move from fads to necessities in the blink of an eye.

Perhaps the greatest of these was gourmet coffee.

Whereas the best part of waking up had once been Folger's in the cup, the morning breakfast beverage became a minefield of specially roasted, varietal coffee beans ground to the perfect texture, brewed at the perfect temperature, and served in the perfect way. Combined with an endless parade of syrups, foams, whipped creams, ground spices and cookie crumbs, coffee moved from pick-me-up, to gourmet event, to multi-million dollar industry.

Nobody benefited more than Starbucks. The Seattle coffee maker became so ubiquitous that its rise to power was parodied in both the Austin Powers series and in The Onion. Suddenly, every small town had two or three Starbucks outlets (and some cities had more than a hundred), where $4 or $5 could buy an affordable little luxury and people who had once been content with milk, two sugars now tried to decide if they were more of a half-double decaf half-caf person or could they be happy with a basic Venti Soy Latte.

Of course, when money gets tight, even the affordable luxuries start to seem expensive. Last month, the chain cut 2,000 jobs and it is currently on track to close 900 stores. The ultimate goal, which is presumably among the topics for Wednesday's meeting, is the company's plan to cut $500 million in costs by fall 2009.

In truth, the chain hasn't done that poorly. While its stock is down 38% off its 52-week high, it is significantly outperforming the S&P 500. Job cuts and closings have probably helped, but it remains to be seen if the same can be said of the chain's two most controversial moves: instant coffee and value meals.

The jury is still out on the Via coffee system, a Starbucks-branded line of instant coffees, which promise a cup of Starbuck's coffee for under a dollar. While undoubtedly attractive, Via also suggests that the cafe experience, the cornerstone of the Starbucks brand, isn't actually all that irreplaceable. Similarly, the chain's decisions to offer a line of value-priced breakfast sandwich and coffee pairings blurs the line between Starbucks and various fast-food eateries.

Starbucks seems to sense the fact that it is straying from the formula that made it king of the cafes. Its new outlet at Seattle's Pike Place Market features wood decor, recycled materials, and other touches that are designed to make it more closely resemble a classic coffee house. It also features small-batch coffee drinks made in one of the "Clover brewing machines" that it acquired in its 2008 buyout of Coffee Equipment Company. "The Clover project," as the small-brewing experiment has been called, has been tested in San Francisco, Seattle, and Boston, with a nationwide rollout possibly in the works.

With fast food and instant coffee fighting against intimate cafes and premium coffemakers, it's worth wondering if Starbucks' customers are going to get caught in the middle. In the end, it looks like the latte leviathan's biggest enemy might be its own brewing identity crisis

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