Can Starbucks Compete in the Grocery Store?

Not content to grow just its cafe business, Starbucks is now making a concerted push in grocery stores. The company announced a 10% decrease in its packaged coffee prices, and starting in May, those packages will allow customers to earn credit toward their Starbucks loyalty memberships. The price decrease reflects both the increased competition for customers and a drop in coffee bean prices. Starbucks last increased prices in 2011, and this price cut should bring them back in line with the pre-hike levels.

Competition on the rise
Out on the streets, Starbucks is competing with companies like Dunkin' Brands' Dunkin' Donuts as well as Caribou Coffee. In the grocery aisle, it's a much fiercer battle. Dunkin' sits next to Starbucks, which is next to Folgers and Maxwell House and Caribou and Seattle's Best and... the list goes on. In grocery stores, Starbucks can't rely on its brand as much as it can in its cafes -- it also has to be competitive on price.

So when Kraft and J.M. Smucker cut prices on their lines earlier in the year, Starbucks had to react. Smucker makes Folgers and the Dunkin' Donuts packaged coffee, while Kraft makes Maxwell House and Yuban. Kraft also used to be the licensed distributor for Starbucks packaged coffee. That relationship soured in 2011, and the companies parted ways. Since then, competition has increased.

Just last month, Kraft started airing ads for its Gevalia brand coffee that claimed it outperformed Starbucks coffee in a blind taste test. Starbucks hasn't responded directly, but its new loyalty program may help it fend off the new competition.

Keeping the customers it's already got
While virtually everyone, everywhere has a Starbucks loyalty card -- the company added 1.4 million in the last quarter in the U.S.  -- they've only been able to use them in Starbucks cafes. Now, customers will be able to get "Stars" for purchasing bagged coffee, and redeem those Stars in-store for freebies. The company is also branching out into its other brands, and customers can earn points by visiting Teavana locations, as well.

The company hopes that the new programs will increase its active members to 9 million by the end of 2013. The hope is that the increase in loyal cafe visitors will translate into loyal grocery store shoppers. If Starbucks can win that battle, it can open up all sorts of new revenue for investors.

Kraft Foods Group is entering a new era after its recent corporate breakup. Its brand power is indisputable and its market share dominates, but Kraft's growth potential is limited and its heavily commoditized categories face massive pressures. In The Motley Fool's premium report on the company, we guide you through everything you need to know about Kraft, including the key opportunities and threats facing the company. To get started, simply click here now.

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Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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