Firm to Offer Second Coffee Brand—Its Seattle's Best—in Fast-Food Outlets, Supermarkets, Machines
SEATTLE—In a counterattack against its lower-priced fast-food rivals, Starbucks Corp. plans to roll out a second coffee brand.
By autumn, Seattle's Best Coffee—a former competitor Starbucks acquired seven years ago—will be sold in about 30,000 fast-food outlets, supermarkets and coffee houses, the company said. 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.
Eventually, Starbucks said, the brand will also be sold in convenience stores, drive-through kiosks, coffee carts, vending machines and mobile trucks. The company has already reached deals to sell Seattle's Best at Burger King and Subway restaurants and at AMC Entertainment Inc. movie theaters.
The new push by Starbucks is a response to the invasion of the specialty-coffee market by McDonald's Corp., Dunkin' Donuts and other fast-food chains, which offer espresso-based drinks at lower prices than Starbucks.
Especially during the recession, the incursion appeared to hurt Starbucks, which suffered a decline in same-store sales and closed hundreds of stores. In recent years, as McDonald's produced big sales gains inside existing stores, Starbucks has struggled to expand beyond a limited menu and a largely morning clientele.
In a presentation last week to the Starbucks board, executives unveiled a new logo for Seattle's Best, along with a new motto: "Great Coffee Everywhere." The motto reflects the Starbucks theory that the success of McDonald's and others in selling coffee has created a fresh opportunity to sell a mass-market brand.
In the past three years, the percentage of Americans drinking premium coffee has jumped to 35% from 29%, says Tom Ehlers, a veteran Starbucks executive who is now vice president of retail for the Seattle's Best unit. "Regular people have found their way to great coffee."
Mr. Ehlers likened the Seattle's Best venture to Old Navy, the Gap Inc. discount chain that now rivals the Gap chain in size.
The new strategy carries risks. Starbucks owns and operates its coffee shops. But despite the challenge of maintaining quality control, it will seek to expand the Seattle's Best coffee-house chain through franchisees operating stores as large as 1,400 square feet and as small as 200 square feet.
But Seattle's Best is intended to appeal to just this sort of Starbucks critic. For those who find Starbucks coffee too strong-tasting, Seattle's Best is promoting the "smoothness" of its blend in ads and promotions. For those turned off by the prices and ambiance at Starbucks stores, Seattle's Best is touted as "unpretentious."
And Starbucks says its risks are small because it has barely 4% of the U.S. market for brewed coffee, and Seattle's Best's potential rests with consumers of mass-market brands. "The people who always drank a cup of Joe still want just a cup of Joe," Mr. Ehlers says. "But nowadays they want it to be good."
David Palmer, an analyst who follows Starbucks for UBS Securities, believes the strategy makes sense. He notes that no national coffee brand can be found across the U.S. convenience-store industry, which operates more than 100,000 outlets. By contrast, McDonald's has about 30,000 restaurants in the U.S.
Pricing will vary widely. Like Coca-Cola, which can cost $5 a serving at a swanky resort restaurant or a dollar in a vending machine, the price of Seattle's Best will depend on where it's sold. In grocery stores, Seattle's Best beans will cost consumers less than Starbucks-brand beans but more than conventional brands, Starbucks executives say.
Seattle's Best helped pioneer the specialty coffee-house concept when it opened its first store in Seattle 40 years ago. But like other coffee-house chains, Seattle's Best failed to keep pace with Starbucks, which quickly grew into the industry's largest player. When Starbucks acquired it in 2003, Seattle's Best had about 50 stores and a sizable supermarket presence, particularly in flavored beans, a lucrative category that Starbucks never entered.
Perhaps the most radical feature of the Starbucks strategy calls for selling Seattle's Best from vending machines. Vending-machine coffee has long been regarded as a last resort, often found in factory cafeterias miles from the nearest fresh brew. But Seattle's Best engineers have developed a coffee-making machine that Starbucks predicts will improve that image.
Critics predicted trouble when Starbucks entered the maligned instant-coffee market last year, executives note. "In the early days of Via, there were many disbelievers," says Michelle Gass, who worked on the Via launch. She is now president of Seattle's Best.
