Starbucks Floundering in Yesterday’s Solutions Won’t Help Today

 

Starbucks' decision to pull back from pricing promotions under new CEO Brian Niccol could create ripple effects across the brand and the wider foodservice landscape according to Steven Johnson Grocerant Guru® at Tacoma, WA based Foodservice Solutions®.

Starbucks pivot away from discounting, once a staple to lure in price-sensitive consumers, signals a fundamental shift in Starbucks’ marketing and messaging. While the intention is to revive its "community coffee house" identity and reduce transactional customer-employee interactions, the strategy may come with substantial risks. The following analysis explores how halting all pricing promotions could backfire and what positive outcomes Starbucks might hope to achieve. Finally, a comparison of other retail brands that tried similar strategies highlights potential long-term pitfalls.

Negative Results from Stopping Pricing Promotions

1.       Drop in Foot Traffic: Promotions like BOGO weekends and discount days have historically driven high customer traffic at Starbucks. In Q3 2024, U.S. same-store sales already fell by 2%, and foot traffic decreased by 6%. Without these promotions, Starbucks risks accelerating this decline, as fewer customers will visit without the incentive of a deal.

2.       Diminished Customer Loyalty: Starbucks’ rewards program, which boasts over 30 million members, has thrived on regular promotional offerings like “Summer App-y Days” and half-price Fridays. Removing these promotions may cause disillusionment among loyal customers who depend on these discounts for affordable access to premium coffee. The risk of attrition is real, with fewer reasons for customers to engage frequently.

3.       Competitive Disadvantage: With McDonald’s and Burger King continuing aggressive discount campaigns like the $5 Meal Deal and $5 Your Way Meal, Starbucks could lose market share. Customers facing inflationary pressures are likely to opt for competitors who still offer value-driven promotions. This could widen the traffic gap and intensify Starbucks' 7% transaction drop in fiscal Q2 2024.

4.       Loss of Digital Engagement: Starbucks' app-based promotions drive customer engagement and increase average ticket sales by encouraging add-ons. Ending these deals may reduce the frequent app use that has fueled digital orders and loyalty points redemptions. In a tech-savvy consumer market, a dip in digital engagement could hurt Starbucks’ momentum in the convenience and quick-service space.

5.       Employee Burnout Persists: One of the justifications for reducing promotions is to alleviate strain on baristas who face high volumes during discount periods. However, without addressing core operational inefficiencies, Starbucks may continue to see sluggish order preparation times, which was a major complaint under former CEO Laxman Narasimhan. Cutting promotions won’t fix systemic issues like understaffing or slow service.

6.       Negative Consumer Perception: Starbucks' move to focus on premium experiences and steer away from promotions might alienate its broader customer base. Many customers view Starbucks as an affordable luxury, not a high-end coffee house. If the brand is perceived as elitist or out of touch with the average consumer, it could face long-term reputational damage.

Potential Positive Outcomes of the Strategy

1.       Brand Elevation to Premium Status: By focusing on creating an upscale coffee experience, Starbucks hopes to transition away from a value-oriented image and attract higher-paying customers willing to pay for premium quality. This aligns with Niccol’s goal of rebuilding Starbucks' identity as a community coffee house rather than a quick-service pitstop.

2.       Increased Average Ticket Value: Though traffic may decline, Starbucks could see an increase in the average ticket size. A more refined, premium menu could attract customers willing to spend more per visit. This strategy could stabilize the company’s revenue even with lower customer counts.

3.       Better In-Store Experience: Niccol’s push for improved store design and seating, as well as distinguishing between dine-in and to-go services, could enhance the in-store customer experience. If successful, this might encourage guests to linger and spend more on additional items such as pastries or sandwiches, helping to boost same-store sales over time.

4.       Operational Efficiency: By easing off promotions, Starbucks might streamline operations and reduce the chaos that stems from overwhelming discount-driven traffic spikes. A more consistent flow of customers could lead to improved service quality, faster order fulfillment, and better employee morale.

5.       Stronger Brand Identity: Positioning Starbucks as a space for community engagement rather than purely transactional visits could reinforce customer loyalty among those seeking more than just a quick coffee fix. This aligns with Niccol's aim to reconnect the brand with its roots as a "third place" between home and work.

6.       Long-Term Profitability: While the short-term hit to traffic may be painful, eliminating discounts could ultimately lead to a more sustainable business model. Starbucks may cultivate a more loyal, higher-spending customer base and avoid the pitfalls of discount dependency, a strategy that can erode profit margins over time.

Lessons from Other Retailers

1.       J.C. Penney’s Pricing Strategy: In 2012, J.C. Penney famously removed its regular discount offers, aiming to reposition the brand as a premium retailer. This resulted in a steep sales decline as loyal customers fled, accustomed to the brand's deep discounts. It took years for J.C. Penney to recover from the backlash, proving that eliminating promotions can alienate core customers and lead to financial losses.

2.       Applebee’s Shift to “Neighborhood” Vibes: Applebee’s once emphasized community engagement and a return to its "neighborhood" roots, moving away from its well-known value promotions. Sales stagnated as customers viewed the chain as a low-cost dining option and balked at paying higher prices. Applebee's eventually reintroduced discount promotions to revitalize its traffic.

3.       Chili's Focus on Premium Menu: Chili’s tried to abandon discounting in favor of promoting premium menu items to boost revenue per customer. The result was a dip in traffic that led to stagnant same-store sales and a reversion to more value-driven deals. The move showed that customers often expect promotions as part of the dining experience.

Think About This

While Starbucks may have valid reasons for stepping back from promotions, history shows that such decisions come with substantial risks. Consumer expectations, especially in the current economic climate, lean toward value-driven options. If Starbucks fails to navigate this transition carefully, it could suffer long-term consequences, just as other brands have. Balancing premium aspirations with customer engagement will be critical for its success.

For international corporate presentations, regional chain presentations, educational forums, or keynotes contact: Steven Johnson Grocerant Guru® at Tacoma, WA based Foodservice Solutions.  His extensive experience as a multi-unit restaurant operator, consultant, brand / product positioning expert, and public speaking will leave success clues for all. For more information visit GrocerantGuru.com, FoodserviceSolutions.US or call 1-253-759-7869