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Poll Shows 73% Americans Think Starbucks is Overpriced

by: Todd Sullivan August 12, 2008 | about stocks: SBUX    
Todd Sullivan

Todd Sullivan

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They needed a poll for that?

Let's think about it. Let's assume the coffee is as good as or better than that had at Dunkin Donuts or McDonalds (MCD). Well, if people aren't going to Starbucks (SBUX) anymore (or are in increasingly fewer numbers) and sales of coffee at the other two are exploding, then it has to be the price.

Here are the survey results:

"76% of American adults say they rarely or never visit one of the shops, and only 14% say they visit occasionally.

A new survey by Rasmussen Reports shows that 73% of Americans say Starbucks coffee is overpriced. Only 6% disagreed and 21% said they were unsure."

It continued:

"Along with the perception of high prices, only 38 percent of the 1,000 adults polled gave the coffee behemoth a favorable rating, while 27 percent had an unfavorable view of the chain. About one-third of respondents had no opinion.

Younger adults have a more favorable view of Starbucks than older adults. Just under 50 percent of respondents 18 to 29 give the chain high marks, while only 28 percent of seniors shared that view. And those who make more than $100,000 a year view the chain more favorably than those who make less than $20,000 a year, the survey said."

So, notice one word that was not there? Value. High prices are one thing if you feel like you are getting what you pay for. I do not expect the same service and food at Denny's as I do at Morton's. As long as I feel like the service and food were great when I leave Morton's, I fell like I got my money's worth. Starbucks problem is people by in large do not feel that way.

The service is non-existent (worse than McDonalds) and the overwhelming majority of folks, by the time they add milk or cream, flavoring and syrup to the coffee, have no ability to ascertain the quality of the bean they are drinking. I will take it a step further and say that unless you are drinking pure coffee or espresso, in 99% of the drinks could be made with the same beans McDonalds and DD uses and no one would be able to tell any difference. If Howard wants to take me up on it, we can arrange a taste testing here in Massachusetts.

Starbucks could then sell the drinks at reasonable prices and finally shut me up.

Now, Howard Schultz, Starbucks' Chief Snob will look at the results and say "educated people who know better prefer us". That, Howard may be true. But, you have 14,000 locations. There are not enough $100,000 plus a year folks out there to sustain the growth you need at all those locations. You'll need to appeal to the "lesser folks" for lack of a better phrase to accomplish what you want. Either that, or you need to admit you need to close another 1,000 plus locations (minimum) to force feed current traffic to existing locations.

Howard has misjudged his market..

Something has to give, right now it is stockholders brokerage accounts...

Disclosure ("none" means no position):Long MCD, none

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This article has 14 comments:

  •  
    Aug 12 04:50 PM
    The picture painted in this article would seem to describe a chain that has a very low brand value, yet it would seem the very opposite is true. The customer service at my local Starbucks is excellent. The majority of the baristas know my drink as well as many others that come in. The value proposition is not simply the coffee, though their lattes and cappuccinos do greatly surpass that of my local McDonalds, which serve powder mix cappuccinos. McDonald's quarterly numbers show that their McCafe's are performing very poorly. There were an overlap of Starbucks in many major metropolitan areas, yet many of those were very full as well i.e. Chicago, New York. I think it is an easy critique to make when someone does't frequent coffee shops. But what I have found is that the independent coffee shops I visit cannot compete in flavor consistency and are oftentimes higher priced.
    Reply
  •  
    Aug 12 05:45 PM
    It may take a year or two, but the author will eat his words because the stock will be MUCH higher.
    Reply
  •  
    Aug 12 05:49 PM
    I couldn't disagree with the article more. Look, does SBUX have issues, yes they do. But most people griped gas was overpriced at $2, but it took $4 a gallon before they actually changed behavior. SBUX coffee has always been slammed for its burnt beans, but they have still built a nice little exclusive feel of being sophisticated for a mere $3 a pop. That hasn't really changed. Yes, the recession will cause some impact, and no they will not be able to grow stores like they did. Yes, it stinks if you lost money on this stock as it has tanked lately - but I find it a good value right now that is why I just got in long. Will it bounce around a bit for the next 18 months, probably, but at the end of the day, go to a starbucks and see the foot traffic - these stores are still quite busy with people standing in line eager to pay $5 for a skinny latte mocha.
    Reply
  •  
    Aug 12 05:57 PM
    I will NEVER set foot in a McD's again, much less buy a cup of their crappy coffee. Those people hardly even look up at you when they take your order plus they're always miserable.
    And Dunkin' Donuts????? I just wish I could understand the guy behind the counter!
    Give me Starbucks any day.
    Reply
  •  
    Aug 12 06:38 PM
    Howard caught a wave and everyone thinks he's a genius. By the time many Americans have descretionary income SBUX will be diluted.
    Reply
  •  
    Aug 12 08:28 PM
    The problem with Starbucks is that when people realize that they have no extra money and they are spending $30 a week on Starbucks, $1500 a year, they might have to cut back.

    Furthermore, their coffee is just not that good. Any other coffee shop is going to offer a better cup of joe, so in cities where coffee shops are prevalent Starbucks has legitimate competition in terms of quality. I have not done McD for coffee, I don't need to save a buck that badly that I would deal with a McD line and cashier, but I am sure others would. As for Dunking Donuts, I love their coffee but worry about how many donuts I am going to buy. Mmmmmm, donuts.
    Reply
  •  
    Aug 13 02:46 AM
    Todd, is it a slow newsday?
    Starbucks caters to people that care about the overall experience as well as the product. With the logic presented in your article, we would all be driving Kia's and shopping at Wal-Mart.

    Nordstrom is overpriced and yet they thrive. I refuse to buy anything where the counter person cannot speak English or cannot make proper change without using the register as a crutch. I like being treated like a person and not a number (McD's).

    And most people cannot tell the difference between Pepsi and Coke, let alone the difference between a French Roast vs. an Americano. So, just like Nordstrom vs. Wal-Mart, Starbucks has a vital place in our society. When a person wants to enjoy their coffee in quiet without the added ambiance of screaming kids on a playset and bright red plastic tables, what are the options?
    Reply
  •  
    Aug 13 11:21 AM
    treesmiths makes a good point. Starbucks is not trying to please everybody, just like Nordstrom and Porsche. You may find out in a survey that 95% of the people find Porsche products overpriced, but guess what: they don't need 95% of the people to like their cars and are doing much better than other automakers like GM and Ford. Another point I would make is that many of those 76% that think Starbucks is overpriced are regular Starbucks customers and will continue to be. I know a few of those types myself. Caffeine is addictive! People complain but keep coming for more.
    I think Starbucks has a very promising turnaround story based on cost cutting and closing unprofitable stores. You will see a shrinking top line but a growing bottom line over the coming quarters.
    Reply
  •  
    Aug 13 11:39 AM
    There seem to be a person born every minute who thinks as long as they buy a luxury product, they're a special person. Starbucks will always have a market in those people. Where I believe their problem lies is thinking they can have a Starbucks on every corner where McDonald's has a store. They need to accept that most people are smart enough to know when they are being conned, and build accordingly.
    Reply
  •  
    Aug 13 01:15 PM
    I used to go to SBUX to get a 'short coffee' for $1.50. (I don't go in for the frou-frou stuff.) But on a hunch, I tried the Burger-King Turbo Joe and it was better! And only $1.

    Looks like they've lost another $1.50 customer to a competitor.

    By the way, with more SBUX stores having drive ups than before, the only 'experience' you get is idling in line--which wastes precious fuel.

    A SBUX as a place to hang out? Not in this town (Reno).
    Reply
  •  
    Aug 13 08:51 PM
    If you don't go for the frou-frou stuff, you aren't really their target. They're a cafe, they make espresso. Save yourself the $1.00 @ Booger King and make it at home. The whole DD, MCD, BK "alternative"... is a red herring. I'd pay a $1.50 for a consistent cup of SBUX coffee anyday before I shelled out $1.00 for coffee roulette @ a fast food joint. They were a slave to growth, plain and simple.
    Reply
  •  
    Aug 14 06:48 PM
    todd-the further along i read in your commentary, the more it seems you are an angry guy. i took the day off this past monday and around 11:30am stopped at one of 2 local sbux for a cuppa. now we know sbux is not what you would call a lunch place, but here is what i found. 5 of 7 outside tables were taken. inside, 2 tables had laptop users, and most of the remaining tables had customers in business attire or non-working people (like me). and there were about 4 or more in line behind me. quite frankly, i was very surprised how busy it was. can you explain it? the survey was probably paid for by mcd!
    Reply
  •  
    Aug 16 03:09 PM
    I have to come to the defense of SBUX here as well. The coffee has NEVER been cheap, but as people have already said, it's about value proposition which is more than 1 mocha = $5 (in Canada, anyway). It's the atmosphere, the brand, and the people that work in the stores.

    I have to liken SBUX's situation today to that of McD's a few years ago when "Supersize Me" came out. Everyone suddenly started to hate McD's, yet look at the massive turnaround since then.

    SBUX caters to the brand-conscious people who don't mind paying more for quality. Tim Hortons and McD's coffee just isn't as good, and I can't see anyone going to Micky D's for a business meeting.

    I am thinking of going long SBUX, but I want to see some support come into the stock before I jump in. Once all these store closures filter through the system, there will be much more efficiency. And if SBUX can't maintain a ridiculous growth rate, then WOW they might use money to buy back stock or pay a dividend - and what's so bad about that?
    Reply
  •  
    Aug 17 05:50 PM
    I am not a fan of Starbucks' coffee but it is unfair to blame them alone for high prices. Coffee at Peets, Tully's and even local espresso stands costs the same.
    Reply
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