Starbucks tries to scoot downmarket

One of the first things you encounter when you read personal finance gurus like Dave Ramsey or Suze Orman is the concept of the "latte factor"--the surprising way that little luxury purchases add up.  A Starbucks latte a day is well over $1000 a year, which sounds less like an "affordable luxury" than a sizeable chunk of after-tax income for many, even most, of the people who buy them.  When Dunkin Donuts is selling for less, and your office is giving it away for free, it seems like a relatively painless way to shore up your finances.

Their calls for latte austerity went unheeded through most of the decade, but as Americans slash budgets, it seems that Starbucks is finally falling prey.  And trying to do something about it:

Starbucks Corp., which built a coffee empire on its premium image, wants to convince customers that its drinks aren't that expensive.

The company said Monday that it's selling discounted pairings of coffee and breakfast food for $3.95, a type of promotion long used at fast-food chains. It's the first move in an aggressive campaign to counter the widespread perception that Starbucks is the home of the $4 cup of coffee.

The Seattle-based company is training its baristas to tell customers that the average price of a Starbucks beverage is less than $3, and that 90% of Starbucks drinks cost under $4.

. . . 

Few companies embody the consumer spending boom of the 1990s and 2000s like Starbucks. Mr. Schultz helped Starbucks grow from four stores to a global chain of nearly 17,000 outlets by transforming coffee from a commodity drink into what he billed as an affordable luxury. But Starbucks's sales have been in steep decline during the recessionary era of penny-pinching.

Color me skeptical that Starbucks can reverse its downward trajectory by getting baristas to pull some "Who you gonna believe--me, or your own lyin' receipt?" move.  No matter how you slice it, Starbucks has a high cost delivery model for coffee that isn't very good.  If I'm going to pay $3.50 for a barista to hand-pull me a cup of coffee, I want them to pull me a cup of good espresso, not throw some charcoal-fired mulch into an espresso machine and drown the resulting mess with milk.  Otherwise, I'll brew my own, or hop down the street to Dunkin' Donuts, where an automatic machine delivers a very drinkable cappucino.  About the only time I drink Starbucks is on long drives where they're the only game in town.

I give Starbucks full credit for revolutionizing America's coffee culture.  In a way, they are the victims of their own success--the competition that grew up in the wake of their success has taught many Americans that burned != sophisticated.  With money tight, they're looking for better value than that.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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