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by Simon Lord

last updated 05/04/2013


the right blend VITAL FOR SUCCESS

by Simon Lord

last updated 05/04/2013


November 2012 - Why do local café chains flourish while a big name struggles?

According to the tabloid H, Starbucks has dropped its coffee prices by around 10 percent and is offering free extra espresso shots in a bid to reverse declining sales. The CEO told the paper formerly known as the New Zealand Herald, ‘We’re really looking to change people’s perceptions of Starbucks.’

I’m not sure whether a price change will really change the common perception that Starbucks is an expensive place to get a low-quality coffee, but the move is an interesting one. Earlier this year, there was a lot of media interest for a few days in the fact that the price of a cup of coffee had not gone down despite the commodity price of coffee beans dropping. The coverage was of the type usually given to petrol price changes, which perhaps reflects the way that coffee fuels our lives these days.

The story, which included advice to haggle with your local barista, broke just before the annual franchise conference so I amused myself briefly by asking the various café franchisors present, ‘What’s your best price, then?’ It enabled them to express their frustrations that few of the media reports had addressed the other components that made up the price of a flat white, and that café prices had actually remained pretty constant in the face of rising rents, surging dairy prices, an increase in the minimum wage and a host of other inflationary factors at a time of reduced demand.

Given the new price consciousness over coffee, though, it may be that Starbucks’ initiative is actually pretty smart, albeit a touch late to ride that particular media wave. Their intention is not to improve the performance of the struggling chain by increasing coffee sales, but to use the attraction of lower coffee prices to encourage people through the doors to experience the new menu range, thereby boosting customer numbers, frequency of visit and average spend – the holy trinity of all retailers. If lowering coffee prices is what it takes to achieve it, that’s not a silly idea – after all, coffee, like carbonated drinks and chips, is a high margin product that can withstand some price pressure.

Lowering prices is always a risky strategy, though. A few years ago, I interviewed Al Dunn, the former managing director of McDonald’s New Zealand who is now a director of BurgerFuel, about how food franchises should prepare themselves for the long downturn ahead. He told me, ‘In the food business, people may have trimmed their budgets but they still want to eat out - it's part of their personal and business lifestyle. Get the proposition right and you'll find it’s actually about value, not price. It's important to maintain operational standards – the classic Quality Service Cleanliness values – because when money is tighter people are much more critical of these things. They may have chosen your business rather than a more expensive restaurant, but they still expect to be treated well. Stay away from a price war or you'll get dragged into the commodity business and margins will evaporate. Instead, change your product mix. Offer new groupings of products that are more value-focussed. If you're clever about it, that won't necessarily mean reduced margins and will attract more people too.’

It’s also worth noting that, unlike corporates, franchises – and especially franchisees – are traditionally averse to discounting as they are acutely conscious of the impact it has on their own wallet.

It may be that Starbucks believes it can win any price war – after all, parent company Restaurant Brands, which also owns Pizza Hut, has already floated the idea of the $2 pizza ­– but that is by no means certain. Starbucks may have enjoyed success when it first launched in 1998 on the back of its ubiquitous appearances in US movies and television series, but the strong local café culture proved more than equal to the challenge. As retail marketing specialist Jon Bird commented, ‘That kind of American cultural imperialism, when it comes to coffee, just doesn’t work in New Zealand.’

Of course, the big difference between Starbucks and most of the other major café chains in New Zealand (including McCafé) is that Starbucks outlets are not individually franchised – Restaurant Brands owns the master licence for the brand but operates all of the units under management. This has the advantage that they can make national pricing and menu decisions without having to convince individual owner/operators of the wisdom of the strategy, but it also reduces the involvement and commitment of the people in the stores. It is that commitment that has helped franchises such as Columbus, Esquires, Robert Harris, Sierra and The Coffee Club to compete successfully with one of the world’s most-recognised brands in our small and crowded market.

In the book market, we’ve already seen the locally-owned Paper Plus franchise repel such mighty names as Borders and Dymocks from New Zealand. Perhaps before long we’ll see the café franchises send Starbucks home, too.

This article was first published in NZ Business magazine, November 2012.

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