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Starbucks Takes on McDonald's in the Morning

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Coffee peddler to re-enter the breakfast wars.

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The world as we know it ends not with the demise of Wall Street, but with Starbucks (SBUX) peddling "everyday affordability" for its new breakfast fare.

Economic reality has clubbed the land of the $4 Venti White Chocolate Mocha, and Starbucks must find a new way to shake money out of its suddenly penny-pinching customers.

One solution: a breakfast menu.

Starbucks swears it's not going toe-to-toe with McDonald's (MCD) line of McCafes, scheduled to open by the middle of the year. The grease factor is sure to be lower at Starbucks, and the calorie count less coronary-inducing, but it's not clear that the folks in Seattle can match McDonald's marketing savvy.

CEO Howard Schultz recently asked: "How are we competing with (quick service restaurants)? How can a premium brand be competitive when customers are trading down on everything? We will combine our breakfast strengths with a value proposition that challenges misperceptions about our everyday affordability."

Misperceptions, eh? It's hard to imagine that anyone misperceives what Starbucks is all about: snob appeal at a premium price. The company brought frou-frou coffee to the masses while creating an aura of sappy exclusivity. In short, Starbucks had a killer business plan for flush times.

But Starbucks last year announced plans to close about 600 stores as sales sagged in a downbeat economy, and last week the company announced that it plans to close another 300 after weak first-quarter sales.

To succeed in the land of "everyday affordability," Starbucks must pull off a marketing trifecta. The company must introduce a cheaper product line to attract new customers that won't undercut its upscale image - and do so without alienating its faithful hordes and their aspirational dreams. Then it has to get down to basics: Who thinks of Starbucks as a place to grab a quick breakfast? That sounds like a hefty marketing campaign when revenue is declining.

Come to think of it, didn't Starbucks recently eliminate hot breakfast sandwiches that were little more than lowfat McMuffins dressed up with spinach and Black Forest ham? Starbucks, however, has yet to release its new menu.

Nevertheless, Starbucks' move to value raises some interesting prospects for iconic brands: How 'bout a designer set of socket wrenches from Tiffany? Perhaps Coach could slug offer "everyday affordability" on moderately spiffy leather backpacks - just the thing for climbing Mt. Katahdin on your next budget trip to Maine.

Typically, market strategies intended to increase consumer spending center on increasing consumption - often by creating new uses for existing products.It's a proven tactic, but not the thing in a shrinking economy - especially when many customers are already cutting back.

Colgate-Palmolive pushed aside cheaper bar soap by successfully betting that many consumers would pay more -- but not too much more -- for the convenience of liquid soap. Starbucks is making a similar bet: Customers will pay a little more for a healthier breakfast at Starbucks than the usual McDonald's triglycerides.

That assumes, of course, that they have a little more to spend. Starbucks' CEO will earn his spurs -- or hang his career high -- on this project.
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No positions in stocks mentioned.
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