Starbucks (SBUX): New product promotions will only cut margins

Posted Aug 29th 2008 4:37AM by Douglas McIntyre
Filed under: Starbucks (SBUX)

Starbucks (NASDAQ: SBUX) will begin to offer a number of promotions and coupons to keep customers coming back to its stores during the current hard economic times. It might as well just cut the costs of its coffee and tell people it is cheaper to stop by for a cup of java.

According to Reuters, the company "will roll out more promotions such as free product coupons to perk up its flagging U.S. coffee sales, even as it holds off on wide price cuts, a top marketing executive said."

Yes, but a coupon for an extra cup of latte or a free donut is a discount, a price cut. So is free Wi-Fi because it costs Starbucks something to provide the service.

All of this means that, even if Starbucks can increase same-store sales, and that is a big "if," the margins on revenue will be smaller. Giving out coupons can get expensive.

Consumers may be fooled by the new programs, but Wall Street is not. It can expect lower gross margins at Starbucks in the next quarter or two.

Douglas A. McIntyre is an editor at 247wallst.com.

Tags: inthenews, SBUX, starbucks