The Coffee Stock: Five-cent coffees at Krispy Kreme franchises a sign of old-fashioned smarts


Brother, can you spare a nickel?

In a sign of the oh-so-like- the-Great-Depression times, Krispy Kreme Doughnuts (NYSE: KKD) franchises in Seattle, Washington and Portland, Oregon, along with other related franchisees in the Pacific Northwest and Hawaii, are selling coffee for five cents. The one-per-customer-per-visit bargain is being named the Krispy Kreme New Deal.

I love the concept. Dunkin Donuts has been offering lattes and breakfast sandwiches for 99 cents in the afternoons to boost traffic in the slow time; and Starbucks (NASDAQ: SBUX) is about to roll out a "gold card" good for 10% discounts on all products. The card, which carries a $25 annual membership fee, is not a credit card but is a parallel program with the regular Starbucks gift card, which allow you to receive bonuses (a free flavoring or other upgrade for your latte beverage, for instance).

Unfortunately, the two simultaneous and mutually exclusive card programs are confusing and a scant benefit. Customers used to buy 10, get one free punch cards at independent coffee houses will see quickly that paying for a 10% discount is hardly a great deal.


According to Starbucks partners commenting at Starbucks Gossip, the customer has to pick which card to use based on which discount would be better; so if you want to maximize discounts, you would have to carry two separate balances (essentially letting Starbucks earn interest on more of your money). Even if you can pay cash to get benefits (as suggested in the Seattle Post-Intelligencer article linked above, although it seemed as if early gold card users weren't able to), it's nonetheless confusing and a lot of work. Paying for the card is a commitment to spend $250 at Starbucks and, while this is likely the monthly budget for many customers, it's a large number that would further cement the company, in the eyes of occasional latte drinkers, as the spendthrift choice.

If Starbucks wishes to keep up with its competition (and with Juan Valdez cafes opening in many major markets, the chain is going to have to start dancing), there is going to have to be some movement on prices. Not just movement for its best customers -- the ones with the biggest disposable incomes -- but its occasional customers, its customers-who-may-be-losing-their-jobs. The ones who are worried in this down economy, who are having to scrimp to buy coffee in the face of rising gas prices. The company has set the worldwide bar for coffee beverage pricing, without simultaneously setting the worldwide bar for coffee quality. If the credit crunch hits Visa and Mastercard -- as it's almost certain to, according to most economists -- many Starbucks customers will soon discover their spending ability is not infinitely expandable, and stop shopping. If Starbucks were to institute a 50-cent across-the-board price cut, and make the $1.00 drip coffee a regular menu item, it would begin to compete with Dunkin Donuts and Krispy Kreme.

The thing is: Starbucks coffee is not that good that it should be vastly more expensive than at its doughnut-focused competitors. Today Dunkin Donuts announced that, in an independent taste test, its coffee beat Starbucks House Blend. As I wrote in that post, Starbucks is being squeezed by good-quality, low-priced coffee from the doughnut shops on one end, and some higher end customers' preference for more snooty, single-estate and direct-trade coffee on the other end. Add to that the credit crunch and you have a coffee company in need of lower prices.

It's time to rekindle old-fashioned prices for coffee everywhere, and Starbucks had better jump on that stagecoach or get left without a homestead in the new, old economy.

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