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Starbucks Has Upscale Concept Percolating

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By PETER ROBISON, Bloomberg News

Published: February 15, 2008

Starbucks Corp. is experimenting with a cup of coffee for its stores that would add a new, premium product to help fight the first drop in U.S. customer visits in its 37-year history.

In its hometown of Seattle, Starbucks is testing 12-ounce cups of "fresh-pressed" coffee at $2.50 each. The price is $2.25 in a Boston trial. Starbucks charges $1.55 for a regular brew.

McDonald's Corp. has been stealing customers with $1.39 coffee and is challenging Starbucks further by adding espresso counters.

The new Starbucks drink, made in a machine that brews each cup individually, may become part of Chief Executive Officer Howard Schultz's plan to increase traffic in the 15,000 stores of the world's largest coffee chain.
Company chairman Schultz, 54, replaced Jim Donald as CEO Jan. 7.
Customer visits to Starbucks' U.S. cafes have declined for two straight quarters.

Starbucks also is experimenting in the Seattle area with an 8-ounce refillable cup of coffee for $1 and slowing its expansion.

"If they can create a better-tasting product and if they can get people to pay more for it, then you'd have the missing ingredient, which is pricing power," said Larry Miller, an analyst at RBC Capital Markets in Atlanta.

At the same time, selling a more expensive drink may be tough as U.S. consumer spending slows, Miller said.

The new individually brewed coffee would be priced just less than the lattes and cappuccinos that are among Starbucks' most expensive beverages. A 12-ounce cup of those drinks costs $2.55.

An $11,000 machine known as the Clover generates the new coffee. Inside, a piston rises and creates a vacuum that pulls water through ground coffee, much like a French press. The Clover's maker says it produces a better tasting drink because the grind, water temperature and other parameters can be set for each cup.

"Testing like this is something we do regularly," Starbucks spokesman Brandon Borrman said.

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