With consumers cutting back, it's not a good time to be considered a luxury. Americans have slashed spending by 40% in the past six months, excluding regular living costs, according to the polling firm Gallup. That's bad news for companies like Starbucks ( SBUX), whose coffee drinks are held up as an example of frivolous spending. After all, even die-hard caffeine addicts can brew a cup at home for far less money. Starbucks faces the challenge that many companies, large and small, are grappling with: making a premium service seem more affordable. These days, companies must prove the value of their products, or customers will consider them something they can do without. Firms of all sizes will be watching Starbucks as it tries to reposition itself without losing fans. Starbucks' reinvention is in the hands of company founder Howard Schultz, who reclaimed the role of chief executive officer a year ago. At the company's annual shareholders meeting this week, management acknowledged the coffee chain's future is on the line. Schultz's initial goal was to reinvigorate the brand, but he quickly found himself caught in the throes of an economic slowdown. Sales at stores open at least a year fell 9% in the quarter that ended Dec. 28 compared with a year ago. He had planned to stop selling breakfast sandwiches at stores, but decided to keep them as part of $3.95 "breakfast pairings." These fixed-price combos, which include coffee and options like oatmeal or cinnamon rolls, are a direct assault on fast-food breakfast champ McDonald's ( MCD).
Schultz said the company will be more aggressive in promoting the brand's drip coffee, which sells for about $2 a cup. The company also introduced its Via line of instant coffee that sells for less than $1 a serving, and started a discount program to reward loyal customers. Employees "thought their Uncle Howie, as they call him, would return Starbucks to a coffee culture," says Jim Romenesko, who runs StarbucksGossip.com, an unaffiliated site that culls news about the coffee chain. "Most of his changes have been panned on my site." Schultz cut workers and closed 600 company-run stores in 2008. Another 300 closings are planned for this year. Those moves will save money, but they've left remaining employees nervous about what's next. "Starbucks employees are like employees everywhere these days," says Romenesko. "They see their stock price tumble, they deal with management throwing everything against the wall to see what sticks, and they deal with grumpy customers who often try to game the system to get free or discounted drinks." Employee discontent could create problems for a company that prides itself on offering a supportive working environment. A company that puts a premium on service risks losing that advantage if customers notice workers are doing more with less. Still, management says they're making changes based on what the public wants. "We've been putting our feet into the shoes of our customers and responding directly to their needs," Schultz said at the meeting. "Our customers are telling us they want value and quality, and we will deliver that in a way that is both meaningful to them and authentic to Starbucks."