Starbucks Sashays Into Smoothies


The coffee powerhouse aims to emulate its rivals' success by launching a blended fruit drink called the Vivanno

by BW Staff

Not so long ago, everyone sought to imitate Starbucks (SBUX), home of the hip, WiFi-enabled caf?s and cool baristas whipping up fancy coffee. These days, many coffee fiends prefer the premium coffees from Dunkin' Donuts and fast-food giant McDonald's (MCD)??hey also cost a lot less. (McDonald's coffee even beat out Starbucks in a 2007 taste test conducted by Consumer Reports.)

The beverage tide has clearly turned. Now, Starbucks is joining the battle of the fruit smoothies, becoming somewhat of a Dunkin' Donuts wannabe. Starbucks' smoothie, dubbed Vivanno, will include banana, milk, and an orange-mango-blend juice, along with whey protein and fiber powder. McDonald's is contemplating a national launch of its own smoothies, which are being tested in several markets says McDonald's spokeswoman Danya Proud. Those smoothies, being tested in California and Michigan, include berries, bananas, and fruit syrup, and are being sold in three sizes, ranging from $2.79 to $3.99.

The 16-ounce Starbucks smoothie will cost $3.75 nationwide ($3.95 in New York), more expensive than the one at Dunkin' Donuts for $3.39. Whether Americans will shell out a little more for Starbucks' extra ingredients remains a key question.

Calories for Sweetness

While smoothies are almost always made with fresh fruit, they are often sweetened with syrup and other sweeteners, which can drive the calorie count higher. For instance, Dunkin' Donuts' small, 16-oz. strawberry-banana smoothie contains yogurt, sugar, strawberry and banana puree, and high fructose corn syrup among other things??nd 350 calories. Starbucks, however, says it formulated its new drinks "with a strong nutritional goal in mind," with no more than 270 calories and fewer than five grams of fat per drink.

"By getting into smoothies, Starbucks is just doing what everybody else is doing. It does nothing to revitalize the brand," says Robert Passikoff, chief executive of Brand Keys, a brand consulting firm in New York. In 2008, Starbucks dropped to the third spot in Brand Keys' annual customer loyalty index, below Dunkin' Donuts and McDonald's. Before 2007, Starbucks had held the top spot for four years.

A cool, healthy drink certainly sounds like a good fit for a summer introduction for a beverage joint like Starbucks. "We have been testing these beverages in our stores, and we have received very positive response from our customers," CEO Howard Schultz said Apr. 30 on the company's second-quarter earnings conference call. Schultz recently came back to head the company after an eight-year hiatus from the top job, hoping to revive flagging sales. "In our research, more than 60% of customers surveyed said they would come to Starbucks to buy healthy, nutritious beverages, and we are confident we have found the perfect answer to their needs."

Health Trend

Overall, sales of smoothies are hot. In a recent report, researcher Mintel International Group, with U.S. offices in Chicago, found that sales of smoothies in the U.S. topped $2.45 billion, a 139% increase from 2002, and it expects sales to rise a further 68% in the next five years. Dunkin Donuts, Subway and Applebee's have all introduced smoothies in the past two years. "It synchronizes with the current trend of consumers wanting to eat and drink healthy," says Garima Goel Lal, a senior analyst at Mintel.

Goel Lal says, however, that price will play a crucial role in the success of the smoothie introduction, especially given that consumers have shut their wallets in the current economic downturn. "Launching smoothies at the right price is very important," she says. Indeed, Seattle-based Starbucks has seen its customer base erode as many people shifted to cheaper premium coffee from McDonald's, which saw a 22% increase in coffee sales in 2007. And in the first quarter ended Mar. 31, sales at McDonald's restaurants open a year or more increased 7.4%, with coffee helping lift sales in its breakfast division. In the same period, Starbucks' fiscal second quarter that ended Mar. 30, comparable store sales dropped mid-single digits. Starbucks has stopped providing specific numbers.

In the past couple of years, as the growth in coffee sales started declining, Starbucks started relying on food for sales growth, introducing warm breakfast sandwiches. When Schultz returned, however, the breakfast sandwiches were the first thing he decided to get rid of. The company is also closing 600 stores.

The challenge for Schultz now is to grow by attracting new customers while getting existing customers to come back for more. But with the smoothies, analysts worry that Starbucks may not necessarily attract new customers, and could see existing customers merely switch from coffee to smoothie purchases. "It won't help sales much if their existing customers just switched beverages," says Goel Lal. Of course, Starbucks is aiming higher. It hopes to not just lure a new customer who is health-conscious, but also to steal market share from the Dunkin' Donuts and Subways of the world.


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