Starbucks Resorts to $1 Discount to Sell Lattes

24/7 Wall St.

Starbucks Corp. (SBUX) does not seem like the sort of company that would offer discounts on its products. For a coffeehouse that sells $4 beverages, it would be like Tiffany offering discounts on its silver. But Starbucks has begun to hand out $1 discount coupons to people who will "taste test" its instant VIA latte against the same version of the drink made in the company's stores by its baristas. Starbucks may have found a cheap way to test the popularity of one product against another, or sales of its VIA product line may be in trouble.

The "Starbucks VIA Latte Taste Challenge" runs from January 16 to January 19. The test is simple. Can customers tell the difference between the two drinks? Starbucks has not said what it will do with the information, or why it has set the program at all.

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The VIA line was created to extend Starbucks sales beyond drinks made in its stores. Along with prepackaged coffee sold in supermarkets, Starbucks has hoped to drive revenue from customers who drink its coffee well beyond its own locations.

Starbucks does not appear to have to offer discounts to sell products, which makes it more likely that the "challenge" is part of a market test program. In its most recently reported quarter, revenues increased 13% to $3.8 billion. Global comparable store sales grew 7%, helped by a 5% increase in traffic. And the company continued to open scores of new locations. However, Starbucks did not boast about sales of products outside its stores. Since Starbucks did not offer much data about the "outside the store" sales, analysts are left to debate the reason.

Starbucks is not without severe challenges, which may be a cause for it to accelerate market test programs. McDonald's Corp. (MCD) is its perennial morning coffee competition. But the world's largest fast-food chain has been joined by Dunkin' Donuts, which sells coffee made in its own stores as well as ground coffee people take home. This second business is a direct challenge to Starbucks. If competition in the "out of store" segment has gotten more crowded, Starbucks needs to sharpen its focus.

Discount promotions set by major retailers are often done so without explanation. Starbucks may discover something about the future of its latte drink popularity, but it is not telling.

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