$1 Coffee at Starbucks

What are Americans willing to pay for a good cup of coffee? Apparently less than they were a few years ago. Facing a slumping economy that threatens to cut into its customers' coffee budgets and increased competition from McDonald's and Dunkin Donuts, Starbucks is test marketing a bottomless eight-ounce cup of joe priced at just $1.

Don't try ordering it at your corner Starbucks quite yet. The company is only offering the deal at a handful of stores near Starbucks's Seattle headquarters. "This is a very limited test," says Starbucks spokesman Wanda Herndon, adding that it's too early to tell whether the company will expand the offering nationwide. For now, the cheapest brew available at all Starbucks locations is the $1.50 eight-ounce "short," which isn't refillable.

By switching to an offer-more-for-less strategy, the company hopes it can revive its stagnating stock price and prevent the competition from siphoning away more of its customers. Shares of Starbucks (SBUX) closed Thursday at $20.39,  far below the stock's 52-week high of $37.40. Earlier this month, Starbucks chairman Howard Schultz, who took the brand from a handful of stores to a global beverage empire of now more than 15,000 stores, came back as CEO, intent on reviving the "emotional connection" that he says customers have with their steaming cups of Starbucks brew.

But consumers seem less willing to pay venti-sized prices for that emotional connection. Oakbrook, Ill.-based McDonald's, which saw sales of coffee jump when it introduced a new darker roast in its restaurants, recently announced it would begin a nationwide rollout of its own brand of gourmet lattes and cappuccinos, priced a bit lower than Starbucks's regular offerings. A spokesman for McDonald's had no comment about Starbucks's $1 test, saying only, "We will continue to bring our customers what they ask for." Dunkin Donuts also has increased its coffee offerings in the last few years and says it plans to introduce additional menu items at competitive prices.

Starbucks's need to compete with lower-priced rivals is clear, but is it selling itself too cheaply at $1? Robert Toomey, an analyst with E.K. Riley Advisors, says discounts can be dangerous. "My initial reaction is that a price reduction could dilute their gross margins," he said, adding, however, that the move may well drive valuable traffic into the stores. "This is all kind of speculation, but maybe it will cause people to come in and then upgrade from basic drip coffee" to more expensive lattes and cappuccinos. Baristas, on your mark.

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