The Latte Wars

Wall Street greeted this week's changing of the guard at Starbucks with cautious optimism; Bank of America, for one, upgraded the stock from "sell" to "neutral." For Schultz the "Starbucks experience"—that fuzzy feeling he hopes customers get when they bring a carefully crafted Starbucks drink to their lips while enveloped in a warm and comforting retail nest—is known to be something of a religion. Bringing him back could be key to reinvigorating a brand that in recent years has seemed more focused on keeping up with demand than ensuring a distinctive brand identity. "It is now more important than ever for Starbucks to justify the premium it charges customers for its coffee and other products," says John Owens, an analyst with Morningstar.

Mariel Rappaport agrees. With a daily latte habit and both a Starbucks and a McDonald's within walking distance of her office in Los Angeles, the administrative assistant, an avid Starbucks fan, says her business could be up for grabs if McDonald's version is tasty and less expensive. "By the end of my week, going to Starbucks really adds up," Rappaport says. "But I can't help it. Going is an important break in my day." Starbucks isn't yet going into detail about its plans to keep customers like Rappaport coming back. In a letter to Starbucks employees this week, Schultz, who declined to speak with NEWSWEEK, said the company would scale back domestic growth, introduce new menu items and store designs, close underperforming locations and expand overseas. "By focusing again on the Starbucks Experience we will create a renewed level of meaningful differentiation and separation in the market between us and others who are attempting to sell coffee," he wrote.

And there are plenty of others. Among the coffee stalwarts pouring marketing and product development resources into their own brews are 7-Eleven stores and Dunkin' Donuts, which began selling lattes and cappuccinos in 2003 and has been marketing itself as a coffee—rather than doughnut—destination. Frances Allen, Dunkin' Donuts' brand marketing officer, says the company views the heightened competition as "an opportunity to make sure we've got our A-game on." Allen says the chain will be announcing several new menu innovations in the next year, including a greater emphasis on food after the morning breakfast rush. "Our customers' habits are changing, and their eating times are changing," she says.

But there are limits. McDonald's is developing sugar-free flavorings, but don't look for them in restaurants anytime soon. And how about the increasingly popular soy latte or green tea chai? "Not yet," says McDonald's Frick. Starbucks, take note.

© 2008