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Starbucks has high hopes for its instant coffee

By Andria Cheng & Matt Andrejczak, MarketWatch
Last update: 2:35 p.m. EST Feb. 17, 2009Comments: 82NEW YORK (MarketWatch) -- After making the $3 latte an everyday thing, coffeehouse giant Starbucks Corp. wants to do something similar with instant coffee.
As expected, the Seattle-based company (SBUX:Starbucks Corp
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SBUX 9.65, -0.48, -4.7%) on Tuesday unveiled its Starbucks Via Ready Brew, an instant coffee that replicates the body and flavor of its house brew, an effort the company says took 20 years to develop. Three single-serve packets cost $2.95, with 12 costing $9.95.
Starbucks will begin selling them at its stores in Chicago and Seattle in March, as well as at Target Corp. (TGT:target corp com
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TGT 29.63, -0.45, -1.5%) and Costco Wholesale Corp. (COST:costco whsl corp new com
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COST 42.12, -0.64, -1.5%) in those cities before rolling them out nationwide in the fall, according to Starbucks Chief Financial Officer Troy Alstead. Internationally, Starbucks' London stores will begin offering the products later in March.
Three single-serve packets cost $2.95, with 12 costing $9.95.
The instant coffee was unveiled at a time when Starbucks is grappling with slowing profit and sales in an economic downturn that has led consumers to cut back on premium-coffee consumption, along with other spending. Starbucks also is taking at stab at appealing to a greater number of consumers through a $3.95 menu that pairs a latte or coffee with a pick of four items, which will be available in March. They're part of growth plans by Chief Executive Howard Schultz, who returned to running operations at Starbucks more than a year ago.
"The opportunity is huge," Alstead said in an interview, declining to estimate how much the instant coffee would contribute to earnings and revenue. "We have opportunity to take some of the [instant-coffee market] share and can grow it."
The $17 billion in instant-coffee sales make up 40% of the global coffee market, with $3.4 billion accounting for the premium segment. As a comparison, Starbucks touts a packet of Via makes a cup of Starbucks coffee at less than $1, while at Safeway supermarkets a 7-ounce jar of Nescafe goes for $4.99; an 8-ounce jar of Folgers Instant goes for $6.99 and Maxwell House Instant costs $8.49.
Schultz disputed that the introduction marked a desperate attempt to rejuvenate its business that may damage the brand's image.
"People are going to say this is off-brand for Starbucks," he told a crowd of about 100 reporters and Wall Street analysts at an event in New York. "This is a long-term strategy. It's not your mother's instant coffee. The proof is in the cup."
Starbucks said the instant coffee would let it tap into overseas markets that already are big in instant coffee, as well as increasing its share of the U.S. market. In markets including Japan, South Korea, Russia and the United Kingdom, instant-coffee sales represent at least 60% of the coffee demand in each. Instant makes up only 9% of the U.S. coffee market, according to Starbucks.
"It's an opportunity to give consumers a chance to experience the brand at a lower price," commented Tom Forte of Telsey Advisory Group. "It's appropriate in this economy. They are being aggressive from a product point of view."

Starbucks said it has conducted blind tests and other consumer research the past year and a half to launch the instant coffee, differing from its prior strategy that typically relies on instinct in launching new products.
To push the product, Alstead said that Starbucks plans a marketing push this fall that'll be bigger for the company. "We'll give it more noise than we typically do," he told MarketWatch. "We intend to go out in a big way."
Starbucks also is studying different packaging and blends and considering other distribution possibilities. Wal-Mart Stores Inc. (WMT:Wal-Mart Stores Inc
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WMT 48.24, +1.71, +3.7%) , which already carries some Starbucks products, may be carrying the instant coffee down the road as well, Alstead added. "We do expect this to be a good profit contributor."
Andria Cheng is a MarketWatch reporter based in New York.
Matt Andrejczak is a reporter for MarketWatch in San Francisco