Starbucks shocked many in the restaurant industry Wednesday when it offered $10 worth of coffee products for $5 through the daily deal site, LivingSocial. Less of a surprise was how quickly the opportunity was slurped up: Before the day was over, 1.5 million of the offers had been sold, making the arrangement the top deal ever sold through either LivingSocial or its chief competitor, Groupon, which holds the most market share in that industry.
Restaurant operators have had a love-hate relationship when it comes to offering discounts through daily-deal sites. Some operators maintain the tactic is effective for gaining new customers and making loyal ones of them; others, however, feel burned when large numbers of coupon-wielding patrons drop by for a cheap meal at a place they would have patronized anyway, or never intend to frequent regardless how good the meal. In either case, conventional wisdom says daily deals are best suited for smaller operations looking for large exposure without risking dollars through traditional advertising. That being the case, one could ask why one of the best known brands in the developed world would need to discount their product by 50 percent to get groggy caffeine addicts in the door.
The terms of the deal may have had something to do with it. Sources inside the daily-deal industry with direct knowledge of the arrangement said that LivingSocial fully subsidized it, meaning that Starbucks in essence lent its name to the deal and sold what amounts to 1.5 million $10-gift cards to sell to LivingSocial subscribers, which netted only $5.2 million after all the cards were sold.
Talk about a loss-leader.
That may seem like a huge price tag, but for LivingSocial, its chief strategy against Groupon is to acquire as many subscribers to its emails as possible. Adding a name like Starbucks among its clients can help that procurement by showing consumers it can play with the big-name brands. Considering LivingSocial had just 16 million visitors in July against Groupon's 30 million, it needs all the help it can get.
Neither LivingSocial nor Starbucks would comment on the terms of the deal, but in an email to Fastcasual.com, a spokesperson for the coffee chain said the partnership was a way for it to reward its current customers and to provide an incentive to attract new customers as it launched the fall menu.
What's unclear is who first approached whom. There, stories conflict, with one source saying that Starbucks first went to Groupon with the offer andwent to LivingSocial only after being turned away. A Starbucks spokesperson denied that was the case, adding that the brand had a great opportunity to work with LivingSocial, and that "it was a successful engagement with our customers."
LivingSocial's Maire Griffin said the partnership is proof that daily deal sites aren't a fleeting trend and that even big brands can benefit from them. She also pointed out that the company recently ran deals with other biggies, including McDonald's and Whole Foods.
Now that Starbucks has made its first foray into daily deals, it may inspire others to follow suit. California Tortilla, which has never run a daily deal, is one fast casual chain that looks to Starbucks as an industry leader. The brand finds it interesting that the coffee chain partnered with LivingSocial.
"Obviously, a lot of us look at what Starbucks is doing, and (California Tortilla) has been assessing whether a daily deal would be a good move for us," said Stacey Kane, vice president of marketing for California Tortilla. "I'd hope that most operators will evaluate such a decision based on their own economics before jumping on the bandwagon just because someone like Starbucks did it, because selling (1.5 million) deals would kill someone smaller like us, obviously."
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Cover photo: Marcopaco
Cherryh Butler has been a reporter for nearly 10 years, writing on a variety of topics ranging from the restaurant industry to business and health and fitness news. Before joining FastCasual.com as editor, she oversaw KioskMarketplace.com and PizzaMarketplace.com and contributed to RetailCustomerExperience.com. She's also written for several daily newspapers, magazines and websites, including The Kansas City Star and American Fitness magazine.