No Smoothie Sailing for Starbucks

Pressing on with a hard-charging drive toward menu innovation, Starbucks plans to roll out two new lines of beverages.

While a new "more-indulgent sweet, icy" drink (hey, isn't that called a Frappuccino?) will be available in selected markets, Starbucks also plans to introduce "a line of smoothie-like drinks made with fresh fruit and whey powder" nationwide.

"It's also what we believe to be a huge differentiator," the Wall Street Journal quotes Starbucks' beverage vice president Rob Grady as saying. "You cannot get [them] from any fast-food establishment."

That seems to be wildly optimistic outlook for the impact of a health shake.

Jeffrey Farmer, who began covering Jamba Juice for Jeffries & Company in January, differs with Grady in how he sees the smoothie situation.

"Smoothies are largely a non-differentiated product, so it's very difficult to meaningfully differentiate yourself there," he says.

In fact, the icy beverages have found their way onto menus at Dunkin' Donuts and Panera, and McDonald's tested the idea last year.

When it comes to the likes of fresh fruit and whey powder, however, Jamba Juice is pretty much the sole national player.

It's bad news indeed if Jamba is what Starbucks has to look forward to. Jamba has lost money each of the last three years, and its stock is down 71 percent over the past year as the company encounters major obstacles.

Jamba has found that as well as being seasonal, the smoothie concept has limited appeal out of the California market, where 373 of its 707 stores are located -- and because of the weaker economy in that region, that has meant leaner sales of late.

But Jamba's biggest problem has to do with the difficulty of building a brand around smoothies as your bread and butter; it's a low frequency product, which makes it difficult to generate enough sales volume to pay the bills.

Farmer says that while a company like Starbucks benefits from the high frequency and regularity of coffee drinking across the population, smoothies are (and ever will be) consumed at a far lower quantities.

"Smoothies are not considered a necessity," Farmer says. "No one can't begin their day without a smoothie."

Jamba did a little more than $300 million in business in 2007 (compared with $2.8 billion for Starbucks), which includes some revenue from the baked goods it now sells in stores.

So even if Starbucks rolled out literally the best smoothies available in America, wiping Jamba Juice off the face of the earth and converting every last one of their customers, that would still increase revenue by just 11 percent. And the reality, of course, will be far more modest.

Not only is the impact of the new beverages likely to be minimal, but they also seem at odds with C.E.O. Howard Schultz's stated intention to bring the focus at Starbucks back to coffee.

The labor intensity of making the drinks, the added blender noise, and the new task of sourcing fruit all add up to distractions from that core concern.

Liz Gunnison