UPDATE 2-Starbucks launches cheaper coffee-and-food combos

Mon Feb 9, 2009 1:19pm EST

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LOS ANGELES Feb 9 (Reuters) - Starbucks Corp (SBUX.O) will start selling coffee and breakfast foods together for $3.95 next month in its first combination discount, to lure consumers into its coffee shops during the recession.

Starbucks said on Monday that the new breakfast "pairings," available on March 3, could save consumers as much as $1.20.

The discounted combinations at Starbucks include a tall latte served with oatmeal or reduced-fat cinnamon swirl coffee cake. Customers can also combine a tall brewed coffee with one of four egg sandwiches.

After its domestic traffic started slowing more than a year ago, Starbucks introduced a $25 annual Gold membership that entitles users to 10 percent off purchases and began selling prepaid cards with a face value of $100 for $80 at club store Costco Wholesale Corp (COST.O).

The company also has been revamping its breakfast menu as it fights to compete with McDonald's Corp (MCD.N), which has dominated the U.S. breakfast business with a steady offering of combinations such as coffee and egg sandwiches.

McDonald's said on Monday that January sales at established U.S. restaurants rose 5.4 percent due to demand for its main menu and breakfast items.

RBC Capital Markets analyst Larry Miller said Starbucks' pairing price of $3.95 represented a discount ranging from 14 percent to 23 percent off current prices and that the program had its pros and cons.

If successful, the program could boost average sales, Miller said in a client note.

On the other hand, he said: "It's possible the program as structured may have some adverse consequences of trading down and may be limited in its appeal as it requires prescribed combinations."

The offerings also could curb Starbucks' pricing power -- which could hamper its long-term recovery -- and may encourage trading down among customers who had been buying the items separately or those who had been buying larger-sized drinks and combining those with other full-priced food items.

Miller said he was surprised that Starbucks didn't offer options with larger-sized beverages and that it chose a pairing with oatmeal, which is reported to be one of the most successful food options it has ever introduced.

After building a business selling premium-priced coffee drinks, Starbucks is now grappling with overexpansion and a deep recession in the United States, its largest market.

Shares in Starbucks rose 1.5 percent to $10.70 in afternoon Nasdaq trading. (Reporting by Jessica Wohl and Lisa Baertlein; Editing by Derek Caney and Lisa Von Ahn)

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