Entrepreneurs Eye Starbucks Rebranding

With consumers cutting back, it's not a good time to be considered a luxury.

Americans have slashed spending by 40% in the past six months, excluding regular living costs, according to the polling firm Gallup. That's bad news for companies like Starbucks (Stock Quote: SBUX), whose coffee drinks are held up as an example of frivolous spending. After all, even die-hard caffeine addicts can brew a cup at home for far less money.

Starbucks faces the challenge that many companies, large and small, are grappling with: making a premium service seem more affordable. These days, companies must prove the value of their products, or customers will consider them something they can do without. Firms of all sizes will be watching Starbucks as it tries to reposition itself without losing fans.

Starbucks' reinvention is in the hands of company founder Howard Schultz, who reclaimed the role of chief executive officer a year ago. At the company's annual shareholders meeting this week, management acknowledged the coffee chain's future is on the line.

Schultz's initial goal was to reinvigorate the brand, but he quickly found himself caught in the throes of an economic slowdown. Sales at stores open at least a year fell 9% in the quarter that ended Dec. 28 compared with a year ago.

He had planned to stop selling breakfast sandwiches at stores, but decided to keep them as part of $3.95 "breakfast pairings." These fixed-price combos, which include coffee and options like oatmeal or cinnamon rolls, are a direct assault on fast-food breakfast champ McDonald's (Stock Quote: MCD).