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Starbucks tries out $1 drip cup of coffee in Seattle

SEATTLE — Faced with growing competition from cheaper rivals, Starbucks Corp. is selling small cups of drip coffee for $1 with free refills as part of a test in its hometown.

That's about 50 cents less than the Seattle-based coffee retailer normally charges for an 8-ounce cup of joe, though prices vary from store to store.

The suggested retail price for a slightly larger 10-ounce cup of premium roast at competitors like McDonald's and Dunkin' Donuts is $1.07 and $1.39, respectively, the companies said on Wednesday.

Starbucks said in statement e-mailed by spokeswoman Bridget Baker that the test "is not indicative of any new business strategy."

Starbucks would not say when the test began, how many stores are part of it, whether it's considering a similar promotion for any other brews or whether any new test markets are on the horizon.

"Testing is a way of life for us, as we are constantly looking for new ways to connect with the customer and provide the best Starbucks experience," the statement said.

Starbucks shares rose $1.42, or 7.6 percent, to close at $20.09 on Wednesday.

The stock has traded between $17.66 and $35.67 over the past year.

In the second price hike in a year, Starbucks in July raised the average price of its coffee and other freshly made drinks in most of its U.S. stores by 9 cents, citing the rising cost of dairy products and other essentials.

A 5-cent increase had taken effect in October 2006.

Price increases have helped shore up revenue as traffic in U.S. stores flattened and then declined for the first time in the company's history last quarter.

Starbucks Chairman Howard Schultz, who recently returned as chief executive after the company fired CEO Jim Donald as part of efforts to revitalize the company, has acknowledged the faltering economy appears to have contributed to the decline.

But Schultz said he believes the company's main problem was it lost its focus on customers in recent years as it concentrated on growth. He has downplayed the threat from a growing cadre of competitors, saying the company has always faced tough competition.

Starbucks is the world's largest chain of coffee houses, with more than 15,000 stores in 44 countries.

Dunkin' Donuts, based in Canton, Mass., and a subsidiary of Dunkin' Brands Inc., calls itself "the number one retailer of hot regular coffee by the cup" in the United States; it had nearly 7,300 franchised restaurants in 31 countries at the end of 2006, the latest count available.

McDonald's, headquartered in suburban Chicago, is the world's largest fast-food chain, with more than 30,000 restaurants in more than 100 countries.