Starbucks pushes limits of what customers will swallow

November 14, 2004Starbucks is rocking, and not just from all the caffeinated drinks the company is pumping out. The coffee store juggernaut this week announced that earnings rose by 49 per cent to $104.3m in the three months to October 3, and its stock is up by 70 per cent in the past year. Much of investors' enthusiasm stems from the manic pace at which it is opening stores: it plans to open 1,500 of them next year alone, adding to the 8,000 already spread among 34 countries.

But the run is also being fueled by, of all things, the prospects for sales of music at its coffee-and-snack counters. In fact, more than a quarter of the sales of the latest album the company championed, a compilation by the late Ray Charles called Genius Loves Company, came through Starbucks outlets, and helped the disc reach platinum status and the top 10 of the Billboard charts. For the holidays, the company is going to be flogging a Christmas album by BeBe Winans along with its eggnog lattes; and at 45 outlets in Seattle and Austin, Texas, the company is experimenting with digital jukeboxes that will allow customers to buy and burn their own mixed CDs while they quaff. Intriguingly, Starbucks is not alone among retailers in pursuing a strategy of unconventional product extentions to fuel growth. For instance, 7-Eleven convenience stores, known largely for their frozen "Slurpee" drinks and various microwavable snacks, is now selling $159.99 Nokia camera phones. Meanwhile hardware chains such as Home Depot are branching into TVs and other home electronics. It's probably an overstatement to say America's niche retailers are trying to be all things to all people, but they are definitely trying to be more things to more people. In some cases, this is simply because the lines have blurred between categories of products: thus you have computer companies such as Apple, Dell and Hewlett-Packard now competing ferociously against home stereo and TV makers, and big book retailers like Barnes & Noble give increasing prominence to music, DVDs and chocolates in their stores. Of course, it's the first rule of retail to try to extend the amount of time that your customers spend in your shop - which helps explain why bookstores and other retailers have cafes, and why shopping malls exist. But the brand extension of America is going to new extremes, driven by the growing influence of the internet on America's true religion - shopping. Although the growth rates of e-commerce continue to dazzle, by now it should be clear that people like to leave their homes and buy stuff and there's no reason to believe that's ever going to change. But there's also no question that people are going online for more information about products before the hunt is in full cry. And it's here, where virtually anything you can desire is a click of the mouse or a Google search away, that the idea of one-stop shopping (not to mention combined shipping) gets ingrained in your brain. It's also online where figuring out the best price or a review of a product can very quickly become confusing - so brands still count. Out of this morass, of course, has grown the granddaddy - if you can call a company that is a mere decade old a granddaddy - of product line diversity: Amazon.com. In 1998 Starbucks' Seattle neighbour boldly decided to branch beyond its original business of books, music and videos, and the company's "non-media" sales of electronics, toys and other goods now account for a quarter of the roughly $6bn in revenues the company will clock up this year. At the same time, Amazon has stealthily launched into the online search business with its own engine, www.A9.com, that could help ensure that shoppers don't migrate entirely to rival sites that Google, Yahoo! or Microsoft might send them to. What is interesting about Starbucks' music thrust, of course, is that it is pouring resources into an industry that has been buffeted by sagging sales, digital downloads and piracy. A lot of discount retailers are using CDs as a loss leader to sell other products, and a lot of kids still think it is free for the taking online. Yet the coffee czar's thinking is that it is providing an environment conducive to the appreciation of good tunes in its wood-paneled hangouts. (And let's not forget that Starbucks' genius is using the power of its brand to condition you to pay $4 for a cappuccino that might cost half that elsewhere.) Starbucks has even created a division, Starbucks Entertainment, with its own CEO, to pursue opportunities in music and elsewhere that include its own branded radio channel on a new American satellite music service. Of course, a couple of popular CDs and some ambitious plans don't prove the concept, and Starbucks has overreached in attempts to diversify before: a couple of years ago it stopped trumpeting an investment in the website living.com as an entre into becoming a full-fledged lifestyle brand. Howard Schultz, Starbucks' founder, also keeps a magazine rack full of the company's cancelled in-store magazine, Joe, in his office as a reminder of what can happen to the best-laid plans. There are limits to what consumers will swallow, but those limits are being pushed as never before.