September 27, 2004

Starbuck Strategies

Starbucks is also set to put CD burners in 45 stores later this year, allowing customers to sample online music and make their own albums.

Grande Plans

Yes, it can seem like there's a Starbucks on every corner, but Howard Schultz says his company is just warming up. A look at how he's rewriting the rules of retailing

Photo Illustration by James Porto for Newsweek
Caffeine nation: America's new Main Street?
By Brad Stone
NewsweekOct. 4 issue - You can't go near the City Centre mall in downtown Seattle without seeing the coquettish mermaid logo of a certain international coffee company. There's a Starbucks kiosk just inside the mall entrance. Not a hundred yards away, another Starbucks is perched near the elevators to the 44-floor office tower. Up a short escalator, there's a third Starbucks. Why does a midsize shopping center need a trio of identical coffee shops? "If we only had one, customers would have to wait, or they would walk away," says Chris Hougland, who manages two of the cafes.

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The satirical online newspaper The Onion was more prophetic than it realized with a 1998 headline: NEW STARBUCKS OPENS IN REST ROOM OF EXISTING STARBUCKS. Back then the coffee chain had 1,778 stores and seemed to be nearing almost comic ubiquity in some parts of the country. Today the company that weaned us away from the free mud in the office kitchen and hooked us on $3 tall double caramel macchiatos (with nonfat milk, please) has 5,945 stores in the United States and 2,392 more overseas and in Canada. While it may seem that there's already a Starbucks on every corner, chairman Howard Schultz says the company is just getting started. His previous goal of 10,000 stores in the United States, set in 2002, now appears "light," he says, and the company plans to double the current number of domestic stores to nearly 12,000. To meet that target, Starbucks will speed up its rollout of drive-throughs and kiosks at airports and supermarkets. And it will continue challenging one of the prime tenets of retail: don't locate your new stores close to your old ones. Don't be fooled: the key to its success is not the taste of its coffee. "The two things that made them great are real estate and making sure that no one has a bad experience in their stores," says CIBC World Markets analyst John Glass.

Starbucks' unconventional approach to real estate goes back to an impulse decision by Schultz more than 15 years ago. In 1988 he visited the company's first international store, in downtown Vancouver, B.C., and saw what every retailer dreams about: a busy store. But he also saw customers twitching in long lines as they waited for their coffee. He startled his real-estate broker by suggesting they expand to the vacant lot directly across the intersection. "It wasn't a different neighborhood but it had a different vibe," Schultz recalls. He sensed that each side of the street had its own traffic pattern, and that customers are reluctant to alter their routines or delay their day for a cup o' joe they consider a luxury.

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Starbucks' real-estate team has developed Schultz's instincts into profitable science. The company's furious addition of new stores fuels its booming bottom line and caffeinated stock price, up 1,500 percent in the past decade. Company execs say there's still plenty of room for expansion, even in seemingly saturated metropolitan areas like Seattle, where there's a cafe for every 12,000 people. (In Boston, they repeatedly point out, there is one Dunkin' Donuts franchise for every 8,000.) They're also looking to cities like Baltimore and St. Louis, with few gourmet coffee outlets, and to the long stretches of highway where travelers seek familiar respites. "I think there are very few places we are not going to be able to go," says Schultz.

Starbucks execs are guarded about how they decide exactly where to locate a new store. But real-estate brokers who follow the company's moves say it goes beyond just looking at traffic patterns, demographics and what other coffee shops are nearby. Patrick Duffy, the president of Florida retail-real-estate firm Colliers Arnold, says Starbucks brokers take to an extreme an old McDonald's maxim: "You want to put your sugar along the trail of ants. And you never want to make the trail turn." Schultz says that every year for the past five years, one third of all existing stores were "cannibalized" by new stores built in close proximity, a sign of its eagerness to make its $2-per-cup-of-coffee lifestyle as accessible as possible. Profits typically rose in the region afterward, no doubt because more people get hooked on its blend of beans. More stores also accommodates today's version of the hallowed coffee break, reduced to a quick dash out of the office by the modern obsession with worker productivity.

Another way it intends to keep fueling its growth is to move customers through its lines more quickly. While Starbucks execs love to talk about their stores' gentle environs as a "third place" besides home and work, it turns out that only 30 percent of customers actually use the tables and couches (many to write their novels, no doubt). Everyone else grabs their java to go. So one third of new stores will now offer drive-throughs. But the company wants to avoid what it calls "fast-food signals." In a month-old Starbucks drive-through prototype on Mercer Island, a Seattle suburb, wooden canopies cover a faux-brick driveway lined on both sides by flower gardens. You won't find that at McDonald's.

When it's not furiously opening new locations or trying speed up lines, the company is brewing new ideas to get customers to dig deeper into their wallets. On each floor of Starbucks headquarters in an old Sears & Roebuck warehouse south of downtown Seattle, highly caffeinated employees tout new plans for food (ovens for hot sandwiches will enter 90 stores later this year) and new drinks such as coffee liqueurs and this year's holiday offering: pumpkin spice lattes.

The most unorthodox plan caters not to taste buds but to eardrums. This month the company's HearMusic subsidiary, which it acquired in 1999, had the No. 2 record in the country with the Ray Charles duet CD "Genius Loves Company," whose release coincided with the musician's death. Schultz says the best-seller showed that Starbucks reaches a music-loving adult audience which feels intimidated by retail outlets and ignored by radio. He plans to release more CDs with other legendary artists and even some new, undiscovered singers in the coming months. Starbucks is also set to put CD burners in 45 stores later this year, allowing customers to sample online music and make their own albums.

Analysts and even most rivals sit in awe of Starbucks, offering only a few criticisms and concerns. As the company lets supermarkets, bookstores and airports run more of its stores, it risks losing control of the customer experience. Then there's the possibility, perhaps remote, that Americans will one day adopt an Atkins-style aversion to caffeine. Of course, these aren't possibilities that keep Schultz and his colleagues up at night. Only a double, nonfat, extra-foam latte after dinner could do that.

MSNBC - Grande Plans

Posted by Craig at September 27, 2004 02:08 PM