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June 28, 2004

Music, Margins, Motives, and Mochas

The July cover story in Fast Company on Starbucks attempt to transform the retail music industry got this former Starbucks marketer thinking …

The article focuses on Starbucks recently implemented new-concept music store where a customer can handcraft a personalized music CD while a Barista handcrafts their grande, non-fat, no foam vanilla latte. Starting with a pilot store in Santa Monica, Starbucks has plans to roll out fully-integrated CD burning café-music stores beginning in August with ten stores in Seattle and a few thereafter in Austin.

The article goes on to reference Theodore Levitt’s “Marketing Myopia” assertion that companies should not narrowly define the business they are in and how Starbucks is clearly not limiting their business to the coffee business, but rather to a lifestyle of comfort, affluence, and convenience.

The crux of the feature story centers around this quote, “This push into music is the start of a daring effort to reinvent one of the world’s best-known brands.”

Having worked for Starbucks from 1994 to 2003, I read this Fast Company article with a somewhat skeptical insider’s eye and left with questions related to music, margins, motives, and mochas.

Why does Starbucks need reinventing?
Same store sales have been in double-digits for nearly two years. Year-to-date, revenue is growing at a robust 28.8%. Starbucks stock is trading at an all-time high. The company has upped its earnings projection for 2004. The brand strength has never been stronger having received accolades and recognition from across the globe.

Are those symptoms of a company that needs reinventing? I think not.

True … Starbucks success could come to a grinding halt. However, given the business performance and brand performance since going public in 1992, Starbucks is well positioned to milk future success for years on end without having to reinvent itself through transformative change.

Will burning music CDs financially reinvent the company?
Profit margins in the espresso business are HUGE!!! Huge as in up to 95% margins. Profit margins in the downloaded music are SLIM!!! Slim as in the wholesale costs for an individual song range from 65 cents to 79 cents and the going download rate for a single tune is around $1 dollar.

Given the slim margins in downloading music, I have my doubts that it’ll financially reinvent Starbucks. I’ll take the margins in mochas over the margins in music any day.

Can Starbucks reinvent itself by financially exploiting a technology adjacency?
Starbucks has garnered tremendous media attention for their wi-fi hot spots. Nearly every article that mentions wi-fi also mentions Starbucks. But, how has wi-fi financially impacted the business at Starbucks? To my knowledge, Starbucks has not released numbers detailing the financial impact wi-fi has had on driving top-line sales.

From my unsubstantiated research, I believe Starbucks has increased their “road warrior” business traveler customer base through wi-fi. Most of the users I’ve seen are business types whose companies pay for the spendy service.

My insider knowledge does know Starbucks benefited greatly from the wi-fi installations as it significantly upgraded their back-of-house technology. Through the wi-fi connection, Starbucks locations now have a two-way high-speed network connection with headquarters. Better yet, all this enhanced technology came at virtually no out-of-pocket expense from Starbucks.

Free wi-fi is fast becoming a cost of doing business for coffeehouses and other "third place" community gathering spots. In Austin, every other coffeehouse, besides Starbucks, offers free wi-fi to their customers. For coffeehouses, there seems to be very little money to be made in wi-fi hot spots. Sure, a customer may linger longer but lingering doesn’t always translate into incremental sales.

Will customers embrace burning CDs at Starbucks and not at home?
I have not used the CD-burning system at the one Starbucks café-music location. However, I’m hard-pressed to believe the technology interface in the download kiosk is easier to use than standard CD read/write technology readily available and used today on a home computer.

The learning curve to download music and burn to a CD with a home computer is not that steep. Because it is so easy to make a CD at home, I struggle to believe that Starbucks can make it any easier for customers.

Then again, making coffee at home is ultra-easy and Starbucks has seemingly made it easier, more convenient, and tastier for customers. But that’s coffee and Starbucks has been in the coffee business since 1971, not the music business.

If Starbucks is busy doing music and entertainment, who is busy doing coffee?
Label me old-school, but with each move Starbucks makes into the entertainment and technology area, the farther they deviate from coffee.

I firmly believe a company “jumps the brand” when they promote their brand over the category. Starbucks used to be about promoting the coffee category. They have and are still transforming the coffee category. But with each step into music and entertainment, Starbucks seems to be more about promoting the Starbucks branded lifestyle experience than promoting the coffee category.

So, if Starbucks is busy doing music and entertainment, who is busy doing coffee? Peets.

Am I totally against Starbucks entering the music and entertainment business?
No, not at all. I fully support Starbucks enhancing the coffee experience by offering music and entertainment options. However, I am not going to fall victim to the thinking that burning a music CD in Starbucks is a transformative tectonic-plate shift in reinventing the Starbucks brand.

Instead, I see Starbucks offering entertainment options as an enhancement to the Starbucks experience and not as a reinvention of the Starbucks brand.

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Former Starbucks marketing guy John Moore takes Starbucks (as reported in this month's Fast Company)to task for their latest big idea: burning personalised CDs for customers while they wait for their mochaccino. His first post questions the strategic v... [Read More]

Comments

John, a great editorial - from one who knows.

But do you think perhaps that this could actually benefit Starbucks not so much by creating music margin as creating another reason for repeat visits - and the coffee purchases that such visits will facilitate?

Good question Mark.

Driving incremental visits and incremental purchases is exactly what Starbucks hopes to accomplish with their café-music stores. That is exactly the story Starbucks will pitch to Wall Street. It’s the same pitch they gave to Wall Street regarding the potential impact of wi-fi.

I am not questioning the relevance of these growth initiatives with analysts living Wall Street. I am questioning the relevance with customers living on Main Street.

Maybe my opinions would change if I saw the financial impact wi-fi has had on the business at Starbucks. It was sold to Wall Street as a financial growth engine and sold to Main Street as an enhancement to the experience.

Wi-fi has succeeded as an enhancement to the experience with customers. But, has that experience enhancement translated into incremental sales? I don’t know.

Chasing technology is tough, especially for a retailer based in coffee and not technology. By the time Starbucks is able to roll-out the fully integrated café-music stores (which will be a minimum of 24 months), how will technology change the burning music CD opportunity? Will technology improve the at-home CD burning experience to make the Starbucks initiative “obsolete” with customers living on Main Street?

Would Starbucks be better off searching for growth opportunities closer to their coffee competency and not to their branded lifestyle experience competency? I reckon time will tell.

John,

I always enjoy Brand Autopsy posts. Much of what you say in this one may be right on in terms of why this is a bad idea for Starbucks, but I have a major beef with the first reason you give. Frankly, I'm surprised you gave it.

I'm referring to the part where you ask: "Does Starbucks need reinventing?" You basically argue that they don't, but I would argue that the time to be seeking ways to reinvent yourself is precisely when you are at the top of your game and others are starting to imitate you with some success. If you wait too long, you're done.

Whether or not music is the best way for Starbucks to do it remains to be seen -- I suppose I'm skeptical like you. But I would argue that now is the time for them to be thinking about reinvention or face a long, downhill journey to irrelevance.

Scott … I agree that it is far better to experiment with new initiatives in good times rather than bad. In good times it signals forward-thinking while in bad times, it signals desperation.

I’ll quickly go back to the question at hand … does Starbucks need reinventing?

I just don’t think so.

However, I do think the Starbucks brand needs to remain relevant and I suggest Starbucks do this through evolutionary means and not through revolutionary ways.

There is still plenty of opportunity for the Starbucks brand to remain relevant by focusing on their core competency of coffee to further evolve the Starbucks experience.

I am not convinced that Starbucks should fall victim to “lifestyle brand mentality” and attempt to reinvent the brand by revolutionizing the retail music industry.

Revolutionizing the music industry to reinvent the Starbucks brand is too much of a stretch for this old school Starbucks marketer.

Whenever Starbuck tries to sell me anything other than coffee, I get irritated. Even the muffins were suspect at first. Heh.

If Starbucks falls out of love with coffee and takes on a new mistress, Miss Third Place, it's over.

The thing is, they don't need to sell me anything else. They get plenty money from me and others like me already. But they now have Wall Street breathing down their necks (as the latter is wont to do). All the music is, is them reaching for the soap.

Combined technology and branding comment:

I think Starbucks may even be adopting this technology too late. The Starbuck experience is about top-quality coffee (and muffins) served quickly. It's not about delayed gratification, and so the smaller the time between buying anything from Starbucks and using it, the more it fits the brand. I bet that the real USP would be to enable people to download MP3s or WMAs straight into their IPod or Walkman. CD players are not the mode chosen by the young elite Starbucks presumably targets. Enjoy your latte while you listen to your new tracks! You could arrange for the CD to be mailed later if you wanted the older medium, too.

Nathan ... I agree totally with you ... this service must be able to download tunes directly to your MP3 player or some other mini-sized USB gadget.

In fact, one of my first questions to a Starbucks partner (employee) after reading the Fast Company piece was 'can this work with my iPod.' 'Not currently,' my well-informed source said. However he did go on to say Starbucks is looking to add that enhancement.

Interesting thoughts on delayed gratification and its impact on the brand juju of Starbucks.

Good stuff, thanks for adding to the conversation.

I hate delayed gratification.

Paulie - I'm so embarrassed that you'd write something like that! Don't talk like that, especially not on the internet! But I am proud you spelled 'gratification' correctly. By the way, you need to write your grandmother. ~ Mom

Areed that it's one thing to sell the jazz compilation that they are playing in the store (in fact, it's a good idea to do so) - but it's another thing to sell customised CDs. I don't go to Tower Records for the coffee, and I wouldn't go to Starbucks for the CDs. By all means, leverage the brand, but don't dilute it.

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