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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