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April 24, 2007 > Amid questions about its brand, Starbucks forges ahead with growth

Amid questions about its brand, Starbucks forges ahead with growth

By Curt Woodward

SEATTLE (AP), Apr 21 _ With a growing crowd of millions lining up for its fancy coffee drinks in the 1990s, Starbucks Corp. was tantalized by seemingly endless opportunities to expand its brand.

A chain of full-service restaurants? Seems like a good fit. A hip tavern with coffee undertones? Hey, sounds sexy. A literary magazine? Why not!

It didn't take long for those ventures to fall flat. And as the coffeehouse titan readies for a long-term explosion of growth, some Starbucks-watchers warn the company may again be stretching its all-important brand too far. Even company chairman Howard Schultz frets that the efficiency improvements driving Starbucks' dominance have robbed stores of their authenticity.

Starbucks' leaders say they haven't forgotten the past. Reminders of their greatest misses are even scattered around global headquarters.

``We do look in the mirror and say, ... 'Hey, don't forget when that didn't work,'' said Anne Saunders, senior vice president of global brand strategy.

Seattle-based Starbucks has more than 13,000 locations around the globe, with a long-term goal of 40,000 stores, half of them outside the U.S. The company had annual sales $7.8 billion in 2006, and is projecting 20 percent growth for this fiscal year. In some markets, the company is saturating densely populated areas with more stores so customers don't have to walk more than a few dozen yards for a caffeine fix.

The company's rapid growth almost single-handedly popularized upscale coffee in the U.S., and its success has enticed McDonald's, Dunkin' Donuts and other retailers to upgrade their coffee offerings.

But not everything Starbucks touches turns to gold.

Starbucks has led investors on a rocky ride over the past 52 weeks, with shares now 20 percent lower than a year ago. In February, the company said its fiscal first-quarter profit rose 18 percent, attributing the growth to the 700-plus stores it opened in the quarter, and a 6 percent jump in sales at stores open at least a year. But results still missed Wall Street's expectations as higher wages in the U.S. and Canada ate into profits.

In the 90s, the company experimented with several strategies for capitalizing on its hot brand.

Among the bigger ventures were attempts to open separate food-and-drink outlets: a full-service, sit-down restaurant called Cafe Starbucks, and a computer-friendly bar under the name Circadia.

Starbucks also partnered with a few Web portals and pushed further into merchandise and media, including a periodical called Joe Magazine and a line of journals and desk supplies.

None of those ideas lasted. But that spasm of unsuccessful brand expansion shows that Starbucks can become overheated about the world outside of coffee, said John Moore, a former Starbucks marketer who heads the Brand Autopsy consulting firm.

``They're kind of caught in the position where I'd say they believe the hype,'' Moore said. ``They talk so much about the brand that they have really fallen prey to the idea that they are a lifestyle entity.''

Moore sees parallels in some of Starbucks' latest moves beyond coffee-related commerce _ namely last year's marketing of ``Akeelah and the Bee,'' a feature family film that was heavily promoted in stores but got a chilly reception at the box office.

``There was no linkage to coffee at all, nothing to the core of what the company was about,'' Moore said. ``You start to realize, 'Wait a minute ... they just want my eyeballs. They sold my eyeballs to someone.'''

Other skeptics question whether Starbucks' other recent media ventures, particularly its new Hear Music record label, are the type of moves that could distract Starbucks from its bread and butter: selling $4 coffees.

Starbucks is wary of casting the company's abandoned ideas as evidence that its all-important brand has a weak spot.

Instead, Saunders said ventures like Circadia, Cafe Starbucks and Joe Magazine fell victim to difficult logistics or poor execution.

``There isn't really an instance that I can think of where we've extended the brand and consumers have rejected that,'' she said.

But that doesn't mean Starbucks is shy about remembering its missteps, she said. Chairman Howard Schultz has long kept a rack of Joe Magazines in his office; workers poking around headquarters can still ferret out bottles of Mazagran, a discarded coffee-and-soda drink that preceded today's bottled Frappuccinos.

The company's penchant for self-examination was put on display in February when a memo from Schultz was leaked to the blog starbucksgossip.com.

In the e-mail to top executives, later verified by the company, Schultz worried that the automation that is helping to drive the company's expansion is sucking the romance out of the Starbucks experience.

The memo set off a flurry of speculation that the luster was gone, and that Starbucks might slow its ambitious growth plans.

Insiders responded that those worries were nothing new, and are a central part of guarding Starbucks' brand as it tries to become the world's neighborhood coffee shop.

``It is, for us, being very thoughtful and careful about how we extend the brand,'' Saunders said. ``We joke around here: It's a slippery slope to sunglasses and underwear.''

In the end, other observers say Starbucks' international expansion plans may be more affected by hard-nosed supply chain problems than consumers' feelings about a legion of smiling, wavy-haired mermaid logos.

Starbucks hopes to have its first stores in Russia and India before 2008, putting the company in 41 countries. Last week, Starbucks announced it will open its first store in Bucharest, Romania _ one of 2,400 locations planned for this fiscal year, at a pace of about seven new stores each day.

Starbucks' real challenge will be hiring enough designers to build those stores and buying enough coffee and milk to stock each location, said Larry Wu, a vice president at consumer consulting firm Iconoculture and a former Starbucks research director.

``I think there's things that people aren't looking at that could bring the brand down,'' Wu said. ``If you can't get enough high-quality coffee and keep the productivity up, that's one area that I think is more influential than people realize. It's not the marketing.''

___

On the Net:

Starbucks: http://www.starbucks.com

Brand Autopsy: http://brandautopsy.com

Iconoculture: http://www.iconoculture.com

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