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Java giant brews up expansion

By Kimberly Pfaff

While it might be hard for consumers on both coasts to believe, there really isn't a Starbucks on every street corner in the United States — at least, not yet. That will begin to change this year, however, when the Seattle-based coffee chain rolls out 450 new locations, primarily in the Midwest and Southeast. And shopping center executives are hoping to jump on the chain's java bandwagon.

Significantly, at a time when most companies are scrambling to establish an Internet presence, Starbucks is harking back to its brick-and-mortar roots. But that wasn't the original idea. Just last summer, Starbucks' CEO Howard Schultz was focused on creating a "lifestyle portal" Web site by partnering with home furnishings retailers and gourmet food sellers — much to the alarm of analysts and shareholders.

A combination of lower-than-expected existing-store sales and delayed store openings, coupled with Schultz's announcement in June that earnings per share would be 54 cents for the year instead of the anticipated 60 cents, sent Starbucks' stock plummeting — and set Schultz and company swiftly back on course.

As Helen Chung, Starbucks' spokeswoman, put it, "After extensive investigation of the risks, costs and benefits, we decided not to execute that strategy."

Today, the lifestyle portal idea is out, and Schultz has a $300 million capital spending budget this year that will be spent on other things; in addition to the 450 new U.S. outlets, the company is expanding overseas. The chain, currently in 13 countries, expects to have 500 stores in the Asia-Pacific region and 500 stores in Europe by 2003.

Starbucks will also broaden its focus to encompass noncoffee products. The firm's recent acquisition of music retailer Hear Music will boost Starbucks' music selection and could lead to in-store listening stations. The chain is doubling the number of locations serving sandwiches and salads to 400, expanding the program to six additional North American markets this year. And it plans to carry more gift items tied into seasonal holidays such as Valentine's Day.

Industry observers believe the switch from clicks to bricks was a smart move.

"Starbucks has ascended to the highest level of retail excellence, to the point where other retailers have found benefits in using their name as a catalyst," said Stan Eichelbaum, SCMD, president of Marketing Developments, Cincinnati. He added that the firm has a knack for promoting secondary products. "They exhibit excellence in service, performance and product standards."

Looking to the future, just how prominent a role will regional malls play for the company that built its business on street locations? Starbucks isn't spilling the beans, but analysts note that, at a time when many downtown areas are brimming with locations, it makes sense to focus on shopping centers.

"I'd be very surprised if malls did not figure heavily into their expansion plans," said retail consultant Kurt Barnard, president of Barnard's Retail Trend Report in Montclair, N.J. "Starbucks today is so ubiquitous, it's almost impossible to find a block anywhere in the U.S. where there isn't one, so growth would probably include shopping centers.

"Also, a company such as Starbucks needs a lot of foot traffic; the more foot traffic it gets, the better," Barnard added. "Clearly, malls are designed to generate foot traffic."

At press time Starbucks, which reported sales of $1.7 billion in 1999, had 2,391 North American locations, ranging from kiosks and small take-out counters to larger settings with comfortable seating that can play host to musical performances or poetry readings. The average store is approximately 1,500 square feet.

Developers say Starbucks' performance as a tenant is impressive and are hoping that the firm's expansion means more branches are on the way into malls.

"We've placed them in both enclosed malls and power centers, and they perform well in all the centers, bringing in well over $1,000 a square foot with us," said Roger Burghdorf, executive vice president of Westfield America, Los Angeles, which has three Starbucks kiosks and seven in-line locations throughout its 39 shopping centers.

"On a sales-per-square-foot basis, they're certainly going to exceed the mall average by a long shot," concurred John Bucksbaum, CEO of General Growth Properties, Chicago, which currently has eight Starbucks locations in its 130 shopping centers and malls. "We are doing both in-line Starbucks locations and kiosk locations, and both of them are working out very well for us. I would hope and expect that the malls will become more prevalent [in Starbucks' expansion plans]."

But one developer, at least, is not expecting a deluge of Starbucks mall locations in the near future.

"There's no question in my mind that they are first and foremost a street store," said Bruce Tobin, a senior vice president at Simon Property Group, Indianapolis, the largest U.S. mall developer, with more than 180 million square feet of space. Currently Simon has just a handful of Starbucks stores, and while Tobin would like to change that, he's not convinced that Starbucks management is fully committed yet to a mall strategy.

"To the extent that they can accomplish their growth targets through opening street stores, I think they'll continue to do so. When those opportunities run out, and they no longer can accomplish growth through street stores, I think they'll get more serious about shopping centers."

Yet executives agree that the coffee chain's widespread appeal makes it a natural for a mall or shopping center environment.

"Starbucks cuts through all demographics; it's not solely an upscale tenant," said Burghdorf.

"Take a look at Starbucks' street-front locations," Bucksbaum agreed. "If you go in at 7 a.m., you'll see construction workers lined up; at 10 a.m. you might see nannies with baby carriages, and at 2:00 you can find the woman who's employing the nanny. They've done a great job of transcending any economic group."

Still, is there a risk the country will be getting too much caffeine? Apparently not, say analysts, who count both the popularity of the chain's core product and its commitment to excellence as signs that lattes are here to stay.

"I was recently in London, and there was a Starbucks at either end of a passageway, and they both had lines," said Eichelbaum. "It's quite an envious franchise, and an achievement in merchandising."

"We've often found that there is a customer demand for more than one Starbucks in close geographic proximity," explained Starbucks' Chung.

Starbucks has not completely abandoned the Internet, however. "We will continue to test our commerce model and expand the leverage of our other business units on line," Chung said.

Some innovative partnering is also in the works, following the chain's recent agreement with Kozmo.com, the Internet door-to-door delivery service. New York-based Kozmo.com will deliver Starbucks coffee by the pound — not in hot beverage form yet — while Starbucks stores will feature drop-off boxes for customers to return rented videos and other items.

"Our alliance with Kozmo.com defines the benefits of a truly integrated clicks-and-mortar strategy for our customers," said Chung.

In addition, the firm has a marketing agreement with Cooking.com, and is also testing a program with mail-order wine merchant Geerlings & Wade.

"They've been able to devise many offshoot products," said Eichelbaum, but, "The linkage has to make sense to the consumer, or it will not work. It has to be related to the base product."