Ezliving_Jim

I am posting this "full text" because the Washingtom Post deletes links after a couple days. This is great stuff.
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Pouring It On - The Starbucks Strategy? Locations, Locations, Locations.

Some years ago, an episode of "The Simpsons" had Bart sauntering into the local shopping mall to get his ear pierced, only to be rushed by the salesclerk.

"Gotta make it quick, kiddo," the clerk tells him. "In five minutes, this place turns into a Starbucks."

As Bart leaves, the distinctive white-on-green Starbucks name hangs over the old In and Out Ear Piercing store -- and over every other storefront in the mall.

The joke hit home because just about everyone has felt like Bart Simpson at some point in the past decade. Consider Dupont Circle in Washington, where Starbucks has four stores in eight blocks -- two of them within two blocks of each other. Or Bowie Town Center in Prince George's County, where a Starbucks store on the strip is echoed by the kiosk inside the Barnes & Noble bookstore -- and the one inside the Safeway supermarket.

The effect is intentional, and the strategy behind it is as counterintuitive as it may be irritating.

Conventional wisdom dictates that a retailer that crams stores close to one another cannibalizes its own sales. It's part of the retail-analyst mantra. Yet Starbucks embraced self-cannibalization as the fastest way to expand its business.

Coffee entrepreneur Howard Schultz, who built Starbucks into a global goliath, explains that the decision was made in the early 1990s, a few years after he purchased the small chain from its founders. At the time, the company found itself in what should have been a predicament: two stores across the street from each other in Vancouver, B.C.

The first, a tiny but top-performing shop, was tucked away in a building about to be closed for remodeling. Fearful of what might happen, Starbucks opened a larger store 30 yards away.

To the company's delight, not only did the two stores coexist, but they thrived. Since then, Starbucks has replicated the model with similar results all over the country.

Under this model, a new Starbucks location typically eats away at the business of the older one nearby -- at first. Within a year, though, sales at the original store recover. And even if they don't, the company would rather have one Starbucks store lose those sales to another than to a competitor.

Today, Starbucks has 4,479 locations in North America and 1,256 overseas. It continues to open three to four stores a day.

"We self-cannibalize at least a third of our stores every day," Schultz said in a recent interview.

The approach worked on several fronts. In the early days, when the Seattle-based coffee company had little advertising money, it used its storefronts as billboards and clustered them close together.

The goals: to intercept consumers on their way to work or home or anywhere in between, and to build brand awareness through ubiquity. The result: a nearly $3 billion-a-year empire that has inspired thousands of copycats.

The approach was a bold move for Starbucks in its infancy, said Michael Silverstein, consumer and retail practice leader at Boston Consulting Group. But it was by no means a revolution in retailing.

Coca-Cola Co. and PepsiCo Inc. learned a long time ago that when they place a new vending machine next to an existing one, sales for the existing one initially drop, he said. But they rebound quickly as consumers simply start to drink more soda.

Franchisees for Dunkin' Donuts saw a similar effect when they clustered stores in New England. The tactic gave them more street exposure, allowed them to pool advertising dollars and drove traffic into their stores.

"The lesson learned by both Starbucks and Dunkin' Donuts is that a retailer can create demand where demand is latent," said Jim McKenna, president of McKenna Associates Corp., a retail real estate training firm in Milton, Mass. "They can increase the size of the pie."

Creating a Culture


Starbucks blasted open a new market by turning a basic commodity into an indulgent necessity for the 20 million customers it serves each week -- and even those who flock to rivals.

By creating an espresso bar culture nonexistent in this country only two decades ago, the company helped spur demand where there had been none, which in turn helped contribute to a steady increase in American coffee consumption since 1995.

More than 109 million people, about half the adult U.S. population, drink coffee every day, and an additional 52 million (about 25 percent) drink it on occasion, the National Coffee Association of U.S.A. Inc. reported, based on a recent survey.

The biggest gains are among daily and occasional drinkers of "gourmet" coffee of the kind popularized by Starbucks. Those drinkers' ranks grew from 87 million people in 1997 to 150 million last year.

Whether Starbucks's dark-roasted beans are "gourmet" is a matter of opinion (some critics call the chain "Charbucks"). But analysts and rivals say the chain certainly has mastered real estate by picking spots populated with well-educated, well-paid and well-traveled consumers sophisticated enough to appreciate a pricey cup of java.

Because of its "early mover" advantage, Starbucks owns almost half of the nation's 13,500 coffee bars, the Specialty Coffee Association of America estimates.

None of its competitors appear poised to catch up. The market's second-largest player, Diedrich Coffee Inc. of Irvine, Calif. (owner of Gloria Jean's Coffees), lags far behind with a mere 383 stores.

"Starbucks now commands so much 'disk space' in consumers' heads that it's extremely difficult to compete against them," said Nancy Koehn, a professor of business administration at Harvard Business School. "It built its brand through its storefronts, and that is a very powerful word of mouth."

As a result, Starbucks has spent less than $20 million on advertising in the past 20 years, company officials said. By comparison, Jaguar, the luxury carmaker, spends about $50 million on advertising each year. Of course, Starbucks's competitors don't seem to spend much either, many gliding along instead in the leader's wake.

Italian Influences


Growth is not what the founders of Starbucks had in mind when they opened shop at Seattle's Pike Place Market in 1971.

Gerald Baldwin, Gordon Bowker and Ziev Siegl were coffee purists, content to sell whole arabica coffee beans to a niche market of like-minded people.

When Schultz was interviewed about joining their marketing team in 1982, the company had five stores. But Schultz, a New Yorker, spoke of growing beyond the Northwest and opening dozens, maybe hundreds, of shops.

As Schultz tells it in his book, "Pour Your Heart Into It," his vision and aggressive style spooked Baldwin and Bowker (Siegl had left in 1980). He had to beg for the job.

Soon after he got it, Schultz returned from a trip to Italy fascinated by Milan's espresso bars and Italians' casual but constant connection with them. He urged his bosses to start selling coffee by the cup.

Very reluctantly, they relented. In 1984, Schultz set up an espresso bar in a small corner of their only downtown Seattle Starbucks store and drew rave reviews.

But the owners refused to move forward, convinced it would push them into the fast-food business and distract them from roasting coffee. Besides, Schultz said, the company was in debt, having just purchased Peet's Coffee and Tea of Berkeley, Calif.

Schultz ventured out on his own. With financial help from his former bosses, he opened Il Giornale in 1985, an espresso bar that sold coffee beverages made with Starbucks beans.

Il Giornale was a success, but Schultz's big break came two years later when Starbucks decided to sell its six stores, its roasting plant and its name for $3.8 million.

Bowker wanted to cash out. Baldwin wanted to focus on Peet's, where he remains a board member.

With backing from local investors, Schultz raised the money, merged Il Giornale and Starbucks, and took over as chairman and chief executive, a title he held until 2000, when he became chairman and chief global strategist.

One year after purchasing Starbucks, Schultz launched a mail-order catalogue that was instrumental in taking Starbucks to the D.C. area.

District Debut


Catalogue shoppers tend to be loyal, so mail order seemed an obvious research tool for selecting which markets to enter. The District, which quickly developed a huge concentration of Starbucks mail-order customers, became a natural. And so in 1993 the Friendship Heights store on Wisconsin Avenue NW made Washington the company's first East Coast spot.

Back then, with 272 stores, Starbucks was already a tough lease negotiator, said Chris Weilminster, vice president of anchor-tenant leasing for Federal Realty Investment Trust, owner of 23 retail properties in the Washington region.

The typical mall or strip-mall landlord collects a percentage of sales from a retail tenant in addition to a base rent, Weilminster said. Under the lease terms, the landlord usually bans the retailer from opening another store inside a certain radius. The idea is to keep the retailer from cannibalizing its own sales, thereby depressing the landlord's share.

Starbucks had early on decided not to franchise, which meant staying away from territorial franchisees, who often want to limit new stores. The chain had decided not to accept landlord restrictions either, believing that demand for its coffee would exceed the capacity of any one store.

"We were willing to accept those terms because they were willing to pay higher rent," Weilminster said. "They would pay to avoid having those types of radius restrictions."

Those deals helped Starbucks lock in prime real estate, leaving upstart rivals at a disadvantage.

Reston is home to nine Starbucks stores inside a three-mile radius. As the company sees it, that area supports 11 supermarkets, so why not nine Starbucks locations?

Each of the Dupont Circle locations serves a customer who might not cross the circle just to grab a latte.

Crowding Out Rivals

Given Starbucks's advantages, Quartermaine Coffee Roasters doesn't even try to beat it at the real estate game, said Roger Scheumann, president of the Rockville-based company.

"For every store we build, they can build a hundred," said Scheumann, a former Starbucks salesman. "They are so excellent at their real estate process that it's very, very difficult to compete with them head to head in that space."

So Quartermaine sold its downtown locations to Firehook Bakery this year and kept two Maryland stores, focusing on coffee beans for take-home brewing and for wholesalers, Scheumann said.

Oddly enough, Quartermaine, with its bean-centric vision, was founded by none other than Baldwin, Bowker and Siegl, the threesome who launched Starbucks. After selling their first chain, the three decided an East Coast roastery might be an opportunity, so they decided to set up shop in Rockville in 1993. Their decision, Scheumann contends, expedited Starbucks's move into the Washington area that same year.

In keeping with its purist roots, the company's stores at the time sold coffee by the cup but provided no seating -- or skim milk.

"But what we learned was that Starbucks was setting customer expectations in the beverage marketplace," he said. "So we added seats and we added skim milk."

Caribou Coffee Co. last year decided to enter the Washington market and now has six locations. The Minneapolis-based chain owns more than 190 stores in all, each designed to capture the look of an Alaskan lodge and encourage leisurely, friendly gatherings.

But its entry into Washington hasn't been easy, said John Merenda, the chain's director of real estate.

"Just about anywhere we go, there will be a Starbucks within a mile -- or within a few blocks if we're downtown," Merenda said.

Caribou tries to work around the handicap by refusing to take inferior locations to its rival: If Starbucks has the corner of a strip mall with glass walls that allow customers to see into the store from two directions, Caribou aims for a similar setting across the street, Merenda said. And no way will it set up in the middle of a strip with a Starbucks on the corner.

And like Starbucks, Caribou tries to locate on the going-to-work side of the street on major commuting routes traveled by at least 20,000 cars a day, Merenda added.

Unsaturated Market


If one believes Starbucks's internal research data, Caribou's push to compete with the coffee powerhouse is not at all foolhardy. Nor is Starbucks's own territorial imperative.

Washington area residents could drink 65.5 million cups of specialty coffee per year based on customer-expenditure data and trends, the company's research shows. Yet Starbucks, Caribou and other competitors currently serve only half that amount.

That fact has encouraged Starbucks's plan to add to its 147 area stores.

The company also argues it is nowhere close to saturation nationwide. In a recent call with stock analysts who closely follow the company's fortunes, Starbucks officials said only seven states have more than 100 Starbucks stores.

"These are still the early days of the company's growth," Schultz said in a later interview.

Fueling that growth are the impressive customer frequency counts that Starbucks generates.

Consumers visit their local shopping malls about 3.7 times a month and their local video store about twice. But loyal Starbucks customers come in 18 times a month. Some come several times a day, according to the company.

Patrons are looking to be served "not only at home, but also at their place of work, at school, along their commute, and so on, which creates the need for multiple points of distribution," said Todd Shugarman, development director for the company's mid-Atlantic region.

But if they encounter long lines, parking problems or anything that takes away from convenience, chances are they'll abandon even their favorite Starbucks location.

To alleviate logjams in high-traffic stores, Starbucks often opens another location of a different size nearby, as it did along the K Street corridor, where a large store at 15th and K NW is only a block or so from a smaller one at 15th and I.

The setup is pretty low-risk because the company pays a lower rent for the smaller space, said Doug Satzman, Starbucks real estate development manager for the mid-Atlantic region.

"The larger store does more sales than the smaller one, but they both have the same return on investment," Satzman said.

Risk and Reward


Low-risk, maybe.

Risk-free, probably not.

One of the key barometers used by capital markets to gauge a retailer's success are the sales at stores open more than a year, also known as same-store or comparable-store sales.

The more stores that a chain opens in a densely populated area, the higher the chances that same-store numbers will drop and the more likely investors are to punish the company because of that.

Also, the business can suffer if the chain expands so rapidly that its service or the quality of its product slips, analysts said.

Such was the case at Home Depot Inc. The home-improvement giant got slammed by shoppers for poor service as the chain grew larger. Its same-store sales were practically flat last quarter, Home Depot executives said.

Joanna Barsh, a director at consulting firm McKinsey & Co., says it's an easy trap for a company to fall into because opening stores is the most obvious way for a company to grow.

"Retail stars often fall from grace if they rely on that strategy alone," Barsh said. "It's fun to be the king, but it's hard to stay the king."

Barsh tracked 400 publicly traded retailers from 1990 to 2000 and found that only 38 percent of the ones that were "stars" at the start of the decade retained that status 10 years later, Barsh said.

Those who clung to their status kept reinventing their services or products while keeping an eye out for the next new shopping occasion.

Wal-Mart Stores Inc., for instance, added food to some of its discount stores and morphed into one of the nation's top five grocers, Barsh said.

Starbucks is taking a similar tack as it strives to introduce new beverages (and technologies) that will attract more customers, of various ages, during different times of day.

In just a decade, it has broadened its menu from 15 to 30 drinks. That's in addition to the bottled beverages and ice cream it sells in grocery stores, in partnership with PepsiCo and Dreyer's Grand Ice Cream, respectively.

Still, "going forward, our efforts to drive growth will extend beyond the innovative products and technology to our real estate," Orin Smith, Starbucks president and chief executive, told analysts recently.

More Stores


How many stores are too many?

Starbucks does not seem to know and, for now, financial analysts do not seem to care.

"As long as the performance is there, the question won't be front and center," said Patrick Schumann, an analyst with Edward Jones.

Last month, Starbucks reported a 20 percent profit boost in the quarter ended June 30. It netted $56.2 million, compared with $46.8 million a year earlier.

Same-store sales have fluctuated over the past decade. But they have remained positive for 120 months in a row, with an 8 percent year-over-year gain last quarter.

And investors got a solid 14.4 percent return on equity in 2001, comfortably above the 10.4 percent median for Fortune 500 companies that year.

With that track record, Starbucks sees no reason to retrench.

Its stores, about 5,700, should double in number by 2005 and quadruple eventually, spurred by a big push into overseas markets.

In the past quarter, it opened its first stores in Germany and Spain. By year's end, it expects to open its doors in Puerto Rico and Mexico.

In Japan, home of the Starbucks locations with the highest volume, same-store sales dropped 11 percent in May from the previous year. Yet Starbucks continues to open two stores a week there. Even with the dip, Schultz said, average sales per store in Japan are almost double those in U.S. stores.

There are also home-grown challenges. What about those notoriously fickle consumer tastes? Does Starbucks become a classic, like Coca-Cola, or a cult drink, like Moxie?

Falling out of fashion is a risk for anything that becomes popular, said Dennis Lombardi of Technomic Inc., a Chicago-based retail consulting company. But "it's not, to me, a strategic threat."

The chain could also be hurt when the currently low price of green coffee beans rises. Starbucks has bought reserves to protect itself, but it's something that could hurt eventually.

John Winter Smith isn't worrying about any of that.

The unemployed computer programmer describes himself as a longtime Starbucks enthusiast so fascinated by the company that he built a mission around it: to visit every Starbucks store in the world.

For five years, between jobs and during vacations, he has crisscrossed the continent. Smith figures he's 400 stores shy of hitting every store in North America. But he's the first to admit the odds are working against him if Starbucks continues to multiply at a protozoan rate.

"I don't foresee that I will be able to end [my mission] anytime soon if Starbucks keeps going like this," Smith said during a recent swing through New York. "When I get tired of it, I'll be done."

By Dina ElBoghdady
Washington Post Staff Writer
Sunday, August 25, 2002; Page H01
© 2002 The Washington Post Company


_________________
Jim.
Entrepreneur Extraordinaire[ This Message was edited by: Ezliving_Jim on 2002-08-27 08:05 ]

tangirl

Thanks for sharing this Jim. I think that they are on to something, but I also believe that the public will eventually experience burnout. I, for one, am fed up with Starbucks. They are on every freakin corner here. And, you never know if your drink is going to be made properly. You can order the same drink at three different stores and end up with three different drinks.

hollywoodtan

first of all why should you tanning people care about what starbucks is doin to the world. starbucks is a very good marketing idea. there is a tanning salon near me with a starbucks in it and they make out very well, mainly because of their starbucks. i think you shoiuld all try it. just because you are sick of starbucks (tangirl) doesnt mean the rest of the world is.

Ezliving_Jim

This isn't a story about coffee, folks.

It's about marketing and management. It's about location and signing strategies. It's about pricing and making high profits on what was perceived to be a cheap commodity product. It's about turning a basic commodity into an indulgent necessity. It's about creating a culture around a product. It's about customer service. It's about market creation and expansion.

Sorry.... It's got no mention of tanning. This may not apply to you.

BooBop

Actually I can see where this would work. In my area, there is one tanning company that has a salon open just about year around and then 3 others a few miles apart that is open in peak season only. Maybe they are on to something, but I do get some of there disgruntled clients when they loose sessions because of the closing of the salons.

And another thing I have kicked around for about a year now it to offer a coffee shop in my salon. I am just waiting to relocate before I put more effort into the idea. But I think this could work.

JeffinKC

Jim,
Without a doubt this applies to every salon owner that is looking at expansion. Many markets, including mine, are currently saturated so instead of opening new locations it is better to aquire existing ones.

For all of you that are interested in what Robbie has done, this is very similiar. In his market he has made people think more about tanning since he has many locations that advertise effectively.

Thats why his model as well as the Starbucks model can not be acheived by all but only by those that are prepared to spend a large amount of money.

TANQUEEN

AN ESPRESSO BAR DEFINATELY INCREASES TRAFFIC,WHICH INCREASES SALES IN ALL PRODUCTS,EVEN TANNING. I AM EXPANDING MY ESPRESSO AREA CURRENTLY. REALLY HELPS OFF SEASON SALES! DEFINITLY,SUGGEST DOING IT.

BooBop

Yes, this is what I had figured. On my end of town there isn't a lot of choices for good food or drink. Even though I have the Mall and Superwalmart within 1 mile of me. (go figure). May I ask what part of the country you are in? I really would like to look into this more. Also, what kind of machines do you think is best to use? What about Health laws?

And if you could take the caps button off it will be easier to read. Thanks Quote:
On 2002-08-27 14:26, TANQUEEN wrote:
AN ESPRESSO BAR DEFINATELY INCREASES TRAFFIC,WHICH INCREASES SALES IN ALL PRODUCTS,EVEN TANNING. I AM EXPANDING MY ESPRESSO AREA CURRENTLY. REALLY HELPS OFF SEASON SALES! DEFINITLY,SUGGEST DOING IT.


_________________
Proud supporter of Don's Army
Mitzi
[ This Message was edited by: Mitzi on 2002-08-27 18:28 ]

BooBop

You know what, I think this espresso/coffee subject should be made into it's own thread. As to not take away from the orginal strategy. So tanqueen will you reply in the new thread I am going to start now. Thanks

BooBop

dang it i goofed.[ This Message was edited by: Mitzi on 2002-08-27 18:56 ]