November 3, 2004
Would You Like an Extra Shot of Music With That Macchiato?
By ROBERT LEVINE
The New York Times
tarbucks is growing increasingly aggressive about marketing music alongside its macchiatos and madeleines. "Genius Loves Company," an album of Ray Charles duets that Starbucks' Hear Music division released in late summer as a joint venture with the independent label Concord Records, remained in the Billboard Top 10 for more than a month and recently went platinum. More than a quarter of the CD's sales were made in Starbucks coffee shops.
Hear, a retailer and label that Starbucks bought five years ago, introduced a satellite radio channel in October that focuses on the kind of adult-oriented pop that Starbucks features. And last month Starbucks announced a plan to install a computer system in some of its United States locations that would let customers make a customized CD that could be assembled, packaged and purchased while they wait for drinks.
Like all that chain's music ventures, the "Genius Loves Company" album and the decision to sell customized CD's grew out of the belief that Starbucks regulars - mostly 25-to-49-year-olds with the kind of disposable income that allows them to spend up to several dollars for coffee or tea a few times a week - are poorly served by radio stations and record stores attuned to teenage tastes. At a time when Starbucks contends that its customers don't have convenient ways to find out about undiscovered artists, "we feel we have the opportunity to present the individual with a new option," Ken Lombard, president of Starbucks Entertainment, said.
In presenting those options, Starbucks is catering to its core customers. "We do not want to be in the Britney Spears business,'' Starbucks' chairman, Howard Schultz, said. Unlike most record stores, Starbucks has a merchandising strategy to sell an experience along with a product. And as in its coffee business, it is so far enjoying the margins that go with that: most albums at Starbucks sell for more than $15 each, while many traditional music outlets are under pressure to cut CD prices.
Mr. Schultz said he believed that the chain's music ventures would become profitable, but it might be more difficult for Starbucks to establish itself in the digital music business than to spotlight a few individual CD's. So far, its efforts to sell items other than coffee have had mixed results. In 2000 Starbucks took a $20.6 million charge from its investment in living.com, a lifestyle portal, and it no longer offers as many lifestyle items in stores as it did around that time.
Major labels are sufficiently intrigued with Starbucks' custom CD venture to allow it to sell some of the music from their catalogs on a song-by-song basis, much as iTunes does. "I would think it's going to give us an opportunity with adult buyers," said Phil Quartararo, president of EMI Music Marketing. At least partly because many adults have not embraced downloading en masse, they represent a group that record companies have become more interested in, as well as one that some industry executives believe is not enamored with many CD stores. Rather than lure customers from standard record shops, Mr. Quartararo said he hoped Starbucks - and perhaps in the future, other such lifestyle retailers - would generate more sales among casual music fans disinclined to enter record stores, which they perceive as overwhelming. By giving space near the register to a few CD's, Starbucks essentially makes recommendations to a specific audience. "It puts the music in front of the right customer and makes it convenient to get," said Glen Barros, president of Concord.
"I think it's potentially a big deal, but I don't see it as hugely competitive so much as something that could expand the pie" of music sold, said Mike Dreese, co-owner of Newbury Comics, a chain of 24 record stores in New England. "Starbucks has the potential to reach millions of disaffected music consumers. They have a decent brand and a history of promoting moderately interesting music collections."
That has been a cornerstone of Starbucks' music strategy from the beginning. In 1999 Starbucks spent $8 million to acquire Hear Music, then a San Francisco-based label and music retailer founded by Don MacKinnon, now a vice president of Starbucks Entertainment.
By the late 90's, many clothing and lifestyle retailers, from Pottery Barn to Banana Republic, were selling compilation CD's. But Mr. MacKinnon helped move Starbucks beyond basic early efforts like "Blue Note Blend," a collection of tracks from that jazz label.
In 2002 Hear Music introduced its "Artist's Choice" series of compilations of favorite tracks selected by performers such as Willie Nelson, Johnny Cash and the Rolling Stones. "It's a way for people to say, 'I like this artist, let's see what they picked,' " said Emmylou Harris, who said she participated in the project as a way to introduce a mass audience to lesser-known artists she enjoyed, like Gillian Welch and Guy Clark.
The CD's offered by Starbucks have benefited from countertop placement as well as in-store play. As of Oct. 18, when Starbucks began the customized CD system in three Seattle stores, the chain began competing with iTunes and other big names in digital music. By the end of this year there is expected to be 15 such systems in Starbucks' Seattle stores and 30 more in Austin, Tex. Initially, Starbucks will face the task of trying to sell customized CD's to an age group that has not embraced downloading. But the company is well positioned to move beyond customized CD's, because more than 3,000 of its stores offer wireless Internet access, which could be used to download music files.
As record labels are trying to prevent the availability of online free music from undermining the value of their CD's, they might take a cue from a retailer with a track record of providing a pricey alternative to a widely available product. "Starbucks is a branding machine," Mr. Quartararo said. "Nobody buys a 40-cent cup of coffee for $4 unless they're buying a brand."
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Tall, grande or venti? Rock, jazz or classical? Customers select songs for their customized CD's at a Starbucks in Seattle.
