Thinking Outside The Cup

Surprise! Starbucks barista-in-chief Howard Schultz is making a big, bold push into the music business. He aims to transform the record industry — and turn Starbucks into the world's biggest brand, period.

Page 3 of "Thinking Outside The Cup"

On some level, of course, it hardly took a flash of blinding insight to see that music and coffeehouses were made for each other. "Our customers respond to music," says Anne Saunders, senior vice president of marketing. "Part of why they come is as an entertainment destination, for a respite, a break with friends, as a place for community gathering. The idea for the music service is very grounded in why people come to Starbucks."

Since acquiring the company in 1999, Starbucks has sold Hear Music compilation CDs in its stores. And it launched a popular series of CDs called "Artist's Choice," in which musicians from Lucinda Williams to the Rolling Stones share their favorite songs. Nearly 400,000 copies have been sold at Starbucks stores. It was after seeing those results that Schultz and Don MacKinnon, one of the founders of Hear Music and now Starbucks' vice president of music and entertainment (doesn't that title tell you something?), began to wonder whether there was a bigger opportunity to explore.

Schultz and MacKinnon came to believe that the core Starbucks customer, an affluent 25- to 50-year-old who's likelier to be tuned in to NPR than to MTV or one of the nine gazillion radio stations owned by Clear Channel Communications Inc., probably feels ignored by the music industry. The shopping experience at most record stores is off-putting, with customers overwhelmed by the volume of stuff but still unable to discover great new music. At the same time, the consolidated radio industry has gone as bland and homogenized as low-fat milk. "What you're left with is this very broad audience made up of the core Starbucks customer, who loves music and can't find it," Schultz says. "We have a unique opportunity to take advantage of this."

There are clear parallels between the way Starbucks is developing this new music business and the way Schultz developed the core coffee business.

Follow that blond girl into the Hear Music Coffeehouse in Santa Monica, and you'll start to see what Schultz means. Down on the Promenade, it's early on a Sunday afternoon, and the cobblestone sidewalks are full of people. They flock to the Starbucks storefront between Broadway and Santa Monica boulevards for iced-coffee confections. Customers order at an outdoor bar, and are directed inside the store to pick up their drinks on the other side of the doorway. More often than not, once folks step inside, they decide to stay.

A smooth R&B tune is grooving over the sound system, and a quick look at the wall over the music bar reveals a projected-light sign: "Now Playing: 'When It Hurts So Bad,' by Lauryn Hill, from the album The Miseducation of Lauryn Hill." The store is crowded. More than 60 people are in the small space — 3,000 square feet, just large enough to accommodate the coffee and music bars, two short aisles of CD racks, plus space to mill around near the center of the store.

Now take a peek around the corner, at the Tower Records on Santa Monica Boulevard. It's easily four times as big as the Hear Music Coffeehouse, and there are just 10 people inside. None are interacting with a Tower employee, and none are using the listening stations — perhaps because three of them are broken. (Tower's parent company filed for Chapter 11 bankruptcy in February.) And here's the Borders, just three doors down from Hear Music. It has an entire floor dedicated to music and movies, but there are no employees and just two customers — both looking at DVDs.

Back at the coffeehouse, each of the seven listening stations at the CD-burning music bar is in use, and — though you wouldn't believe there was enough space for this many — all of the 55 other HP Tablet PC-based listening stations around the store are in use, too. Three more stations outside at the coffee bar make 65 places in all where customers can listen to as many songs as they have the patience to sample.

There are no restrictions on what songs you can listen to, or for how long. Pick up any CD from the racks, wave its bar code under the scanner at the bottom of the listening stations, and a complete list of the songs on the album appears on screen, along with a description of the artist and links to other records. "The scanning thing is pretty rad," says Nathan Hill, 26, who comes by often to check out the selection. "It helps me find stuff." If Hear Music has written reviews about, conducted interviews with, or produced compilations that include the artist, those are linked, too. The tablets are simple ATM-style touch screens. And often there are recommendations: "If you like Norah Jones, you might try Shelby Lynne."

There are clear parallels between the way Starbucks is developing this new music business and the way Schultz developed the core coffee business over the past two decades. Though his ambitions are global and his product is mass market, each coffee drink is personalized and created individually. Like all Starbucks executives, Saunders, the marketing chief, worked in a store when she first arrived on the job. "I waited on hundreds of customers while working the cash register and was struck by how every single one of them ordered something different," she says. "A flavor shot, extra hot, half-caf, maybe all those things together. Every single person coming in here has a different experience, designed the way they want it."

At the Hear Music Coffeehouse, the personalization is even more . . . personal. Choose your cover art. Create an album title. Select your songs. Move them around into a different order. Pick music by mood, by artist, or by genre — it's your choice. "We have a marketing tagline on the wall to reinforce how important we think that personalized experience is," says Saunders. "It reads: 'It'll be your favorite CD because you picked every song.' " And the product itself is high quality and perfectly packaged. "So many people aren't ready for digital music if they approach it on their own," says MacKinnon. "Here, there is no barrier to exploration, and you take something home that is tangible and beautiful."

And here's who MacKinnon has in mind: a woman with a head of unruly gray hair who has been tapping intently on a screen at the music bar for nearly two hours now. It's Mother's Day, and Kerry Smallwood, 47, just received a gift certificate to the store. A friend brought her here when the Hear Music Coffeehouse first opened. Today is her sixth visit. "I pretty much just listen to the CDs I make here now," Smallwood says. Her playlist so far has songs by Norah Jones, Rufus Wainwright, Sting, and Oscar Petersen.

Has she ever burned a CD for herself on a computer at home? Smallwood's expression is completely blank. "No, no, I've never done that. I don't know how." She's exactly why Starbucks thinks it can go up against Apple's more technology-oriented iTunes service. Smallwood will never know that there is a mini server farm hidden behind the service door at the back of the store. She just knows that for $6.99 for her first five tracks and $1 for each additional song, plus about a five-minute wait, she gets another beautifully packaged, personalized CD.

It's all very smooth, it's all very seamless, and it all seems to make so much sense. But does it? Can Schultz and his team carry off a transformation like this? Is it really a smart move for a coffee company to reimagine itself as a lifestyle-entertainment enterprise and to start by serving up music? After all, the mere fact that a certain sort of music and a certain sort of coffee appeal to the same sort of customer doesn't necessarily mean that they should be sold at the same store. By such logic, what would stop Starbucks from selling, say, hiking shoes, or take-'em-home versions of the new-agey furniture in its stores, or earth-friendly kids' toys? That's why Mohr, Davidow Ventures' Moore cautions Schultz to tread carefully. "It's a very interesting experiment, but if I was on their board of directors, I'd be more concerned that they not corrupt the brand," he says. "If Starbucks is just trying to find more ways to monetize the traffic that comes through, this is a bad idea. At some point the customers will start to feel abused."

Though he acknowledges the risk, Schultz sees his company poised at a turning point — and he's confident the music service is the next step along Starbucks' path toward becoming, yes, the world's biggest brand. "The hardest thing is to stay small while you get big, to figure out how to stay intimate with your customers and your people, even as your reach gets bigger. We want to be a respectful merchant so that we're not trying to sell anything that would in any way dilute the experience," he says. The music business won't do that, he vows; rather, it will enhance that experience. "Great retailers recognize that they're in the business of constantly surprising and delighting their customers," he says. This big, bold push into music, he expects, will do both.

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