Do You Hear What Starbucks Hears?

FC: As the music business continues to fragment and have so many problems, it's a really scary time to say, 'We're in the music business.' Is that what Starbucks is saying? Let's jump into the music business?

Schultz: We're not jumping into the music business. We are leveraging our assets and our core competencies to take advantage of what I would characterize as the perfect storm of what took place over the last three or four years in the retail record industry. At its peak, in the year 2000, the retail record industry was approximately $13 billion. That's a very, very large market. And a number of events took place that began to fracture the industry's growth and potential, as well as the consumer's appetite to buy music. Beginning with the fact that, in my view, the nature of shopping for a CD or a piece of music at a traditional record store is, at its best, a very poor consumer experience. And you can read one research report after another and see that consumers were not satisfied and their expectations were not being met.

FC: What was it about the experience that was poor?

Schultz: When I think about the average music-shopping experience, what I would call the sense of romance about music is gone. Stores were not nurturing new artists. Consumers were overwhelmed by the volume of music but not discovering anything new. I think that is the antithesis of the Hear Music environment that we saw when we first saw Don's stores.

In addition to that, I think the level of training and education that existed behind the counter, for the sales people, was really skewed toward more MTV and a narrower, much younger audience. But the Starbucks customer might want to find a Diana Krall album, a Tony Bennett album, or anything that was not being played on the radio, well, they would have a hard time going into Tower Records. Maybe they'd find the album there, but they could not find someone who could talk to them about it. That consumer has disposable income and has had a long history of buying and enjoying music, but they have nowhere to go.

So first there was a bad shopping experience. Second, about three or four years ago, Best Buy and other discounters broke ranks with the suggested retail selling price and started discounting music. This created a bifurcation in terms of how the retailers were going to market. It also put tremendous pressure on the economic model of Tower Records. And subsequently -- not because of this, but one of the manifestation of this, is -- Tower Records as you know, has filed bankruptcy.

Continuing on the continuum of this perfect storm was radio. I don't know how old you are, but when I was a kid, the way you discovered music was through the radio. Radio introduced you not only to new music, but the DJ was the editor; he was a trusted friend. Radio has been homogenized to such a point by consolidation that there's no longer an editorial voice, nor can young artists and emerging artists get played on the radio.

Then you had technology come in and piracy begin. Between a bad shopping experience, a bifurcation of pricing strategy, the bankruptcy of Tower Records, and the homogenization of radio, you have this very broad audience out there who is the Starbucks core customer. We have 30 million people a week, coming in many many times a month. And we've demonstrated over the last few years that they've given us a license because of the trust that they have in the editorial voice of Starbucks to sell music and create music for them.

FC: Was this all stuff you could see five years ago? Could you see this trend starting to happen?

Schultz: No. We're not clairvoyant! We did not see this. All we saw was the fact that we have an unusual set of assets, that we could take advantage of the way in which we could do music that others weren't doing, and that we could bring our editorial voice and point of view to it.

FC: How did you convince the record industry to play ball?

Schultz: The record industry is looking for new channels of distribution and new partners anywhere they can find them. In addition to the traditional record problems that I described, you also had the video game surge as well as DVDs taking sales -- and mindshare -- away from traditional movies.

FC: What kind of research did you do to find out that your customers were ready for this?

Schultz: We talk to our customers all the time. Focus groups, exit surveys, things of that nature. Because we own and operate all our own stores, it's very easy for us to have intimate conversation with our customers every day without any formality and talk about music. Most of our customers who buy music have bought CD's from Starbucks, one after another, have the whole collection, and are asking when the next one is coming out. They also suggest what they think we should be doing.