Starbucks Brews a New Strategy

Visit the Starbucks Web site, and your hosts will gladly tell you about a coffee bean's long journey from a Kenyan plantation to your neighborhood cafe. But there is an equally intriguing odyssey that may never be recounted on the site. That's the story of Starbucks's own relentless quest to use the Internet to connect with its customers.

In 1998 and 1999, Starbucks moved boldly, acting as if the Internet presented a can't-miss opportunity. Then the company stumbled again and again, as high-profile initiatives led to costly write-downs. Now Starbucks is pursuing what may be its wisest online strategy yet. No longer is the company trying to redefine its business in radical ways around the Internet.

This time, Starbucks is tying its online efforts closely to its central mission: building customer loyalty around cappuccinos, lattes, and other fancy beverages. "We aren't in the business of selling Internet access," says Darren Huston, senior vice president for new ventures. "Our job is to sell more coffee."

On its Web site, Starbucks now runs a simple, easy-to-use store that sells coffee beans, mugs, brewing machines -- and not much else. Gone are the dreams that the company once harbored of involving itself in the online merchandising of everything from furniture to videocassettes. And while the company is currently rolling out high-speed wireless connections in its physical stores, it's doing so in a way that minimizes any disruption of the traditional cafe experience.

Starbucks executives hesitate to put their strategic overhaul into a broader context. But the lessons that they've learned aren't hard to see. Customer loyalties can't be stretched or transferred overnight to a new product or channel -- no matter how tempting it may be to sketch out such ambitions on a whiteboard. Eventually, the Internet may reconfigure how customers think of mass-market brands. But that shift will take years to unfold, and company leaders need to manage the transition with great skill.

It's easy to see why Starbucks found itself dreaming big at the height of the Internet boom. Its cafes attract young, affluent, tech-savvy customers -- exactly the sort of people who made that boom take off. In 1999, Starbucks estimated that 70% of its customers were Internet users. Today, that figure has risen to 90%.

Starbucks chairman Howard Schultz also had an insider's view of the Internet's potential. In mid-1998, he joined the board of eBay, shortly before the online-auction company made its highly successful IPO. In early 1999, he spoke glowingly about the potential to leverage the Starbucks brand in cyberspace. People go to coffee shops to chat, he noted. People go online to chat.

Shouldn't it be possible -- and profitable -- to combine those two habits in some way?

But as Schultz spelled out his vision more explicitly, Wall Street shuddered. In June 1999, Schultz talked about setting up Starbucks X, a quasi-separate division that would be built around the Internet. A month later, Starbucks reported disappointing quarterly results from its real-world stores. Company officials say that the slump in business had nothing to do with Starbucks X or with any other Net-related venture. But the company's stock dropped more than 20% in a single day, and analysts widely urged Schultz to focus on his core business.