Image: Starbucks products in store
James Cheng  /  MSNBC.com
Starbucks is looking to fill up a lot more aisles in your local megamart — and many other locations.
Alison
By Allison Linn Senior writer
msnbc.com
updated 2/23/2007 8:56:15 PM ET 2007-02-24T01:56:15

For years, Starbucks Corp. has been working to make itself your favorite stop for a cup of coffee. Increasingly, it also wants to be the only brand that comes to mind when you think about coffee, period.

The Seattle-based coffee retailer is increasing efforts to sell Starbucks pre-made coffee drinks, coffee beans for home brewing and other branded caffeinated products. The efforts include wider distribution, a new advertising campaign and even plans for vending machines that will spit out hot coffee drinks with the touch of a button or two.

Starbucks maintains that its core business will always be the thousands of Starbucks stores that now dot the world, which the company likes to refer to as a “third place” between work and home. But increasingly, executive Gerry Lopez said, the company also is realizing that there are many other times when they might be able to sell someone a Starbucks beverage.

“When they walk out of that store, when they go back to that first place — home — or that second place — work — it’s not like they’re not drinking coffee,” said Lopez, Starbucks’ senior vice president and head of global consumer products.

That means the challenge is, “How do you reach out and continue to build that relationship with that customer so that we are within their sphere whenever they have a need or feel like, ‘Gee, a cup of coffee would feel good right now?’” he said.

The effort has been brewing for years. Starbucks has been working with partner Kraft Food Inc. since 1998 to distribute coffee beans to grocery stores, wholesalers and other retailers. In the last couple years, that distribution has expanded even further to include such unlikely retailers as drug stores. Kraft also now distributes Starbucks’ Seattle’s Best brand beans.

In the next few weeks, Starbucks and Kraft also plan to expand their reach to include coffee bean sales in the United Kingdom. Bob Levi, senior vice president of global brands and partnership for Kraft, said it also would be natural to see more international expansion of its beans sales in the future, which Lopez said could include countries such as Germany.

Image: Starbucks vending machine
Starbucks
Starbucks vending machines are expected to debut later this year.

A separate deal with PepsiCo Inc., dubbed the North American Coffee Partnership, has put Starbucks’ bottled Frappuccinos and other cold coffee drinks in convenience stores, delis, gas stations and other locations since 1994.

Starbucks is working with Pepsi on the vending machines as well, which are expected to debut later this year after years of discussions. The machines will be located in universities, train stations and other areas where putting a full-fledged store isn’t feasible, said Tracey Doucette, general manager of the North American Coffee Partnership.

Through separate deals with other companies, Starbucks also offers coffee-flavored ice cream and liqueur.

Perhaps because of its own success in these offshoot markets, Starbucks is facing increased competition. Rivals The Coca-Cola Co. and Caribou Coffee Company Inc. recently announced plans to offer their own bottled, cold coffee drink, which could potentially eat into Starbucks and Pepsi’s dominance in that market. Also, more high-end coffees are now edging their way onto grocery store shelves, potentially providing Starbucks with increased rivalry there.

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Starbucks believes the increased competition is at least partly a result of its own ubiquity at retailers.

“To ignore the competition would be foolish, but I would say that the reason you’re seeing more coffee on the shelves is because of our success,” said Wendy Pinero, Starbucks’ vice president for packaged coffee and tea in the United States.

Nevertheless, Starbucks recently launched an ad campaign focused on the coffee beans retailers sell for home use.

The segment of Starbucks business that includes grocery store and bottled drink sales has proved lucrative, accounting for operating income of $41.6 million, on revenue of $90.75 million, in the company’s most recent quarter. By contrast, Starbucks’ closely watched international operations reported operating profits of $33.1 million, on revenue of $405.1 million, during the same fiscal first quarter.

Still, the segment’s profits for the quarter ended Dec. 31 represented a slight dip over profits in the same period a year earlier, which the company blamed in part on decreased sales of its coffee drinks, plus higher costs for marketing those drinks in Asia. Lopez concedes that there was some increased competition in the drinks category and other issues, but insists he’s not worried about long-term problems.

John Owens, equity analyst with Morningstar, said he plans to keep on eye on out for further drops, but doesn’t think it’s worth reading too much into one quarter’s results.

Owens said it makes sense for Starbucks to increase its focus on selling coffee beans to home users, because of the vast potential of that market. Americans drink more than 300 million cups of coffee a day, according to the trade group Specialty Coffee Association of America, and about 75 percent of those cups are made at home.

While Starbucks may seem ubiquitous, for now Lopez said the company remains a small player in the overall market, accounting for under 10 percent of the coffee beans sold in the U.S.

On the other hand, the North American Coffee Partnership, formed in 1994, now controls the vast majority of the cold coffee drink market. In 2005, sales of Starbucks’ Frappuccino and DoubleShot beverages accounted for $418.5 million of the $445.5 million market, according to Beverage Marketing Corp., a research organization.

If more Americans start drinking their Starbucks at home, one concern could be that the company effectively steals business from its own stores. But Owens said he thinks the opposite could happen, if growth in bean sales introduces new people to the brand, in turn driving them to Starbucks stores for pricey coffee drinks on the go.

“This could potentially help them with the sales of coffee at the coffeehouses,” he said.

Lopez said Starbucks saw a similar phenomenon in Japan, where it introduced a cold coffee drink and found that sales at its Starbucks stores increased.

As Starbucks has widened its reach beyond its signature stores, Lopez admits that it’s been tricky to balance the company’s desire to make its coffee more broadly available with concerns that such efforts will dilute the prestige of the company’s brand.

Some of those concerns have faded as Starbucks has become more mainstream, however. For example, Levi said the two companies probably wouldn’t have put Starbucks beans on drug store shelves in the 1990s, “but over time their brand has become more ubiquitous.”

Still, Lopez said there are some areas where the company wouldn’t put its products, such as dollar stores.

Other companies, such as Krispy Kreme Doughnuts, have learned the perils of building out too quickly into too many mainstream outlets, resulting in the brand losing some of its luster.

Owens, the Morningstar analyst, said he is watching closely for any signs that Starbucks’ brand is being diminished by its increasingly mass-market reach. But so far, Owens said, the company appears to be managing its growth without devaluing the brand.

“We have seen absolutely no signs of that whatsoever,” Owens said.

Still, the company notes there are some concessions it has to make if it wants to sell coffee outside its store. For example,  a pre-made, bottled Frappuccino will likely never taste as good as a Frappuccino made by a barista.

“It’s never going to be the same (as) the hand-crafted Frappuccino that you get in a store, ... but it’s going to be a close approximation,” Lopez said.

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