Starbucks Does Not Live By Coffee Alone

Its name is appearing on everything from ice cream to CDs

One of the first things Scott Bedbury did as Starbucks Corp.'s new vice-president for marketing was learn how to make Frappuccino. The cold blend of ice, milk, and coffee introduced on the West Coast last year boosted local business by 11% in June, July, and August. On a hot day last summer, Bedbury toiled behind a Starbucks counter and found he couldn't make the stuff fast enough for the Frappuccino-frenzied crowd. "I was at that blender all day," recalls Bedbury, who came to the Starbucks marketing job after a seven-year stint as Nike Inc.'s global advertising director. "Now they call me the Seattle frap artist."

Starbucks is hoping for more artistry from the 39-year-old Bedbury. He is pushing Starbucks' name onto grocery shelves through a series of carefully planned joint ventures. The most ambitious: a partnership with PepsiCo Inc. to make a bottled version of Frappuccino that will appear this month in West Coast groceries. "We are reinventing coffee in other categories. My job is to strengthen the brand on all fronts," says Bedbury.

TORRID PACE. Starbucks, which pioneered upscale coffee bars, is still in a fast-growth phase as every crossroads in America gets its obligatory espresso bar. Not all of them belong to Starbucks. But the more people get used to spending $2 on a cup of coffee, the more Starbucks, the dominant player, benefits. Last fiscal year, which ended in September, sales grew from $285 million to $465 million, up 63%. Earnings rose 156%, to $26 million, 10 times the level in 1991. Still, that torrid pace looks unsustainable. For the first half of fiscal 1996, earnings rose just 4.3%, to $14.4 million, on a revenue gain of 49%, to $323 million. "Local competition among coffee stores is intense," says Jean-Michel Valette, an analyst at Hambrecht & Quist. "But Starbucks is the only one out there that has a national level of recognition and awareness."

The company, which expects to grow from 870 stores now to 2,000 by the end of the decade, has no plans to move away from its core business. But Starbucks is hoping that a strong presence in supermarkets and other outlets will reinforce the brand and drive more traffic into Starbucks stores. In another 50-50 deal, Dreyer's Grand Ice Cream Inc. is distributing five flavors of Starbucks coffee ice cream, such as Espresso Swirl and Javachip, to grocery freezers across the country starting this month. The coffee chain has also collaborated with Capitol Records Inc. on two Starbucks jazz CDs, available in Starbucks stores. And Redhook Brewery, part-owned by Anheuser-Busch Cos., uses Starbucks coffee extract in its Double Black Stout Beer.

Bedbury says the company is interested in other joint ventures with partners that can extend the brand. Although Starbucks is ubiquitous on both coasts, the company figures only 1% to 2% of the U.S. population has tried its coffee. "Brand extension gives access to new customers and channels of distribution," says Andrew M. Barish, an analyst at Robertson, Stephens & Co. in San Francisco.

But the strategy carries risk, too. "There are not a lot of brands that can do both retail and packaged goods," says David Aaker, author of Building Strong Brands. "Personality and energy are hard to reinvent in packaged goods at the supermarket." And too many extensions can erode a brand's identity. Bedbury admits that overextending the Starbucks brand is his biggest worry.

TOUGH SELL. Still, if Starbucks and Pepsi succeed with Frappuccino, the potential rewards are immense. With $30 billion in annual sales, coffee is the second-largest beverage category, after soda pop. And specialty coffees such as Starbucks are the fastest-growing segment. But while the numbers are irresistible, cold coffee in the U.S. has proved to be an extremely tough sell. Maxwell House's Cappio, pulled off shelves this spring, is just the latest to flop. Mazagran, a carbonated coffee drink that was an earlier product of the Pepsi-Starbucks partnership, failed last year. But Starbucks believes its name is strong enough to power a successful entrant. And it plans to learn from earlier mistakes. Cappio was relegated to the bottom shelf of the coffee aisle, for example. Frappuccino will be sold with soft drinks and iced teas, where Pepsi already commands prime shelf space.

Starbucks is not the only one tempted by the prepared-coffee category. This summer, some big names in beverages will give cold coffee a try. Coca-Cola Co. is teaming up to test a coffee drink with Nestle, its iced-tea partner. Nestle is also independently test-marketing its six flavors of ready-to-drink coffee on the West Coast in prime Starbucks territory. With a competitive battle brewing, the Seattle frap artist will have to work hard to keep the Starbucks brand perking.

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