HOW STARBUCKS PLUNGED INTO GROCERY COMPETITION

TIM MORAN

KALAMAZOO, Mich. -- "It's not about the coffee! It's about the people, stupid!" That's the reminder Starbucks Corporation leaders often use when they debate entering a potential new market for their treasured brand, says Ted Garcia, the coffee-house concept's executive vice president of supply chain and coffee operations.

Garcia outlined how this guiding principle helped the company develop and implement a retail grocery coffee program during the 34th Annual Food Marketing Conference, held at Western Michigan University here. The theme of the conference was "Keeping the Focus on the Consumer."

If any company epitomizes high-touch service trends in the '90s, Starbucks does. Founded in 1971 as a single coffee house in Seattle's Pike Place shopping mall, Starbucks is now a global company employing 35,000 people.

More importantly, the Starbucks in-store experience of customer service has been the key to growth. Sales in 1994 were $284 million; 1998 sales topped $1.3 billion.

"A Starbucks needs to be friendly, warm, to be a welcoming place. When a customer leaves one of our locations, that customer must feel better than when they first walked into our store," Garcia said.

In this people-oriented business, though, Starbucks was very careful in weighing the merits of selling high-end retail coffees and coffee products in retail channels.

"For about two years, we debated going into the grocery channel," Garcia told SN in a post-speech interview.

Company executives wanted to broaden the brand's exposure without losing its guiding purpose, he noted.

"We don't want to get into anything that doesn't permit us to establish and sustain defensible and premium market position," said Garcia. "We must stand for something, or all we will be is a purveyor of a commodity." Starbucks' self-adopted purpose, said Garcia, is "to provide an uplifting experience that enriches people's everyday lives." Another corporate mantra offers customers "rewarding moments every time they come into contact with a brand."

Simply offering coffee on grocery store shelves could have pushed Starbucks closer to that purveyor role without any guarantee that it would fulfill the corporate mission.

So Starbucks established what Garcia termed "brand guardrails" to keep trade-relationship selections on track. These guardrails set the conditions for business. Among them: relationships must work flexibly and quickly; everything done elevates work already accomplished; distribution chains must offer multilevel opportunities and add value back into existing operations.

The company first used these parameters to form associations with outside vendors who wanted to operate airport versions of Starbucks' own stores. Those that most closely reflected its own values did the best.

"We have many companies approach us about business relationships. Shared values and corporate cultures are the starting point. Our partners need to be committed to customer service," he said.

Prior to the retail rollout, the company's two, 350,000-square-foot high-tech roasting plants began providing coffee to air travelers on United. Starbucks also licensed coffee-based bottled beverages with Pepsi and established relationships with Marriott, Host Marriott Services and Aramark.

Last year, the company also began an experiment with a full-menu, full-service food-service concept, called Cafe Starbucks.

Garcia said Starbucks knew there was high demand for its coffee, but the company was concerned about the potential to dilute its brand image.

"You can't believe the number of people who would call us and say 'I'm going to Hawaii, I need a pound or two of coffee for the trip,"' he said.

However, selling the Starbucks name directly to the consumer via retail brought up new challenges. From July 1996 through March 1997, the company test-marketed its coffee in retail stores in Portland, Oregon. Then in July 1997, Starbucks also tested coffee sales in Chicago.

Starbucks decided demand was good and the model would work. But the company also determined that the process of building infrastructure and dealing with a maze of local brokers for store placement was not part of its core competence.

Buoyed by their experience in opening the airport units, Starbucks officials sought an established retail partner that shared its values and corporate character. The search brought Starbucks to Kraft Foods.

Alan Gulick, media relations manager for Starbucks, said: "[The partnership] combines our expertise in sourcing, roasting and packaging, with Kraft's excellent knowledge of marketing, selling and distributing directly to grocery customers."

To safeguard the integrity of the Starbucks product, Garcia said that the company needed assurances that Kraft would maintain quality standards as if they were their own.

As one example, Kraft was willing to work with Starbucks' freshness requirements for merchandise rotation. The retail coffees are sold in Starbucks' trademarked Flavorlock bags, which have a membrane opening that pulls oxygen away from the coffee. The coffee can be on-shelf a maximum of 26 weeks; 20 is preferred.

"The product has really been out of our control -- for example, the operations at the airports," said Garcia.

Starbucks in 1998 introduced six of its coffees in whole bean and ground form for grocery retail sale in 3,500 stores in Chicago and on the West Coast. The coffees, distributed through a licensing agreement with Kraft Foods, are packaged in 12-ounce and 2.5-ounce "sample" bags. They represent 16 stockkeeping units; the MSRP for the 12-ounce bag is $7.49, a price much more in line with 32-ounce sizes of national brand coffees, he said.

Starbucks expects to expand its coffee offerings into Wisconsin grocery stores in April, followed by a second expansion onto grocery shelves in unspecified parts of the Northeast by the end of 1999.

"Our company and brand, we feel, has transcended the three generations -- mature, baby boomer and generation X," he said.