Starbucks' Net strategy called weak brew

The coffee-retailing juggernaut's much-anticipated Internet strategy is leaving some Wall Street analysts feeling like they drank decaf.

Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
Kim Girard
3 min read
Starbucks' much-anticipated Internet strategy is leaving some Wall Street analysts feeling like they drank decaf.

After months of hype swirling around Starbucks' brand extension to the Net, some industry observers now are wondering whether the company is straying too far from its coffee-shop roots and investing into a dark hole in cyberspace.

Those fears--as well as an expected earnings shortfall announced yesterday--drove Starbucks' stock down 11.625 points today to 25.9375 a share.

The Seattle-based retailer's plan entails targeting the so-called $100 billion lifestyle product market, expanding its Web site by Christmas to include links to vendors that sell gourmet food, furniture, and home furnishings. The company said it plans to create a subsidiary named Starbucks X to operate the portal, which will launch later this year.

Andrew Barash, analyst at BancBoston Robertson Stephens, questioned whether the company is drifting from its core focus: selling specialty coffee at its land-based stores. Starbucks is expected to spend $4 million on the Web initiative this year and $10 million next year.

"I don't understand [its Internet strategy]," Barash said. "I don't think it's fully together enough to understand what it's going to mean or what it's going to do. Until then, I will remain fairly skeptical."

Barash added that he believes the market has become leery of successful offline companies pushing to extend their brands online.

One of few strong voices of enthusiasm, Merrill Lynch analyst Scott Waltman, in a research note, said Starbucks' Internet strategy is "even better than what we imagined."

Other analysts noted that an expected online partnership within the next 30 days could help Starbucks with a plan to spin off its dot-com business. To date, the company has built a corporate Web site, which sells its coffee. An online magazine, Joemag, debuted last month.

However, Zona Research analyst Clay Ryder said the only reason people are paying attention to Starbucks' latest plan is because the company's name is attached to it.

"This doesn't strike me as all that revolutionary or grand in scope," Ryder said.

Starbucks has been hyping its Internet strategy since April, when chief executive Howard Schultz told investors that it would be expanding online into a "multibillion-dollar" category.

The company declined to name its partners on the site, saying only that it would make an announcement about a "major strategic partnership" later this summer.

Forrester Research analyst David Cooperstein questioned whether the Starbucks' brand would be enough to draw the company's typically affluent, Web-educated customers to the site.

"I don't think brand is a driver of community," Cooperstein said. "I don't associate with people just because they go to Starbucks."

Cooperstein said it would make more sense for the company to deploy Internet kiosks in its stores and direct people to other products through the kiosks.

"Leveraging its brick-and-mortar stores makes a lot more sense than expanding the brand itself on the assumption that people live the Starbucks' lifestyle," he said.

Still, not all analysts were skeptical.

Hambricht & Quist analyst Bonnie Kramer Tonneson said Starbucks' Web success will depend on competent partners and a well-managed site. Starbucks will also need to carefully balance building an online brand while maintaining a strong product line.

However, Starbucks core business is sound and the firm has a great opportunity to do well on the Net, she said.

Kian Ghazi, a senior analyst at New York-based Midtown Research, agreed. "They're building a brand that's one of the strongest out there in America," he said. "It could become the equivalent of a Coke."