Starbucks Should Switch To Decaffeinated Internet Strategy

Starbucks’ new Internet strategy does little more than sugarcoat its weak earnings, so says a report released last week by Cambridge, Massachusetts-based Forrester Research, Inc. Furthermore, the report is highly critical of the Seattle, Washington specialty coffee retailer’s “nebulous plan” to launch a lifestyle Internet portal.

“Starbucks will dilute its strong suit — selling coffee — with unrelated categories like gourmet foods, kitchen products and home furnishings,” the report says.

The scathing critique is in response to Starbucks recently announced strategy to create a strong presence on the Internet by pumping millions into Web sites, so it can pitch its 10 million coffee-drinking customers a melange of other products.

“Our research indicates that the revenue opportunities represented by these categories, which is estimated at more than $100 billion, is enormously attractive given the natural synergies with our core demographics,” said Howard Schultz, Starbucks chief executive, last month.

When you add to this equation the fact Schultz is on the board of eBay and drugstore.com, a privately held Web-based pharmacy, you begin to understand why some analysts fear Starbucks could lose its focus by becoming too fixated on the Internet.

Toned-Down Internet Expansion

Recently, Starbucks opened up its new prototype Internet cafe called Circadia. Located in San Francisco, Circadia provides 18 Internet connections, laptop rentals, a computer kiosk and a 10-person conference room equipped with a large-screen computer for presentations. It also pumped about $8 million (US$) into Talk City Inc., a company that created and runs a popular chat site on the Internet.

After its Internet spending spree pulled down its third-quarter earnings, the company pledged to its jittery stockholders that it would grow its online business conservatively and not take its eye off coffee — its main staple.

Actions Speak Louder

Nonetheless, some analysts say that Starbucks may be talking softer about its Internet expansion, but its actions are screaming a different message. The Java-seller recently “loaned” $20 million to Austin, Texas-based Living.com, an online seller of home furnishings slated to open soon. This characterizes the main flaw in Starbucks’ game plan, according to Forrester.

It’s report contends that bleary-eyed 40-year-old execs, Web developers and emergency room doctors have little in common except that they drink Starbucks coffee, use the Net and earn above-average incomes.

“A single portal strategy defined by equating income and coffee with lifestyle will fall flat,” the report adds.

Maybe the best advice that could be given to Starbucks about its Internet strategy would be for it to keep drinking its caffeinated coffee when it comes to the real-world, but to switch to decaffeinated when it comes to cyberspace.

What do you think? Let’s talk about it.