0 Starbucks' New Wavelength [Special] May 11, 2004

David and Tom Gardner recently interviewedStarbucks(Nasdaq: SBUX)Chairman Howard Schultz onThe Motley Fool Radio Showon NPR. This is the second of five parts.

TMF: Howard, you are experimenting with allowing customers to burn their own music CDs in-store. How did you arrive at this idea and what might it say about where Starbucks is going?

Schultz: We are very, very excited about the evolution of the Starbucks experience and specifically what has happened over the last couple of years with music. With [Hewlett-Packard(NYSE: HPQ)] as our partner, we are burning CDs in our new format store in Santa Monica.  The expectations we had were fairly modest going in. We just didn't know and have blown the doors off. It has only been open four weeks, but we have plans now to integrate CD burning in many, many Starbucks stores in the near future. 

What I think in terms of your question, we want to leverage and enhance the experience our customers are having in our stores. We want to surprise and delight them, but at the same time, we do not want to do anything that would dilute the integrity of the coffee experience. What we have learned over the years is our customers that come to Starbucks see it in many ways as an oasis to get away from all the noise, and we have to preserve that experience. 

TMF: And you have used the phrase "experience" a lot now. The evolution of the Starbucks experience. Howard, when most people think Starbucks, they do still think coffee and I know that makes you happy.  But you also offer food. What portion of your overall business these days is non-coffee sales of food?

Schultz: Less than 20% of the business is food, which has grown over the years. We want to make sure the equity of the brand experience is about coffee and the romance of coffee, the seduction of coffee, and we want to do everything that we can to create complementary experiences in products and experiences that enhance the coffee.

TMF: Let's talk about the competition a bit. In January, we asked Starbucks CEO Orin Smith to rank these competitive threats. They are local coffee houses, Dunkin' Donuts, Krispy Kreme(NYSE: KKD), and McDonald's(NYSE: MCD). Those four local coffee houses, Dunkin' Donuts, Krispy Kreme, and McDonald's.  I'd love it if you would rank those, and afterwards, I will tell you how your answers match up with Orin's. 

Schultz: OK, I haven't seen the interview with Orin, but I would say the local stores, they don't pose the most significant threat, but I think anytime you have a local competitor who has a relationship that is deeply seated in the community, I think that is an opportunity for us that is more competitive and a tougher situation than a national company. When I look at McDonald's and Krispy Kreme and Dunkin Donuts, those three companies do an excellent job, but they are in a different business than we are. They are in the transaction business, fast-food business. That is the antithesis of Starbucks. So, I would see the local company as the one that poses a more competitive pressure situation than those national chains.

TMF: Fair enough. Orin also agreed on local. I am wondering if you had to identify one of those three, Dunkin' Donuts, Krispy Kreme or McDonald's, as all being a transaction company, but one that is transacting in a fair amount of coffee, which of the three should I, as a Starbucks shareholder, regard as a potential threat?

Schultz: I think it varies on a national scale. Dunkin' Donuts is a Northeast-based company. They do a fantastic job, specifically in New England. In New England, they are a very tough competitor. Krispy Kreme and McDonald's, they are really not in our business, per se; they are selling coffee, but I don't view them the same way.

Tomorrow: It's not all about coffee anymore at Starbucks. How is the company coaxing non-coffee drinkers into its stores.

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