News Article

The Latte Effect

Starbucks gives the music business a jolt -- The corporate coffee giant's CD sales are having a big effect on the industry

The next time that jazz singer Madeleine Peyroux goes to Starbucks, she'd better leave a generous tip. That's because one week after Starbucks began selling her cabaret-pop album in all of its 4,400 U.S. stores, Peyroux's sales grew an astonishing 241 percent and her CD leaped to No. 81 on Billboard's album chart.

Coming off its Hear Music label's stunning success with Ray Charles' Grammy-winning Genius Loves Company (the coffee chain sold nearly 25 percent of the CD's 2.9 million copies), Starbucks is intent on being to music what Oprah became to book publishing: a mass-appeal tastemaker. By handpicking artists to play in stores and sell next to the chocolate biscotti, the chain is carving a niche that could help the music biz out of a post-Napster malaise. And CDs are just the start — the empire is expanding with a Starbucks-branded XM satellite radio channel, in-store digital music media bars (now in 45 stores, with a national rollout through 2006) for buyers to burn mixes from a 150,000-song database, and Hear Music stores. Growing its boutique appeal into a venti-size, multimedia force is a prospect that has record labels pumped and some CD outlets peeved.

Who could blame them? It'd be tough to find a retailer with more loyal customers than Starbucks' 33 million a week worldwide. ''[Starbucks has] a really strong voice right now and they resonate really well with their customers,'' says EMI exec Ted Cohen. EMI should know: Its Capitol Records label scored with a Tina Turner best-of collection in February, giving the singer simply the best album chart ranking (No. 2) of her career. ''They're focusing on two or three artists at a time. As long as they pick and choose, they're going to maintain their customers' trust.'' A trust born of near-daily visits: Starbucks' most loyal cup-o'-joe schmoes get their fixes 216 times a year.

With its customers captive and caffeinated, Starbucks is ready to introduce stage 2: exclusive content. In June, it'll release an acoustic version of Alanis Morissette's Jagged Little Pill six weeks before any other outlet — a move that's irking some music retailers. ''The exclusive is extremely annoying,'' gripes Mike Dreese, co-owner of Newbury Comics, a 26-store New England retailer. In retaliation, Newbury Comics will penalize Morissette's Maverick label by tripling its promotion fee over the next six months.

Not all retailers are so incensed, but they're watching Starbucks' every move. Traditional music chains have seen massive declines in the past few years — their market share is down 8 percent since 2002, according to researchers the NPD Group — as goliaths like Wal-Mart and Target have muscled in with deep discounts. ''The challenge is, who is the Starbucks customer going to be?'' says the NPD's Russ Crupnick. ''And where might [Starbucks] take some volume away from someone else?''

So far, that customer has seemed most interested in baby-boomer faves like Ray Charles, Sheryl Crow, and Tina Turner (the chain will sell Santana's next CD in June). ''If you look at their demos, it's a little older,'' says RCA Music Group exec Tom Corson. ''It's a different venue to reach that hard-to-get crowd.'' But Starbucks is also brewin' up partnerships with new artists, like its exclusive release of female rockers Antigone Rising's live acoustic debut CD (due May 11). Says guitarist Kristen Henderson: ''As a new band, it's so hard to get anyone to buy your record.... I really do believe that this will help retailers when our studio album comes out later this year.''

Like a rookie band, Starbucks has high hopes for its musical future. ''We've been a niche player,'' says Ken Lombard, Starbucks Entertainment prez. ''And if we're going to build it into a 'destination,' we need to carry Beck and others.'' But last month's snafu — some stores sold Beck's Guero a week ahead of its release date — demonstrated that the coffee emporium is still learning to juggle mochas and music. Despite Starbucks' influential-brand status, observers caution the franchise about expanding too broad, too big, or too fast. Even Lombard agrees, ''We don't want our customers walking in and feeling like we've converted their coffee shop into a music store.'' Because if that consumer trust erodes, there'll be nothing left but a cup of bitter brew.

Originally posted Apr 18, 2005 Published in issue #816 Apr 22, 2005 Order article reprints