Starbucks adds value by taking on wireless

February 3, 2003

BY MICHAEL KRAUSS

Starbucks' customers really are different. Here's an example: I was waiting in line for a grande decaf skim latte at Starbucks in New York's Union Square.

"Just wanted to tell you the wireless network isn't working," said a twenty-something customer to the clerk, being genuinely helpful, without a hint of East Coast hostility in his voice. "I just want you to know in case anyone else has problems." Only at Starbucks, I thought, with its brand and culture, would the customers be so collaborative. My guess is the network wasn't down for long -- at least not if Anne Saunders had anything to say about it.

"We get great feedback from customers," says Saunders, vice president of Starbucks Interactive in Seattle and the force behind Starbucks' promising wireless initiative. "I get unsolicited e-mail daily talking about how people are using the network. We even get articles about people who don't have offices and have started new businesses at their local Starbucks."

One hot spot
Launched in August 2002, Starbucks' "T-Mobile HotSpot service" offers wireless Internet connectivity in about 2,000 locations in the United States and Europe. The ambitious move is yet another example of Starbucks' commitment to innovation and risk-taking. Though the effort's success is still uncertain, Starbucks' approach is a guide to marketers in general.

While Oak Brook, Ill.-based McDonald's and Miami-based Burger King engage in a dollar-menu death-spiral price war, Starbucks has customers paying nearly $ 5 for a cup of coffee and $ 49.99 per month for a wireless access connection. My guess is Ray Kroc, McDonald's Corp.'s founder, would admire Starbucks CEO Howard Schultz's chutzpah. This is the right way to build a customer franchise.

The Starbucks initiative is instructive because it's a coffee company using technology to enhance its core offering --- the Starbucks experience. Its marketers see the promise of technology, but are pragmatic and realistic in their expectations about what it can do. And they've adapted the technology to their environment, rather than the other way around.

"We're not creating an Internet coffee-house," Saunders says. "We've enabled a new service for our customers."

A third place
Saunders is trying to capitalize on Starbucks becoming the "other place" in people's lives where they want to be connected to the Internet. "It's not the office and it's not home," she says. According to Saunders, it's working; Starbucks customers who use the connection spend more time in the store and buy more product than others.

Reluctant to give many metrics, Saunders volunteered, "The average customer using the network is in the store 45 minutes, which exceeds the general average, and 90% of that is outside our peak day part. All of that says there is 'plus' business for us."

Then there's the revenue opportunity from the wireless network subscriptions with T-Mobile, although Saunders declines to go into details.

Starbucks' approach adds value to its core business. It helps differentiate the company. It rewards the customer and meets a need. It enhances the experience. And over time, it has the potential to become a separate, profitable, incremental revenue stream. And isn't that what all of us are seeking in the recession?

How and who?
Still, there were some obstacles and difficult decisions --- what technology to use and which partners to select, to name just two.

"A row of monitors and desktop computers isn't conducive to the kind of environment we want to have at Starbucks," Saunders says. So Starbucks is betting heavily on WiFi -- the wireless fidelity standard that acts as a high-frequency wireless local access network -- to build out its networking capability. That is, instead of the Internet coffeehouse, Starbucks has become an enabler, or a platform, as tech marketers like to say. You can connect your laptop or wireless Internet device at their store. If your PC isn't enabled for wireless, they'll point you to a Hewlett-Packard Internet site where you can get the necessary hardware and software (including some free downloads). And they'll help you get connected through a monthly wireless Internet access account from T-Mobile costing $ 29.99 for a local account and $ 49.99 for national access in the United States.

Picking your corporate partners and negotiating a deal is always a risk and a challenge for a major technology initiative. Starbucks picked Bellevue, Wash.-based T-Mobile, the wireless subsidiary of Bonn, Germany-based Deutsche Telekom AG, because of its focus on wireless and because of its reputation for quality customer service and support. They picked Hewlett-Packard to provide hardware and software both because HP had the right technology and because of the relationship and shared vision of Palo Alto, Calif.-based HP CEO Carly Fiorini and Starbucks' CEO Schultz.

Hey, partner
"We tend to be judicious about our partnerships," Saunders says. "It's rare that you'll see someone else's brand in one of our stores. As a coffee company, we wanted to host the service and provide the hospitality, but we clearly were not the network provider and our expertise is not in configuring your laptop."

Adds Saunders, "We needed companies that align with us in terms of focus on the customer and quality of service."

Reflecting on her launch of the wireless network, Saunders told me there's a mantra around Starbucks that comes straight from Howard Schultz: "Continue to grow and expand." That's not always easy, but, as Saunders says, "Management is supportive of trying new things."

Saunders' advice for marketers is fairly straightforward. "You have to be a little bit of a pioneer," she says. "You have to have a lot of determination and perseverance. You have to have a stomach for experimentation. You have to be in an organization that's supportive."

The art of downplaying
But Saunders is doing something especially wise. She's managing expectations down --- not up, the way many marketers did in the dot-com boom.

"New-product marketers get into situations in which they get overly optimistic. In a program like this, you have to have realistic expectations about the 20% of our customer base that is never going to use this service. I have to set realistic expectations about how long it is going to take to get a new technology adopted," Saunders says. Listening to Saunders, I understand why that fellow in Manhattan was so nice about the network being down. Starbucks has created a culture that's positive and embracing -- a culture that attracts and retains smart marketers like Anne Saunders.

Oh, by the way, that guy in New York . . . he bought a big coffee and an expensive pastry after he told the counter clerk about the network problem.

Michael Krauss is a partner with DiamondCluster International in Chicago. He can be reached at michael.krauss@diamondcluster.com or news@ama.org.