STARBUCKS READIES SUPERMARKET INVASION

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Starbucks Coffee Co., pledging to take on Procter & Gamble Co. and Kraft Foods on their home turf, this summer begins testing sales of branded specialty coffees in supermarkets, with plans to roll the line nationwide next year.

Starbucks expects to surpass P&G's category-leading Folgers in sales. Indeed, Starbucks-which predicts it will have $1 billion in coffee revenue this fiscal year-already claims to be the leading brand, thanks to its retail outlets and alliances with United Airlines, Nordstrom and other partners.

But the new thrust is intended to tap the store shelves from which 80% of the nation's coffee is purchased, a venue now dominated by Folgers and Kraft's Maxwell House.

"We will dominate everyplace coffee is sold, and that includes supermarkets," Starbucks President Howard Schultz said last week at a Hambrecht & Quist investors conference in Napa, Calif.

GOING NATIONAL IN '98

The new line will be tested in an undisclosed U.S. city this summer and will go national starting next year.

Starbucks has designed a line of specialty coffees just for supermarkets. They will be sold in test in whole-bean and ground versions in specially designed displays. The packages are in shades of colors such as pink and purple to differentiate the beans from those sold in Starbucks stores.

The new supermarket products will include flavored coffees intended to draw consumers accustomed to a traditional American brew. They will be priced at less than $9 per pound, the same price point as the coffee sold through Starbucks stores.

Starbucks is entering a market that annually generates nearly $3 billion in sales via supermarkets,Starbucks' grocery plans drugstores, and mass merchandisers, according to Information Resources Inc. The largest piece is the $2 billion ground coffee segment, with the flagship Folgers brand leading with a 29.4% share. The flagship Maxwell House brand is second with 21.1%.

17-WEEK SHELF LIFE

Starbucks last year conducted a supermarket test in Oregon, which found that competing coffee brands were on the shelves for as long as nine months. The Starbucks product, packaged in a vacuum-sealed bag, will have a 17-week shelf life, producing a fresher cup of coffee, Mr. Schultz said.

He said the test indicated Starbucks' presence in supermarkets caused little or no cannibalization of sales at area Starbucks stores.

Starbucks already has a branded presence in supermarkets through coffee ice cream marketed in partnership with Dreyer's Grand Ice Cream, and a bottled Frappuccino drink marketed through a joint venture with PepsiCo.

Mr. Schultz said the Frappuccino drink alone should develop into a $1 billion business, in part fueled by the distribution of 3 million samples from May through July.

Starbucks also has marketed a blend called Navigator at Meijer supermarkets in the Midwest.

SUPERMARKET `BOUNCE'

Mr. Schultz said supermarket sales offer a unique marketing opportunity for the brand because Starbucks will be able to "bounce customers" between supermarkets and its own retail stores by, for example, rewarding store customers with coupons for supermarket products.

He would not disclose ad plans for the supermarket coffee but said the additional revenue will give Starbucks the opportunity to expand its presence in traditional mass media.

Starbucks last month launched its first major-market TV campaign, an estimated $8 million effort from Goodby, Silverstein & Partners, San Francisco, tagged "Starbucks, purveyors of coffee, tea and sanity." Starbucks spent only $6.2 million on advertising last year, according to Competitive Media Reporting.

Changes are also ahead for Starbucks' own stores. Mr. Schultz said the company will begin redesigning its stores, moving some to a more traditional coffee shop look.

In addition, Starbucks plans to start opening small units in malls, office buildings and other heavily trafficked locations.

Under questioning from analysts, Mr. Schultz acknowledged the retailer has been struggling with the food selection offered at its coffee shops. Baked goods are often 17 hours old before they get to the store, and Starbucks doesn't cook or prepare foods in its stores.

The need for a better food selection and stronger sales during certain dayparts "clearly is the Achilles' heel of the company," he said

To begin to address that, Starbucks this summer will test a "new, very exciting menu" at an unspecified location in the Northwest, he said. Starbucks also has aggressive expansion plans in the Pacific Rim, where it hopes to open 200 stores by 2000.

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