Starbucks Warms Up to Idea of Advertising

Critics Worry Chain's First National TV Push Will Dilute the Brand

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CHICAGO ( -- While you had turkey for Thanksgiving, Starbucks was eating crow.

In a huge turnabout, the legendary brand that boasted it didn't need to advertise has launched its first national TV campaign. Starbucks says it's necessary for long-term growth, but some observers believe the campaign is exactly what it doesn't need to assure its future.

The 'Pass the Cheer' holiday commercial features a man who hands a cup of coffee to a reindeer as they pass each other on a ski lift.

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"There's risk in Starbucks going mainstream in that it could dilute the differentiation of the brand -- and that's one of the things I worry about for these guys longer term," said analyst Larry Miller of RBC Capital Markets, adding that it makes him "nervous" that Starbucks has begun to advertise. "It says something about the maturation of the brand."

Diminishing returns
And what a brand it is. The ubiquitous coffee chain has more than tripled its number of U.S. locations in the past two years alone, with 10,000 -- up from 3,000. In some cities, there are three Starbucks within as many blocks, so growing by opening more is a lot tougher than it once was. In its last quarterly earnings, Starbucks reported its first decline in customer traffic.

The chain's plan is to use mass media to coax more low-fat lattes out of the faithful who already frequent those stores and capture those who don't. It's also expanding to places such as Lexington, Ky., hoping to conquer smaller markets in its quest for growth.

Starbucks CEO Jim Donald said the company is "reaching out to a broader audience" with the ad campaign, which includes TV, print, out-of-home and online marketing.

Big step
"[TV is] truly just one of many media we're using," said spokeswoman Tricia Moriarty. "This is by no means the primary driver, but it's one of the mix." Ms. Moriarty said the TV will include cable spots on networks such as CNN and the Food Network along with pricey prime-time spots, including several during ABC's "Grey's Anatomy" and CBS's "CSI: Miami. "

That's a big step up for a company William Blair analyst Sharon Zackfia said was "underspending" on marketing. Starbucks spent $37 million on advertising in 2006 and $24 million in the first six months of 2007, according to TNS Media Intelligence, which doesn't break out coffee advertising for McDonald's and Dunkin' Donuts, which have designs on Starbucks' customers.

Both companies have been more aggressive with their coffee in the past year. McDonald's has instituted free-coffee Mondays and will introduce premium coffee drinks in 2008. Dunkin' Donuts has signed a deal with Procter & Gamble to put its coffee on grocery-store shelves, where bagged Starbucks has been a growth machine in recent years.

Starbucks' first holiday commercial (all are animated) features a man who hands a cup of coffee to a reindeer as they pass each other on a ski lift. The tagline is "Pass the Cheer." In 2008, it's believed the campaign, from independent Wieden & Kennedy, Portland, Ore., will try to capture the Starbucks experience, positioning it as a salon where ideas about politics and celebrity culture are bandied about. The company did not comment on the spots by press time.

Average joe?
The risk, of course, is that Starbucks could morph into what it promised never to be: a mainstream marketer. That could alienate early adopters, who once were told they were too savvy to be seduced by advertising.
Starbucks goes for warm and fuzzy for the holidays.
Starbucks goes for warm and fuzzy for the holidays.

Then there's the contingent that believes Starbucks is its own worst enemy. Darren Tristano of Technomic said the chain will keep having trouble increasing store traffic as its locations continue to poach from each other. "It's not even the need to differentiate from the Caribou next door," he said. "You're attacking the same customer, so it becomes about convenience."

The best way to improve store numbers, according to Seth Godin, author of "Small is the New Big," is boosting sales of food, music and novelty items, but he said that's unlikely. "[Starbucks founder] Howard Schultz already did it once with the idea that expensive coffee could be an adult treat," he said. "It's unlikely that lightning will strike twice, but they have to try."

What the company really needs to sell, Mr. Godin added, is a realistic picture of its future growth to Wall Street.

Not 'Wal-Mart of coffee'
And price could be more of an issue in the future, with McDonald's growing its stake in the game. Some critics maintain Starbucks has launched its advertising just in time to cut against the marginal customers who could be swayed by lower-priced lattes.

Ms. Zackfia, however, scoffed at the suggestion. In test markets, McDonald's experimental coffees have not leached from Starbucks' business -- and Starbucks' entire positioning is based on paying more for quality, the analyst said. "They've never been the Wal-Mart of coffee."
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