Starbucks to up Noncoffee Merchandise for Holidays

Posted 10 July 2006 @ 12:50 pm EET     Print     Reprint     E-Mail     Comments

NEW YORK (Reuters) - Merchandise sales which Starbucks says have hovered at about 4 percent of total sales in recent years, down from a high of 8 percent in 1998 have been a tricky area for the company, but one on which it remains focused.

Even as company planners sip this summer's new concoctions, such as pomegranate and tangerine frappuccinos, they are already looking toward the winter holiday season for a jolt in sales from tchotchkes, ornaments and gifts.

"There's still an opportunity on their part to drive merchandise a little bit more with more unusual (and) original offerings," said McAdams Wright Regan analyst Dan Geiman. "If they do have some compelling offerings, it's an area they could do well in."

To get the job done, the coffee company has made Janet Parks its new vice president in charge of merchandise. Parks, who previously worked in a "global creative role" at Disney for 12 years, was hired by Starbucks about a year and a half ago, and was given permission to do more hiring.

About 90 percent of her team is new, Parks said, and the company has put merchandise on its beverage team's faster promotional calendar which introduces new products every six to eight weeks. The winter holiday season is key to Parks' master plan for the noncoffee pipeline.

The holiday line-up will feature a glittery snow globe on a gold-colored base, at least three kinds of Christmas ornaments, a reusable Advent calendar that turns into a miniature chest of drawers at the end of the season and a dessert plate reading "Cookies for Santa."

Also on offer: plush "Bearista Bears" wrapped up for winter a reference to the "baristas" behind Starbucks counters. Parks sees holiday merchandise as a way to "extend the cafe experience," she said, reaching past customers' kitchens and into their living rooms with gift offerings that have only a slight connection to coffee or none at all.

But Parks has been hired to fill a tall order, said William Blair & Co. analyst Sharon Zackfia, who said the main reason merchandise sales look small is the sheer volume of Starbucks' beverage sales. Zackfia, who does not own Starbucks shares, has an "outperform" rating on Starbucks shares, but said a merchandise sale at a Starbucks was no more than "an incremental add-on" against the main business of the store.

Between 2004 and 2005, Starbucks' total net revenue rose 20.3 percent, according to the company's November 2005 earnings press release. "They are running on all cylinders in other parts of their business so they can still do well (in merchandise) and not gain much as a percentage of sales," said Geiman. But the drive to sell more merchandise is a good idea if the company makes certain to maintain both its "aspirational" image and its core coffee business, Zackfia said. Starbucks coffee drinkers associate the brand with upward mobility, which is one of the keys to the company's success. "They're the world's most affordable luxury item," she added. The company has a strong track record of introducing merchandise in keeping with that image, Zackfia said. "They'd never want to introduce something that's going to alienate a coffee drinker," Zackfia said. "That's trading a high margin customer for a low margin customer that's probably not repeatable at that. Preserving that core beverage drinker is critical."