THE RAGING BULL'S CYBERSTOCK INVESTOR REPORT
"Your Weekly Internet Stock Newsletter"
June 25, 1999
"Now Read By Over 140,000 CyberInvestors Weekly"
Editor: Matthew W. Ragas
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***RAGAS SPEAKS FOR THE WEEK***
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Java and the Web
Something Net-related is brewing at Starbucks Coffee (SBUX) headquarters in
Seattle, and it's not just another steaming hot cup of java.
Recall that back in April Starbucks founder and Chairman Howard Schultz hinted
that his firm was about to launch "a new and significant e-commerce business"
that would be the "undisputed leader" in "a multi-billion dollar category."
When the man who grew Starbucks from a single coffee shop into a $5 billion
retailing goliath speaks, people listen. The news sent Internet analysts and
reporters scrambling for additional information. Schultz's "Internet tease"
was even good enough to propel Starbucks' stock price to a 52-week high of 41
in May.
Unfortunately, Schultz has kept quiet about his plans for Starbucks on the Net
beyond those few tasty tidbits of information. He has even declined to do
interviews related to Internet strategy until the company officially announces
its plans at the end of this month. The usually talkative coffee mogul is, for
the moment, silent. Maybe Schultz should have been a drama major instead of a
retailing magnate.
Is Schultz Web-savvy?
You're probably asking yourself what a coffee mogul really knows about the Net.
A lot. So far, Schultz has been incredibly savvy with his personal Web
investments. He received his first direct exposure to the Net when he was
invited by Bob Kagle, a venture capitalist at Benchmark Capital, to join the
board of eBay (EBAY), then a fledgling auction site. After initial skepticism,
Schultz agreed to join; and through Maveron, a venture capital firm he formed,
he invested $2.5 million for roughly 800,000 shares of eBay stock last year.
Schultz's stake in eBay now sits at north of $100 million. Not a bad return
for an Internet investment rookie.
In November Schultz decided to again dip his feet into the Internet venture
capital arena. This time he invested in drugstore.com, an online pharmacy
based in Seattle that is backed by big-name investors like venture capital firm
Kleiner Perkins and e-commerce titan Amazon.com (AMZN). Maveron and Schultz
now own more than 1 million shares of drugstore.com, and Schultz sits on
drugstore.com's board. Drugstore.com filed last month for an initial public
offering and announced minority investments from national drugstore chain Rite
Aid (RAD) and vitamin retailer General Nutrition (GNCC) earlier this week.
While the jury is still out on the long-term success of drugstore.com, Schultz
looks like he has another winner on his hands.
Bringing the off-line community online
Schultz appears to have shifted his Internet investment focus directly towards
the Starbucks mother ship. He seems to want Starbucks to act as a
quasi-Internet venture firm, taking stakes in various e-tailers and community
sites in exchange for promotion throughout the company's global network of more
than 2,000 stores, as well as its nascent Starbucks.com Web site. Think about
this for a second. Before there were online communities like GeoCities and
Tripod there was a neighborhood Starbucks around the corner. Starbucks was an
"off-line community" before the term "online community" was ever invented. Who
better to help merge the physical world with the online world?
In many cases, people don‚t just buy a cup of Joe at Starbucks, they buy into a
social experience where they can interact and meet with friends of similar
interests. I believe Starbucks has the potential to serve as a valuable
conduit that helps shepherd online brands to the off-line world and vice versa.
Starbucks' thousands of stores could become the gateway and subsequent meeting
destination for extending the relationships formed by members of online
communities to the off-line realm. That's powerful stuff. Starbucks'
customers are a very Web-savvy bunch. The average Starbucks customer is well
educated, a frequent Internet user and makes $75,000 a year. That's just the
kind of demographic e-tailers can't wait to get their hands on.
However, any Internet plans Schultz announces will surely be met with a strong
dose of skepticism. Critics will wonder what business a coffee retailer has
parading around in cyberspace attempting to transform itself into an Internet
company. Some shareholders and analysts will undoubtedly clamor that Starbucks
is simply trying to divert attention away from its weakening core retail coffee
business. While these are interesting and provocative statements, they are all
wrong. Starbucks belongs on the Net.
Merging off-line and online assets
The last few months have marked the early signs of a consolidation and greater
partnering between established off-line brands and Internet companies. I'm not
talking about Barnes & Noble (BKS) and the formation of its separate online
unit, barnesandnoble.com (BNBN). (Note to B&N Chief Executive Leonard Riggio:
That's the wrong way for a traditional retailer to attack the Net and win.)
Recently, bricks-and-mortar pet supplies retailer Petsmart (PETM) announced
plans to form a separate online venture with well known Internet incubator
idealab. In a similar deal, Toys R Us (TOY) announced plans a few months ago
to form an online joint venture with Benchmark Capital. Kagle (who was also a
founding partner at Benchmark) and Schultz both understand the benefits to
partnering online and off-line assets. I expect a variety of Benchmark's
portfolio companies to be involved in Starbucks' future Net plans. Mark my
words: Howard Schultz will be remembered not only as a brand-building and
marketing whiz, but as a pioneer in merging the strengths of off-line brands
with the benefits of their online cousins.
The most recent example of a strategic marriage between online and off-line
assets came earlier this week when Rite Aid and GNC announced their investment
in drugstore.com. The online pharmacy will now become the exclusive retailer
of GNC products on the Web. More importantly, drugstore.com customers will be
able to pick up their prescriptions at Rite Aid's thousands of
bricks-and-mortar locations. Drugstore.com will also be able to provide
prescriptions to customers with insurance reimbursement plans through its
alliance with Rite Aid. As you can see, there are times when even the most
devout pure-play Web-based e-tailer needs to partner with its seemingly stodgy
off-line brethren to extend and appease its existing customer base.
These deals prove that partnerships between off-line and online firms at times
do make sense and can work. Bricks-and-mortar firms like Toys R Us, Rite Aid
and Petsmart have evidently come to the conclusion that it makes the most sense
to leave their Internet operations to Web-based businesses. Web guys know the
Web. Bricks-and-mortar guys know off-line retail. There's a wide divide in
required competencies and skill sets between the two worlds.
Firms like Benchmark, drugstore.com and idealab understand that the trusted
brand name association, as well as additional distribution channels that
old-line bricks-and-mortar firms can provide, are invaluable. This should all
be music to the ears of Schultz, who is setting up his own virtual tollbooth at
Starbucks.com to capitalize on this convergence.
Recent moves
So far, Starbucks' e-tailing forays have been cautious at best. Customers can
only purchase different blends of coffee via the Starbucks.com site. Last
week, however, Starbucks quietly launched Joe, a new quarterly literary
magazine that is available in its 1,800 stores. Joe is published under a joint
agreement between Starbucks and Time Custom Publishing, a unit of media titan
Time Warner (TWX). Starbucks also launched joemag.com, a site that features a
variety of free content that is available in the print version of Joe magazine.
The Starbucks.com site also now features a link to joemag.com.
It would appear that Starbucks is beefing up its online content offerings in an
attempt to build "stickiness" and return traffic to its site for when it rolls
out a number of e-commerce partnerships on the site in the next few weeks.
Rest assured that Schultz's quest for the convergence of print, Internet and
Starbucks' retail stores has only begun.
In another move aimed at stickiness, Starbucks led a $20 million mezzanine
investment in online community site Talk City in early May. It appears the new
Starbucks.com site will feature a variety of co-branded chat rooms, message
boards and other community tools from Talk City, which should make
Starbucks.com more attractive to potential e-commerce partners. I will be
interested to see how Talk City and Starbucks experiment with intertwining
Starbucks' 10 million weekly customers with Talk City's online users and vice
versa.
More Web plans
Hints of grandiose Web plans continue to trickle out of Seattle. Last week,
Starbucks announced a strategic alliance with Oxygen Media, the new women's
media company founded by Walt Disney cable television veteran Geraldine
Laybourne. Details of the partnership remain sketchy, but it will likely
entail mutual promotion on both companies' Web sites, as well as sharing of
online content. Starbucks will also provide in-store promotion for Oxygen at
all of its retail locations. Because Schultz was able to get Laybourne on
board as a new partner in his Starbucks Net ventures, I have to believe he has
lined up a number of other powerful Net partners as well.
It is interesting to note that Oxygen Media also received a $100 million
investment from Vulcan Ventures, the venture arm of (MSFT) co-founder Paul
Allen, who himself has made a $40 million minority investment in drugstore.com.
Maybe not so mysteriously, Allen and Schultz are both based in the Seattle
area. Could their paths cross again in a direct relationship between
Starbucks.com and some of Allen's portfolio companies or Vulcan Ventures? It
wouldn't really surprise me.
If all goes according to schedule, Schultz should offer a much larger view of
Starbucks' Web plans to the public next week. Until then, I'm sure he is
advising existing shareholders to continue sipping their lattes while they
brush up on their mouse-clicking skills.
After all, there's a lot of e-commerce to be mined from Starbucks‚ 10 million
loyal customers each week. How about this online greeting from marketing
meister Howard Schultz: Welcome to Starbucks.com. Care for a refill on your
Starbucks.com shopping cart today? |
