Hot on the heels of Starbucks warning on Wednesday that they expect their earnings to drop to 15 cents a share (down from 19 cents a year ago) in the fiscal second quarter, Starbucks announced Thursday that they were ceding all management responsibilities for its music label, Hear Music, to its partner, Concord Music Group. Starbucks, which cut about 600 positions in February, is clearly looking for more ways to reduce costs.
“As part of our ongoing transformation, we are committed to examining all aspects of our business that are not directly related to our core,” said Howard Schultz, chairman, president and ceo in a press release here. “We have had numerous successes in music and books including eight GRAMMY® Awards and three No.1 books on the New York Times bestseller list. However, now is the appropriate time to restructure our Entertainment business to better align our efforts with our overall business strategies.”
Hear Music, founded in 1990, was purchased by the Starbucks in 1999. In 2007, the company partnered with Concord to release Paul McCartney’s Memory Almost Full, record, his first non-major label recording. Hear Music has also released music by Dave Matthews Band, Joni Mitchell, Paul McCartney, James Taylor, Simon & Garfunkel, and Wilco.
I’m a fan of alternate retail and distribution outlets, and completely targeted niche-marketing campaigns. But I tend to agree with Mr. Schultz in that perhaps managing Hear Music has interfered with Starbucks core market, and the resulting changes are designed to refocus what they’re good at: selling high priced coffee. The fact is that Starbucks/Hear have done some great things for developing artists (including being an instrumental partner in breaking Antigone Rising, whose members are current Berkleemusic students!), but the sales from Starbucks were marginal at best. The New York Times reported last month that on average each Starbucks location sells only two CDs per day!
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As someone who has actually handled the Starbucks/Hear Music account for their custom compilations at one time I think you’re slightly off the mark here.
Even before Starbucks purchased Hear Music they had their own music team on staff, and this team was absorbed into Hear Music at that time. And while I’ve seen some reports that minimize the unit’s impact on Starbucks’ bottom line, just their custom CD business was a multi-million dollar a year revenue source… and that was before Ray Charles, and before the establishment of Starbucks Entertainment, and before they started their own label signing artist like McCartney and James Taylor and Joni Mitchell. An average compilation project ran between 35,000-50,000 units, and there were some CDs which received re-orders, but most of the time Starbucks just developed new packages for sale.
And all the while Starbucks was expanding their retail footprint, growing to over 10,000 locations, and their music operatiosn grew in turn.
The mistake Starbucks made was in thinking “now that we’re growing so big and reaching new consumers, then we must have to broaden out our artistic aesthetic so we can be ‘mainstream.’ Let’s stock more commercial releases! Let’s sign artists!”
Starbucks has been instrumental in showing how music can play an important role in building a brand. If you look at “non-traditional accounts” reporting to Nielsen SoundScan I believe Starbucks and Limited Too (and possibly JCPenney) are the only ones doing so.
For me, the big question has always been “why haven’t other brands, who might otherwise see a musical tie-in as a relevant marketing program, invested in music from a merchandising standpoint? Is music - at least physical product - such an unattractive category for a specialty retailer to wade into?
That the major labels haven’t solved that conundrum says to me they have given up fighting the CD fight and are just staving off their inevitable collapse once the digital and mobile picture shows it can’t sustain these companies as an ongoing business proposition. If not, then where is the next Starbucks? Where is the next chain with a big (or even a medium) footprint where the industry can develop a positive PR story about? Because it’s not as if the biz couldn’t use some good news to report.
Hi Peter,
Thanks for the post! Well said, and excellent points all around. I don’t disagree with anything you’ve said here, other than A) I have not read anything that disputes the 2 CD sales per store figure that the Times quoted, which is not impressive no matter how you look at it, and B) I do think that when overall earnings are down, it makes sense to focus on ones core market. Starbucks deal with Apple is one of the most forward thinking retail/distribution strategies out there, but I’m not sure their physical music sales are the reason they have 10,000 locations. One can certainly argue that music is important to their overall brand, but I can see why Howard Schultz might want to pull resources out of the physical music retail business if the revenue is not there, especially in lean times.
Don’t get me wrong - I think corporate branding could play a huge part in the future of the music business. I’m waiting to see how the Jermaine Dupri-led Tag Records initiative works out:
http://www.thedailyswarm.com/headlines/tag-records-proctor-gamble-jermaine-dupri/
Thanks again for the excellent comment.
Hey Mike,
Great read! I noticed starbucks stock has been on a down hill trend for the last 2 years. We may have a good entry point soon. Its just off its 52 week low. SBUX
Hi John,
Great to hear from you!
You could be right…
Best,
Mike
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