Starbuck

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SOAPBOX

Starbucks CEO upbeat on sales

Coffee retailer's IPO plans in Japan slowly brewing

By Bill Clifford, CBS.MarketWatch.com

Last update: 5:07 a.m. EDT Aug. 3, 2001

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TOKYO (CBS.MW) -- During a trip to Japan to celebrate Starbucks' fifth anniversary in its first and largest market outside the United States, Chief Executive Orin Smith spoke with CBS.MarketWatch.com about the U.S. economic slowdown, the coffee retailer's wireless ambitions and the challenges of globalization.

Here are excerpts from the interview:

In the U.S., Starbucks' same-store sales growth has slowed sharply in recent months from a 10 percent year-on-year growth clip in 2000. How much does that worry you?

You know, in fairness, that's not a pace that had been typical for the last five years. We had been mid-single digits -- roughly 6 or 7 percent per year -- and we just had an extraordinary year last year. And this year we're at roughly 6 percent still, year to date. But in recent months we've been at 3 percent. Now this reduction in the comp-store sales growth rate is coincident with the weakening of the U.S. economy. But I would add that 3 percent is a comp-store growth rate that most retailers and restaurant operators would love to have in good times. That's not a bad year-over-year growth. It's only relative to our extraordinary comp-store growth that we have had in our recent past. So I feel very good that in a weakening economy we continue to grow our same-store sales. It speaks to the power of the brand and the loyalty of our customer base. [Starbucks (SBUX:

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SBUX, , ) reported after the interview that July same-store sales rose 4 percent from a year earlier.]

Tully's Coffee Japan, an affiliate of your Seattle competitor, just pulled off a terrific initial public offering, with its stock price doubling on its Nasdaq Japan debut last week. What's happening with Starbucks Japan's IPO plans?

We don't have the sense of urgency that Tully's might have, for example, because they were looking to find funding to finance their growth. And that really isn't a constraint for us right now because both North America and Sazaby (Starbucks' joint-venture partner in Japan) are able to finance our growth here. Having said that, there are some advantages to being a public company here, and we're exploring all of those.

What are the advantages?

Chart of SBUX

Well, one of the things we've done is introduce stock options in Japan ( see the press release), as we did in North America. And employees are very, very enthusiastic about that. So we're looking at ways to eventually monetize those as they earn them. Another thing we found in the U.S. is that many of our good customers want to participate, so when we had our public offering, we had this overwhelming demand from our customers -- we were really unique among public companies for having such a large portion of the business owned by individuals. And I would expect if we did something like that here we'd also have that kind of participation. So I think in many ways it's a brand builder.

Have you seen that brand-building effect in Hong Kong under the Nasdaq's pilot project there?

It's hard to tell what the impact has been. Certainly it has given us more visibility.

Well, in Japan are you even close to talking IPO dates, pricing and so forth?

You know we haven't even decided whether we're going to do that here. We are deeply discussing it.

How about your wireless project in the U.S. -- are many of your stores now equipped, or is this still in the planning stages?

They're equipped. We have 500 equipped, but we haven't turned it on. ... This will be a different experience than just Internet access. I don't want to go into a lot of detail, but what will happen when a consumer comes into a store and has a wireless device is a screen will come up that'll ask them if they want to make an order. They'll be able to order and pay for the drink. It will also provide them with things like, are you interested in a culture event, a sporting event, a movie across the road? So they'll be able to look at the entire entertainment scene, and probably buy their tickets eventually.

Are you concerned that this might also encourage hanging out in the store without more purchases?

I think it's a great question, and we don't know fully the answer to this. Generally speaking, in those stores now where lots of students come in, especially during final exams, you'll see them in there for hours on end, and they do consume more than one beverage.

When do the 500 stores go live? And is this happening only in the U.S. at this stage?

This fall, in the U.S., but clearly it's of interest outside America as well. ... We are trying to make this work first. But the kinds of companies we're partnering with -- Microsoft (MSFT:

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