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Starbucks Turns to TV In Bid to Boost Results


By JANET ADAMY
The Wall Street Journal

November 16, 2007

Average customer traffic at Starbucks Corp.'s U.S. stores fell during the company's fourth quarter for the first time, a sign that the Seattle coffee giant is having difficulty attracting customers as it moves into the holiday season.

The company reduced its earnings and same-store-sales-growth estimates for the coming year.

Starbucks planned to launch its first national television-advertising campaign today. In an interview, Chief Executive Jim Donald called the campaign "a very culturally sensitive, product-driven" effort. He said Starbucks is getting into TV advertising because "as we grow our stores, we're trying to reach out to this broader audience that maybe [has] not had a chance to experience Starbucks." Chief Operating Officer Martin Coles said the ads highlight factors that differentiate Starbucks from rivals.

The spots are part of Starbucks's holiday/winter campaign and feature animation technology and the tagline Pass the Cheer, according to a source familiar with the campaign.

Mr. Donald said the 1% dip in average transaction per store in the U.S., the first decline since Starbucks started disclosing this measure of customer traffic about three years ago, isn't a sign that the company has built stores too quickly or that the market is showing signs of saturation. "The saturation comment's overblown," he said.

However, he said Starbucks plans to open 1,600 stores in the U.S. next year, 100 fewer than it had projected this fall, because the company is "taking a little more deliberate approach."

In after-hours trading, shares of Starbucks fell $1.90, or 7.9%, to $22.20. Based on yesterday's closing price of $24.10, Starbucks shares have fallen about 38% in the past year.

Starbucks said same-store sales increased 4% in the quarter ended Sept. 30, within the 3% to 7% range the company has called its long-term target but at the low end of what it has achieved in recent years.

Total revenue rose 22% to $2.44 billion in the quarter. Starbucks said it expects earnings per share in the fiscal year of $1.02 to $1.05 and first-quarter earnings per share of 28 cents because of softer consumer spending and rising commodity costs. The company said it expects a same-store-sales increase of 3% to 5% next year.

Mr. Donald said Starbucks, like other retailers, is feeling the effects of pressures on consumer spending. Also, a sharp rise in dairy costs this summer caused the company to raise prices for the second time in less than a year. "We're seeing this economic impact not just in select states across the country but...coast to coast," he said.

To improve results, the company will reduce the number of items it sells and promotes and will have district managers spend more time in the cafes.

--Stephanie Kang contributed to this article.

Write to Janet Adamy at janet.adamy@wsj.com

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