Marketing: Starbucks: Coffee, Tea, CD?

Carole Suzuki is a self-professed Starbucks addict. But a tall half-caf with hazelnut syrup isn't the only thing she's fixating on at her local coffee spot. The 40-year-old mother of two from Culver City, Calif., also satisfies her aural cravings there, frequently picking up a compilation CD or maybe a new album from the likes of jazz singer Madeleine Peyroux. "I won't make a special trip to a record store," she says, riffling through a stack of discs. "But I've bought more than 20 Starbucks compilations, and they're awesome."

Suzuki is exactly the type of customer the chain, based in Seattle, is counting on as it makes bolder--and potentially riskier--moves to add more music to its mix of high-margin macchiato and muffin sales. Besides hawking regular CDs and allying with XM Satellite Radio and other ventures, Starbucks has begun installing "media bars" in cafés in which customers can download songs and burn customized discs. So far, 45 stores in Seattle and Austin, Texas, have the units, and Starbucks plans to announce more by year's end. "[Music] is a big component of our overall strategy," says Starbucks Entertainment president Ken Lombard, adding that coffee-house sales will "transform how music is discovered and delivered."

Starbucks isn't the only nonmusic company to think CDs will boost the bottom line. Victoria's Secret, which started the trend with a line of classical CDs back in 1988, recently sold a Bob Dylan compilation in its lingerie shops. Target is selling an exclusive EP from singer Rob Thomas, and Cracker Barrel Old Country Stores are serving up a special disc from country stars Alison Krauss and Union Station. Pottery Barn has put out more than 70 different titles, with music touted among its top-grossing product categories. The Gap, Restoration Hardware, Lane Bryant and Eddie Bauer have released unique, company-branded packages, some purely for promotional purposes and others aimed at turning a profit.

The music industry, struggling with the challenge of illegal downloading, is delighted by the new sales outlets. Starbucks' biggest score to date came from Ray Charles' final album, Genius Loves Company, which sold nearly a third of its 3 million copies at barista stations. That success has lent Starbucks new clout with music companies. Madonna's Maverick label gave Starbucks an exclusive six-week window to sell Alanis Morissette's all-acoustic version of her first hit album, Jagged Little Pill, and the coffee company is launching a new girl group, Antigone Rising, whose debut CD (from Lava Records) is available only through Starbucks. "With file-sharing being as rampant as it is, the industry is competing with free," says Jim Donio, head of the National Association of Recording Merchandisers. "Getting people to hear new music and actually want to buy it is the best way we know to compete with piracy."

For Starbucks, the music foray has some risks. While selling CDs will boost revenues--in April, same-store sales were up a healthy 9% over a year earlier--some analysts warn that the media bars may be a distraction. In the 1990s, Starbucks jumped into the magazine business and dotcom investments with disappointing results.