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Chip Hanna, 26, explores his newly bought iPad at a Starbucks in Fort Worth, Texas, on Saturday. (Tom Pennington/Getty Images)
Chip Hanna, 26, explores his newly bought iPad at a Starbucks in Fort Worth, Texas, on Saturday. (Tom Pennington/Getty Images)

Starbucks to lure customers with digital treats Add to ...

Starbucks is racing to serve up a cappuccino with an extra twist.

In past weeks, it has rolled out a spate of new initiatives to diversify beyond basic coffee. It's testing beer and wine at one of its stores, and pumping up its instant coffee business with new flavours. On Wednesday, the U.S.-based coffee chain extended its free online offerings by promising U.S. customers e-books, movies and other exclusives, including no-charge access to some paid websites. On the café front, it's giving instructions to its baristas to focus on mixing a quality drink, even if it takes more time.

It's part of the iconic coffee chain's efforts to keep customers coming back to its stores, lingering longer and spending more, amid heated competition on its home turf and few opportunities to open new cafés.

"This chain needs to refocus on not becoming bigger but becoming better in its existing units," said Jack Russo, a retail analyst at Edward Jones in St. Louis.

Starbucks is borrowing from the playbook of fast-food chain McDonald's Corp. by concentrating on improving business in its existing cafés, closing underperforming stores and looking overseas for new store sites. Its philosophy in North America is simple: Add more bells and whistles to generate more sales from current store space.

So far, the efforts appear to be paying off. Since founder Howard Schultz stepped back into the chief executive role almost three years ago, the upscale coffee chain is getting back its mojo. After slumping sales in 2008 and 2009, business began to perk up this year at stores open a year or more. Now it has to keep up the momentum in a shaky economy as McDonald's and other rivals fiercely chase the fancy coffee habit.

The diversification strategy holds risks. Starbucks stands to dilute its upscale coffee image by adding new offerings, such as Internet access and instant coffee, rather than focusing on brewing the best coffee at its cafés, said Luke Sklar of market researcher Sklar Wilton & Associates in Toronto. Starbucks lost its way when it added movies and music to its menu several years ago, he said.

Now it's testing beer and wine in a Seattle café in a bid to woo customers in the slower hours of the afternoon and evening. And it's teaming with Yahoo to introduce its new digital offerings, after introducing free wireless Internet access in July.

Mr. Schultz said he's responding to customer requests by rolling out a simplified WiFi offering. He's committed to "turn this feedback into action" to make customers' time in the stores more enjoyable - and get them into the drinking mood.

At the same time, the chain is moving to bolster the quality of its drinks. According to reports, it is telling its baristas in the U.S. and Canada not to skimp on quality when rushing to prepare coffees. They're being instructed to prepare one drink at a time - and not more than two at a time; use a separate pot of steamed milk for each serving; and rinse pitchers after each use.

Some industry observers are so impressed with Starbuck's overall changes that they're declaring the efforts a victory. "It is becoming increasingly clear that this is more than just a turnaround," Felix Narhi, an analyst at Odlum Brown in Vancouver, said recently. The new brew of initiatives is generating results, and huge international growth opportunities lie ahead, he said.

Starbuck's third-quarter sales jumped 9 per cent at stores open a year or more; customer traffic in the quarter rose 6 per cent and the average amount customers spent picked up by 3 per cent.

On Nov. 4, the company will provide a further glimpse into its progress when it releases its fourth-quarter and year-end results. "It's too early to predict how recent changes at Starbucks will play out," Mr. Russo said.

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  • Starbucks Corp
  • Updated May 25 11:20 AM EDT. Delayed by at least 15 minutes.

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