Schultz Returns as CEO of Starbucks

Founder Is Critical of His Company's 'Self-Induced' Woes and Promises Turnaround

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SAN FRANCISCO ( -- Starbucks Coffee Co. has returned its No. 1 barista, founder Howard Schultz, to his former role of chief executive to perk up its sales and stock price.
Starbucks Chairman Howard Schultz, right, is returning as CEO of the coffee behemoth he founded, replacing president-CEO Jim Donald, left, seen together at an annual shareholders meeting in Seattle in March 2007.
Starbucks Chairman Howard Schultz, right, is returning as CEO of the coffee behemoth he founded, replacing president-CEO Jim Donald, left, seen together at an annual shareholders meeting in Seattle in March 2007. Credit: AP

Mr. Schultz, chairman, at the request of the Starbucks directors, returns to the CEO role he handed over in 2005 to Jim Donald, who is leaving. In a letter posted on the Starbucks website, Mr. Schultz said he was stepping back in as CEO "to share with you my personal commitment to ensuring that every time you visit our stores you get the distinctive Starbucks Experience."

'Self-induced' headaches
In a conference call with analysts yesterday, Mr. Schultz said "growth and size can hide mistakes," and many of Starbucks' headaches have been "self-induced," not just a result of a sagging economy or increased competition from Dunkin' Donuts or McDonald's, which according to a report in the Wall Street Journal yesterday plans to open coffee bars using baristas in its burger chains.

To jolt sales, Mr. Schultz said Starbucks is working on three strategic initiatives, specifically to improve the U.S. business: develop new products akin to past blockbusters such as the "frappuccino"; close underperforming stores; and shift capital dollars from the U.S., where it has some 14,000 stores, to growth opportunities internationally. He said the changes would assure the coffee retailer, with a store on so many corners in close proximity to other Starbucks outlets, is not cannibalizing its own sales.

Focus on 'Starbucks experience'
To differentiate its brand, Mr. Schultz said Starbucks would focus on its store "experience," one which he criticized in a memo to Mr. Donald last February. In that missive, Mr. Schultz criticized use of new coffee machines that block a customer's view of the barista, resulting in a less theatrical, dramatic and "intimate" coffee experience, and the lack of the aroma of roasted coffee due to the need to ship large quantities of coffee to stores in tightly sealed aluminum bags.

He said another element of his plan is to "realign" the Starbucks organization to better support the customer.

The return of Mr. Schultz is the latest attempt to restart the coffee giant, which has moved into unfamiliar financial territory when the average number of transactions per store fell in the quarter ended Sept. 30. In response, Mr. Donald late last year authorized Starbucks' first national TV campaign, a holiday "Pass the Cheer" effort from its agency Wieden & Kennedy, Portland, Ore.

During a conference call with analysts, Mr. Schultz declined to discuss holiday sales pending the announcement of corporate earnings later this month.

Incentives for loyalty card holders
Nevertheless, Mr. Schultz, never a fan of big ad campaigns, said he plans to better tap information from Starbucks loyalty card holders to "surprise" consumers in new ways. New incentives are under way to persuade consumers to buy Starbucks bottled coffee drinks (produced in conjunction with PepisCo), or the whole beans, ice cream and other package goods it sells in coffee stores.

Marie Tupot, research director, ScenarioDNA, New York, applauded Starbucks' decision to reinstate Mr. Schultz as CEO. "It's time for them to evolve before the brand erodes any further," she said. Starbucks' problem is oversaturation, she said, but the company must be careful about which stores it closes, not just shuttering underperforming stores in poor neighborhoods.

Ms. Tupot, who consults for Starbucks' competitors, also said Starbucks might consider adding more local character to individual stores so that a traveler to another city might enjoy not just a predictable cup of coffee but be able to "capture the locality." While Starbucks has been careful to point out that it is not a fast-food restaurant, Ms. Tupot believes it could do well selling certain types of foods beyond cake and other sweets. For example, she said East Coast chain Le Pain Quotidien serve baguettes and spreads along with coffee and allows customers to sit at a long table and linger.

She noted one promising Starbucks initiative is its use of text-messaging, whereby customers can order drinks from a cellphone and pick them when they arrive at the store, bypassing those standing in line.
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