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Should Howard Schultz Be Smiling?

A Look at CEO's First (Admittedly Recession-Plagued) Year Back Atop Coffee Chain

By Published on . 1

CHICAGO (AdAge.com) -- It's been a little more than a year since Howard Schultz retook the reins at Starbucks, a move anticipated to return the coffee chain to its roots and the restore its brand essence. But what's happened since? Starbucks' stock price has fallen from $18 to $10; it's shuttering 600 stores; and has reported falling profits for the last three quarters. Same-store sales are lagging generally behind the quick-service and casual-dining categories.

Howard Schultz
Photo: Mario Tama

'Brand compass': His efforts in 2009, including Pike Place Roast and surprise success oatmeal, may not have been enough for Starbucks.

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Of course, the dire economy hasn't been any help in the past 365 days or so, and some say it's an inopportune time to issue a report card on Mr. Schultz (including, apparently, Mr. Schultz, who declined to comment for this story). As William Blair analyst Sharon Zackfia put it: "In January 2008 few on Wall Street thought it was going to get as bad as it did as quickly as it did."

But even factoring in consumers with less money to spend on premium coffee, there hasn't been a huge amount of progress. There have been some hits, such as -- surprisingly -- oatmeal, which has become the chain's best-selling food. Pike Place Roast boosted the chain's drip-coffee sales, but Vivanno smoothies and array of more-healthful breakfast options weren't exactly out-of-the-park. Starbucks will try "value" pairings and this week will announce an instant, "soluble" coffee called Via.

But given all the hoopla surrounding Mr. Schultz's return, which greatly calmed investors, some are now pondering whether the innovation he put forth in the last year is enough. "It's created some hope," one analyst said. "But he's thrown stuff at the wall."

It's clear he's tried. "With Howard you're going to get some great home runs, and you're going to get some strikeouts," said Ms. Zackfia. "It's very hard to tell, over the past year, what some of those new products would have yielded in a more normal environment." She added that some of them may have even staved off a sharper decline.

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Where he seems to have veered from the original Starbucks course is advertising. The chain has ground through one creative shop -- Wieden & Kennedy, dumped for BBDO, New York -- and made a handful of TV ad buys, which were once anathema to the brand, with more expected in the coming months.

The creative direction, however, has stayed true to Starbucks' image, focusing on social activism. The chain assembled a last-minute Election Day giveaway, announced during a spot on "Saturday Night Live." The promotion also had the benefit of appearing on a show hosted by then-presidential candidate John McCain, which resulted in huge ratings -- and it ended up being illegal, which garnered another day of free press and an outpouring of goodwill. At Thanksgiving, Starbucks announced the beginning of a multiyear partnership with Project Red to fund African AIDS programs. And on Election Day, Starbucks launched a community-service program, encouraging Americans to donate five hours of time during 2009, and get a free coffee for making the pledge.

All worthy, but it almost serves to point out what David Palmer, an analyst with UBS, said is a problem Starbucks shares with Whole Foods: Its premium brand garnered its original cult following. Mr. Palmer said that Mr. Schultz must find a way to undercut price assumptions without devaluing the brand. The chain has an uphill battle because McDonald's and Dunkin' Donuts, which are marching much more aggressively into the territory Starbucks owns, spend more on advertising. "It's their voice; their advertising impressions are lower," he said. "They get defined by competitors."

In the meantime, Mr. Schultz has focused on reducing the chain's bloated cost structure. Starbucks, unlike other major chains, does not franchise its locations. Mr. Schultz has promised to produce $500 million in cost savings this year, but by way of closing underperforming stores, layoffing off staff at the company's Seattle headquarters and trimming expansion plans. "There's really been no sacred cow," Ms. Zackfia said.

Except, of course, for Mr. Schultz. "He is a good brand compass," one executive said. "He knows what fits within the Starbucks brand, while the old guard was more [same-store-sales]-focused, to the point where they added a lot of complexity and stretched the brand in a lot of directions. But they didn't come up with real innovation other than a new flavor of Frappuccino for a 10th year in a row."

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