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Starbucks Plots New Course, Charges Full-Steam Ahead

Under Pressure, Chain Aims to Improve Lattes, Reward Customers, Fight Global Warming and Much More

By Published on . 7

CHICAGO (AdAge.com) - "We are going to fight to the death not to allow any company to take the position away from us," recently reinstated CEO Howard Schultz assured investors at Starbucks' annual meeting today, where he was received as a rock star. "You have our promise."
Howard Schultz
Howard Schultz Credit: AP

His battle plan: new coffee-making equipment, improved blends, a loyalty program, a social-networking website and an environmental partnership designed to transform the brand experience.

All apologies
"I humbly recognize and share both your concern and your disappointment in how the company has performed and how that has affected your investment in Starbucks, and I promise you that this will not stand," Mr. Schultz said.

One of the primary complaints regarding the Starbucks experience has been the perceived declining quality of lattes. To address the issue, the company is replacing its current espresso machines with a new version that allows baristas to have eye contact with their customers. The new equipment also grinds the beans for each espresso shot as it's ordered and has a steam function that creates a creamier foam.

The new machines will be in 30% of U.S. company-owned stores by year-end, and in 75% of all locations by 2010.

Please come back
As expected, the chain is introducing a loyalty program, but one that falls short of the value menu some analysts hoped for. Starting next month, customers with Starbucks cards will be entitled to free customization of their espresso-based beverages, a free tall coffee when purchasing a pound of coffee and free refills on drip coffee.

Mr. Schultz described these offerings as a way to "step back from the problems in the economy" and "provide some relief."

Starbucks is also starting a major push in drip coffee. The company has developed a new blend, dubbed Pike Place after its first location. It was described during the meeting as "mild" and "smooth." Pike Place Blend will be served in special cups with Starbucks' original 1970s logo.

In another move to improve the quality of drip coffee, Starbucks also acquired Clover, a coffee-equipment company with machines that grind fresh beans and use the French-press method to prepare individual cups of blended coffee. Using Clover, customers can select the type of coffee they desire and dictate certain attributes. Those custom cups of coffee will be more expensive, about $3. The Clover machines will be rolled out more slowly, and in select stores.

Slow drip
Separately, on the drip-coffee front, Senior VP-Global Strategy Michelle Gass put the kibosh on dollar coffee, which has been tested on the West Coast. The drip coffee business didn't have enough volume to make the offer work, she said.

At the meeting, Mr. Schultz was joined by Conservation International CEO Peter Seligmann to announce a partnership in coffee-growing regions in Asia, Africa and Latin America to prevent deforestation and thereby combat global warming. Starbucks has designed a sustainability seal that will appear on bags of sustainable and ethically traded coffee, which will be on all coffee and whole-bean espresso sold in Europe, the Middle East, Africa and Asia in 2008. All espresso-based drinks system-wide should qualify by the end of 2009.

Starbucks is also dipping its toe into the world of social networking. Mr. Schultz acknowledged that the chain has "never had any online presence to speak of," but hopes that will change with the launch of mystarbucksidea.com.

Chief Technical Officer Chris Bruzzo said the new site will present a variety of ideas for Starbucks, allow visitors to vote on those ideas, post comments and make their own suggestions. Votes will be tallied online, and ideas will be assigned a value in points. Some of them will be brought into stores; Starbucks also created a mirror site, for its employee "partners."

'A giant leap'
So how well was Mr. Schultz's plan received? "They have tried to take a bold move, and to me it was almost that they took one giant leap when all they need to take was a small step," said former Starbucks marketer John Moore. He said that while the plan was full of ideas, many of them seem geared to future growth. "I think long-term it's got a lot of potential, but I think the short-term impact is minimal," he said.

Mr. Schultz also said that Starbucks will be a player in energy drinks and the health and wellness field, although he did not go on to describe how that might happen. He also reminded the audience of his chain's dedication to training, bringing up the recent store-closing event which garnered so much media attention, and even playing a clip from "The Colbert Report."

"We never imagined that it would get such unbelievable coverage," he said. "Honestly, it wasn't a PR thing."
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