The New York Times
By BRAD STONE
Published: March 19, 2008
SEATTLE — The chief executive of Starbucks announced sweeping changes for the company on Wednesday as it seeks to reconnect with customers who have left for competitors or pared back their coffee budget in hard economic times.
The initiatives are designed to restore an authentic coffeehouse experience to the company’s stores and, in turn, re-energize an ailing stock that has lost half its value in the past 15 months.
Before 6,000 investors, employees and analysts at the company’s annual shareholder meeting, the chief executive, Howard D. Schultz, unveiled an improved automated espresso machine that grinds coffee for each drink and has a lower height — so customers can see baristas making their beverages. He said the company would roll out the Swiss-made Mastrena machines to three-quarters of Starbucks stores by 2010.
Mr. Schultz also announced the company’s acquisition of Coffee Equipment Company, the four-year-old Seattle-based maker of the Clover coffee brewing machine, which brews one cup of coffee at a time. The price was not disclosed. The company will roll out Clover systems to select markets.
The Starbucks chief presented a host of other plans: a pungent new coffee blend, a partnership with Conservation International to certify environmentally responsible whole bean espresso products, and a rewards program for users of the Starbucks customer card.
Beginning in mid-April, users of the customer card can customize their drinks — adding vanilla or using soy milk, for example — for free. He described this as a start to an evolving rewards program.
The announcements are designed to help Starbucks hang on to customers in the face of intensifying competition from Dunkin’ Donuts and McDonalds, which is widely introducing espresso beverages this year, but are also drawing customers with brewed coffee.
“This was more of a position statement,” said Sharon Zackfia, a securities analyst with William Blair & Company. “They are going back to their core. They are saying, ‘We are not going to change who we are; we are going to defend turf aggressively.’ ”
Mr. Schultz obliquely referred to the powerful new rivals in an afternoon question-and-answer session with reporters. “A lot of people are making unique claims about coffee and what they do,” he said. “What’s interesting to me is that they are not coffee roasters.”
But Mr. Schultz largely strove to keep the focus on the company’s internal challenges and future moves. “This is the first time the U.S. business is under pressure,” he said. “It’s a character test. But it’s not about the economy. We don’t want to use that as an excuse. And it’s not about the competition. Don’t believe the media hype, there’s no coffee war going on. This is about us.”
“We somehow evolved from a culture of entrepreneurship, creativity and innovation to a culture of, in a way, mediocrity and bureaucracy,” Mr. Schultz said.
His remarks combined self-criticism with musings on the turbulent economy, which he noted was reducing traffic to Starbucks stores. The company faces a hurdle that may be impossible to overcome in the short term: the economy. Will penny-pinching Americans, in the steely grip of a recession, still pay $4.10 for their daily dose of white chocolate mocha?
Mr. Schultz said several times that the economy looked grim for the rest of the year, particularly in regions of the country hard hit by the subprime mortgage crisis.
Starbucks has also suffered from rising wholesale prices for coffee and dairy products.
In the face of such pressures, Mr. Schultz, who drove the demand for premium coffee that has nearly replaced the mud in the company kitchen, returned as chief executive 11 weeks ago. He quickly announced 600 layoffs and the closing of 100 of the least profitable stores in the United States. He also announced that Starbucks would stop selling a line of warm breakfast sandwiches, which he said were overwhelming the aroma of coffee in stores.
At the heart of the new announcements is a desire to revisit the company’s early devotion to high-quality coffee. The new coffee blend, called Pike Place Roast, is a reference to the location of the first Starbucks store. Starbucks will introduce the new blend to stores next month. Baristas will be directed to brew smaller batches of coffee and refresh the coffee in urns every 30 minutes. Today, coffee can sit in Starbucks stores for as long as two hours.
Mr. Schultz called the new blend “a coffee so fresh that those people who drink it with milk and sugar will want to drink it black because of the sweetness.”
At the event, the company also introduced a new online community, MyStarbucksIdea.com, where Mr. Schultz and other managers will contribute to a corporate blog. Customers will also be encouraged to visit the site, which opened Wednesday, to make suggestions and interact with employees.
Looking further ahead, Mr. Schultz said that the company plans to introduce health-and-wellness-related food and drinks and energy beverages later in the year.
Wednesday’s meeting marks what Mr. Schultz hopes will be a sharp turnaround in the speed and spirit of innovation at Starbucks. In the first half of the decade, the company thrived on product introductions like the Frappuccino, a frozen coffee drink. The last innovation widely thought to be successful was the Cinnamon Dolce Latte — in early 2006.
Mr. Schultz partly has his own relentless ambition to blame for Starbucks woes. In the last two years, citing ever-larger expansion goals, the company doubled its number of stores to more than 15,000 in 44 countries — many in comically close proximity to one another and to other coffee shops.
Analysts say new stores cannibalized traffic from existing stores and thinned the ranks of well-trained Starbucks managers and employees. The company then strove to create efficiencies between stores, adding technology like massive automated espresso machines, which have little of the romance or aroma of the old hand-operated machines.
In the second half of last year, same-store sales — a significant number watched by Wall Street — declined for the first time.
Shareholders and employees began lining up for Wednesday’s event as early as 6 a.m. As a barbershop quartet sang and green-aproned employees handed out free coffee, many shareholders expressed excitement over Mr. Schultz’s return.
“I’m glad Howard is back at the helm,” said Jan Melin, a retiree and shareholder from Seattle who was there with her husband, Bill. “Starbucks is his heart. I have every confidence he will turn the company around so this stock can take our family on our 50th wedding anniversary trip next year.”