Donald Out, Schultz Back In at Starbucks

Discussion
Jan 08, 2008

By George Anderson

Starbucks is facing some challenges as it moves ahead and the company has made the decision that the best person to lead it into that uncertain future is the same man who grew the company from a small seller of gourmet beans into a phenomenon that changed the way Americans and others around the world think about and drink coffee.

Howard Schultz was named to return to the position of chief executive of Starbucks, succeeding Jim Donald who is leaving the company. Mr. Donald joined Starbucks from the Pathmark supermarket chain in 2002 and was made president and CEO of the company back in 2005.

Mr. Schultz takes back over a company that has seen customer traffic slow down for a variety of reasons, ranging from the economy to increased competition from a host of foodservice and retail competitors. Just yesterday, The Wall Street Journal reported that McDonald’s planned to open coffee bars staffed by baristas at its 14,000 restaurants in the U.S.

Setting Starbucks right is not as difficult as it could be, Mr. Schultz maintained in a letter to employees, because many of the challenges it faces were of the company’s “own making.”

Mr. Schultz’s plan focuses on returning to the customer experience that made Starbucks business during its growth years. He cited the need for: “Re-igniting our emotional attachment with our customers by restoring the connection our customers have with you, our coffee, our brand, and our stores. Unlike many other places that sell coffee, Starbucks built the equity of our brand through the Starbucks Experience. It comes to life every day in the relationship our people have with our customers. By focusing again on the Starbucks Experience, we will create a renewed level of meaningful differentiation and separation in the market between us and others who are attempting to sell coffee.”

Other steps planned to turn Starbucks around include slowing new store openings in the U.S., closing underperforming units, streamlining management and expanding more aggressively overseas.

Discussion Questions: What do you see as the root causes behind the challenges faced by Starbucks over the past year? What will be its challenges for the future? Is Howard Schultz the right person to lead the company at this time? What are your thoughts on Mr. Schultz’s plans for the company?

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19 Comments on "Donald Out, Schultz Back In at Starbucks"


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Max Goldberg
Guest
14 years 4 months ago

As Starbucks grew, they moved away from their core brand and, to some extent, lost first-mover advantage. Howard Schultz realizes this and has a plan to fix it. His challenge is not insurmountable. Starbucks is also positioned for significant growth outside the US.

Ryan Mathews
Guest
14 years 4 months ago

Starbucks was a retail front-runner and suffered from front-runner’s syndrome–the implicit belief that one is somehow above it all, beyond the game combined with the burden of walking around with a large target on your back. The syndrome expresses itself in hundreds of ways–overstoring; exploration of alternative (and often silly) revenue streams; and an introspective (as opposed to customer facing) approach to business. As to the second part of the question if Howard Schultz isn’t the best person to turn things back around, that person doesn’t exist.

Peter Fader
Guest
14 years 4 months ago

The instant poll above summarizes the reasons very well–how about “all of the above”? All great things must fall (or at least slow down a little), and Starbucks in no exception. Howard Schultz has his hands full. This is a courageous move on his part; his legacy would be better if had distanced himself from the current slowdown rather than jumping headlong into it. So let’s give him credit for the move, but not raise our hopes that he’ll get Starbucks back on the caffeinated superhighway anytime soon.

Mark Lilien
Guest
14 years 4 months ago

Starbucks’ worst competitor: Starbucks. Cutting back new location growth in the USA will help Starbucks tremendously. Every retail and restaurant chain hurts existing store comp sales when additional locations are built nearby. Let’s see if bringing back Howard Schultz helps Starbucks more than bringing back Michael Dell. Dell stock was $26 a year ago. Today it’s $5 less.

Heather Thornton
Guest
Heather Thornton
14 years 4 months ago

Here in Florida, there really is not much competition for Starbucks. Every location that I have visited seems to have great customer service as far as any retail company is concerned.

I think the only major factor that may harm their business is the economy. Starbucks’ prices are pretty high when it comes to coffee and the only people that can afford to drink this coffee all the time would be the upper class. This is why, in my area anyway, you tend to find their stores only in areas with higher property value and other high priced retail chains.

Mark Hunter
Guest
Mark Hunter
14 years 4 months ago
Starbucks has lost its cachet due to the number of stores it has. Nothing wrong with that, the challenge just becomes harder. Where Starbucks slipped is in its drive to increase same store sales. Their push into cold beverages and food items both served to slow the time it took to serve customers. In response to this, they automated the preparation process which has served to eliminate the sound and smell that make Starbucks so unique. Their goal has always been to make their locations the place to meet, talk and essentially become today’s living room. Here they’ve fallen behind everyone else with the hard wood chairs, tight space and the need to pay to access the internet. These are huge issues that others–from Panera, Caribou and everyone else–have done a much better job with. As a Seattle native, I grew up with Starbucks in my blood but today it’s no longer my first choice and many times is my third choice. Howard has Starbucks in his blood and now that he has let go… Read more »
Dick Seesel
Guest
14 years 4 months ago

It’s ironic that the shakeup at Starbucks happened on the same day that McDonald’s trumpeted news about its expansion into a broader assortment of upscale beverages. Mr. Schultz now needs to take a page from the McDonald’s playbook that began its turnaround a few years ago: Slower expansion; weeding out of unproductive or duplicate locations; more attention to the in-store experience; improved marketing; and more focus on innovative menu items. Macroeconomic forces may be affecting discretionary purchases (like that expensive cup of coffee), but a lot of Starbucks’ ability to restart its growth lies in its own hands.

Edward Herrera
Guest
Edward Herrera
14 years 4 months ago

To the point earlier, Starbucks is a 2008 New Year resolution for frivolous spending, intense caffeine intake and empty calories. There is a place for Starbucks in the American portfolio but not to the degree it once was. This time the Starbucks experience comes with a price tag and customers will ask themselves if it makes sense. I believe a commitment to healthy teas and side bars may be the answer to higher spends per visit. Customer counts will level off or see a decline in 2008.

Eliott Olson
Guest
Eliott Olson
14 years 4 months ago

Designer coffee has peaked on the novelty curve. Whenever your business becomes the butt of jokes, it is time for the CEO to start sweating.

The concept is old. The experience is dated. Its margins are too high for an economy bordering on a recession. Starbucks is running out of expansion sites that will not cannibalize exiting units. The automated coffee making systems that they have introduced changed the taste and experience while removing a competitive advantage. Packaged Starbucks coffee sold at the supermarket is diluting the brand, not enhancing it.

Competitors have upgraded their coffee and back up their introductions with strong promotions. Fortified beverages and natural juices are also new competitors. People will always visit Starbucks as they visit the malt shop, for nostalgia.

Doug Fleener
Guest
14 years 4 months ago
I guess now that he sold the Seattle Seahawks, Howard has more time on his hands. I applaud Starbucks for making this move and think Howard Schultz is absolutely the right person to get them back on track. I think Starbucks’ problems are not unique to just them. It seems that companies grow to a point where they are more focused on feeding the monster known as Wall Street and start doing less of what got them to where they are. Instead of the art of the barista they switched over to an automated machine. It’s probably the same machine that McDonald’s is now putting into their store to commoditize the same products Starbucks sells. Same for the breakfast food. Did the customer really want a hot breakfast or did Starbucks need to squeeze out comp growth to satisfy Wall Street? Either way, Howard Schultz has to get Starbucks back to doing what they do well, sell a premium coffee product delivered with a superior customer experience. On a side note, this Starbucks vs. McDonald’s… Read more »
Lee Peterson
Guest
14 years 4 months ago

Who better than “The Man” to get the company back to basics???

I personally, as a big fan, am interested in what he means by “lost touch with customers” as they’re still far and away better on the service side than any competitor, including (and obviously) McDonald’s, which I’d describe as a “non-experience.”

They’re the best and it’s wise from time to time to regroup, simplify and get back to core. They should be admired and emulated for that (e*trade, take note).

Mark Pennington
Guest
Mark Pennington
14 years 4 months ago

Starbucks rocks! It’s an excellent “experience” and their biggest challenge is building and maintaining that experience. Comfortable amounts of elbow room while waiting in line, cozy, relaxed seating, and last but not least–spotless clean interiors, exteriors and bathrooms.

Cleanliness is the least mentioned item in business, but in all arts of work we “experience” what is seen without being seen; we develop a perspective sometimes without even realizing it, and if on any level your mind ‘blinks’ in hesitation over something thats unclean then you will be far less likely to enjoy your $5.00 latte.

Hopefully they will refocus on their HR efforts to better manage their associates commitment to cleanliness because it seems they’re slipping in that area, which may be an indicator of the company’s performance overall.

Jeff Hall
Guest
14 years 4 months ago

In its pursuit of hyper-growth, Starbucks has unfortunately diluted much of the essence which originally made it a unique and aspirational brand. As the company reaches a level of maturity in the U.S., it faces an important crossroad: continue on the path of commoditization, or instead, find a way to return to its heritage.

It is refreshing to see Starbucks transparently sharing its self-reflection, challenges and way forward with its partners and customers. Howard Schultz is clearly the individual to champion their new strategy–he is deeply grounded in the Starbucks values and most importantly, inspiring to the leadership team in Seattle and partners across the store network.

I am confident Starbucks will ultimately be a better company by taking pause and reconnecting to what made it great in its formative years–connection with its customers and an authentic in-store experience.

Gene Hoffman
Guest
Gene Hoffman
14 years 4 months ago

More than one Starbucks coffee at a time is excessive drinking. When Starbucks invested ahead of the curve by cannibalizing stores, processes, infrastructure, roasting plants and coffee bean procurement it took away at least some attention from the Starbucks customer experience in its stores.

Meanwhile, McDonald’s and others have learned that a lot of folks want good tasting, rich, fashionable coffee and decided to sap some of the surge from the high-priced coffee rage that Howard Schultz has created. Now Starbucks’ challenge is re-invent itself on a newer and higher innovative slope, not just improve itself. Improvement in Starbucks’ operations would not be innovation. So whatever you do now Howard, good luck.

Li McClelland
Guest
Li McClelland
14 years 4 months ago

I think lots of people who love Starbucks have started to add up the amount they spend there on any given day, have extrapolated that expenditure over the week, month and year, and are totally shocked. They have decided it’s time to cut down and put their fancy coffee fix back into the occasional “treat” category again. This does not bode well for Howard who will have to deal with way more Starbucks real estate than is sustainable.

Kenneth A. Grady
Guest
Kenneth A. Grady
14 years 4 months ago

It is tough to be the front runner forever. For one thing, the law of large numbers starts to come into effect (see Wal-Mart). Starbucks needs another turn at the innovation wheel, though Schultz coming back isn’t necessarily the change needed. The obvious tasks need to be completed: challenge the number of locations, look at the product offering and refresh it, see where the customer wants to go, etc.

Starbucks also needs to look a bit into the future and decide where to head rather than look to the side and watch McDonald’s.

At the end, it is a strong brand with tremendous presence so with the right leadership, this is a mid-course correction not a disaster ready to happen.

Mark Burr
Guest
14 years 4 months ago
“A medium coffee with a little bit of ice, please.” Simple enough? Not at Starbucks and not at McDonald’s. Neither one can get it right. Starbucks baristas spend minutes explaining the name for their size and forget the ice. It’s also not a three sentence order, so I think they don’t know how to handle something simple–no double shots, no whipped cream, no triple flavors, fat free, etc. How about a cup of coffee with a little bit of ice? It’s just not simple. For me it is, and I refuse to call it anything but a small, medium or large. Too ubiquitous? Brand diluted? I don’t think so. What I think is that they, like most, are failing at execution. The first good thing is that they now know it. They once had that down better than anyone in retailing. Like with any problem growing in a business, if you catch it early, you have an outside chance of correcting it. The hard to identify factor is how many consumers will give them the… Read more »
Mark Barnhouse
Guest
Mark Barnhouse
14 years 4 months ago

For me, Starbucks jumped the shark when it started putting franchises into Super Targets and Safeways. I’ll sometimes patronize one of these locations, but the experience feels generic. Were I Howard Schultz, I’d get out of these agreements as soon as my contract allowed me to do so. Sure, that real estate would then be available for a competitor chain to come in, or for those chains to do their own coffee bars (a la the Allegro coffee bars at Whole Foods), but it would enhance the Starbucks brand to get out of those environments (which can’t be producing as much revenue as a stand-alone store anyway–they’re never busy).

Also, they made a major mistake when they partnered with Cingular for their pay Wi-Fi. In 2008 America, Wi-Fi is a commodity–the expectation is that it should be free. I’ll spend more money in a coffee house where I can sit for two or three hours and get work done.

harvey gutman
Guest
harvey gutman
14 years 4 months ago

I am surprised that virtually all of the comments suggest so strongly that Howard is the right man for the job. He may be, but where do you think Howard has been during the last five years? On sabbatical? Out of the loop? Not at all; he has been actively involved in all of Starbucks’ major decisions.

The fact that Starbucks has challenges ahead and needs creative thinking is clear, but Howard has to correct many of the decisions that he made, or OKd, himself. He will have to be open to change and will need to listen to diverse opinions. Perhaps Jim Donald, a superb leader and motivator, had some of those diverse opinions?

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