Starbucks’ strange brew of business plans

Allison Linn Senior writer • Profile • E-mail

When Starbucks Chief Executive Howard Schultz announced that he was taking back the reins at the company he had built to glory, the recession had just begun and the foreclosure and banking crises were far from apparent.

A little more than a year later, the economy is considerably more troubled and so, potentially, is Starbucks. Over the past 12 months, the Seattle-based coffee chain has said it would close hundreds of stores and lay off thousands of workers, and made substantial changes in its management ranks. Shares in Starbucks have fallen by nearly 50 percent.

Meanwhile, the company has rolled out an increasingly broad array of products and initiatives aimed at helping Starbucks find its footing in a vastly different economic environment. The latest, and perhaps most surprising: instant coffee, launched this week.

The fast-paced series of changes have left some hopeful that the company is taking the necessary steps to get through the crisis, while others wonder whether the company has lost its vision.

“It’s actually split,” said R.J. Hottovy, an equity analyst with Morningstar who follows Starbucks.

Starbucks acknowledges that it has made a lot of changes in the past year, which it says are partly a reflection of its broader goals and partly an effort to respond quickly to the recession.

“There are long-term strategies and plans in place that have not changed at all, but, that said, we have had to adjust because of the economy, just like every other business,” said Deb Trevino, a Starbucks spokeswoman.

Video   Schultz discusses changes at Starbucks Feb. 17: The CEO talks about the company's new instant coffee and other initiatives with CNBC's Maria Bartiromo. CNBC

Schultz, who led the company through its explosive growth in the 1980s and 1990s, announced in January of 2008 that he was returning to the chief executive position, while maintaining his role as chairman of the board. The news came amid growing worries that Starbucks had expanded too quickly, and in the process lost some of the touches — including a focus on coffee and an attention to the customer — that had made it such a success in the first place.

Schultz pledged to remind customers about the things that brought them to Starbucks years ago. Executives rolled out fancy new espresso machines and a new blend of coffee, Pike Place Roast, that baristas were instructed to grind fresh in their stores. The company even shuttered the doors of its shops for three hours one evening, so baristas could review their latte-making skills, and said it would add high-end Clover coffee makers in some of its stores.

Starbucks also said it planned to get rid of its meat and cheese breakfast sandwiches, which were popular but also had been much derided for their fast food smell.

But as 2008 wore on, it became clear the economy was deteriorating, leaving millions of Americans worried about gas and food bills, and job security. For many newly budget-conscious consumers, a mocha Frappuccino or a pumpkin spice latte was the first thing to go.

Starbucks was forced to change tactics, and talk of Starbucks shifted from recapturing the Starbucks experience to laying off more workers and closing more stores. While the company continued to push ahead with its plans to refocus on coffee, it also began to branch out, launching a line of blended drinks and an array of healthier breakfast options such as oatmeal.

The hot breakfast sandwiches also stayed, although Starbucks tweaked the recipe to reduce the smell. Next month, it plans to further expand the lineup of breakfast sandwiches, as part of an initiative to offer $3.95 “pairings” — the company’s version of the value meal, and a response to customers’ money worries.

The move toward more budget-oriented offerings also comes as Starbucks faces another foe: growing competition from the likes of McDonald’s, Dunkin’ Donuts and even the local gas station. Such companies have pushed aggressively onto Starbucks’ turf just as the deteriorating economy left people more open to trying a cheaper coffee drink.

“On the one hand, the coffee space has become infinitely more competitive since Howard rejoined the firm, (and) in response to the competitive pressures they’ve had to take a new approach and try out a lot of things,” said Hottovy, the Morningstar equity analyst. “On the other hand, a lot of the things that they have tried haven’t really panned out.”

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