How Howard Schultz saved Starbucks

It only seems like yesterday that Australians reacted with equal parts horror and delight to the news that Starbucks was closing 61 of its 85 Australian stores.

While the scale of the closures and job losses (685 staff lost their jobs) stunned many entrepreneurs, coffee lovers were quick to point out the flaws of the American chain. The WiFi may have been free they said, but the coffee was no good.

Of course, that wasn’t yesterday. Almost three years to the day have passed since Starbucks’ Australian exodus.

But while the chain’s star may have faded in this country, the US group has made a remarkable comeback.

The company’s shares have more than doubled in the last two years and in early July hit an all-time high. Starbucks record third quarter results, released late last week, showed the company’s turnaround is continuing. Net profit was up 34% during the period to $US280 million, while revenue rose 12% to $US2.93 billion.

One man is responsible for the turnaround: Howard Schultz, the founder of the company who came out of retirement in late 2007 to save his company.

Schultz has been one of the biggest beneficiaries of the company’s comeback – last week Forbes declared the soaring Starbucks share price had pushed Schultz back into the billionaires club.

“You know it takes courage to come back, it is much harder the second time around. Much harder,” he told The Guardian last year.

“I could’ve just walked away but I never could have forgiven myself to allow Starbucks to drift into mediocrity or not be relevant. I just couldn’t be a bystander.”

So how did Schultz restore Starbucks – and his fortune – to their former glory? It’s a story of clever cutbacks, instant coffee and the de-commoditisation of a great brand.

The cancer of growth

In a controversial leaked memo written in 2007 entitled “The Commoditisation of the Starbucks Experience”, Schultz took aim at the sense of “entitlement” that had developed within the business as it grew from 1,000 to 13,000 stores.

The problem, as Schultz explained in an interview published earlier this year in the McKinsey Quarterly, was that growth was being pursued for the sake of growth itself. Stores were being opened simply because that’s what Starbucks had always done. In Schultz’s words, growth had become “carcinogenic”.

“When we reviewed some of the underperforming stores, I was horrified to learn that the stores that we ultimately had to close had been open less than 18 months. When you look at that – the money invested and the money that we had to write-off – those decisions were made with a lack of discipline.”

“When you look at growth as a strategy, it becomes somewhat seductive, addictive. But growth should not be – and is not – a strategy; it’s a tactic. The primary lesson I’ve learned over the years is that growth and success can cover up a lot of mistakes.”

Clever cutbacks

The store closures seen in Australia back in July 2008 were part of Schultz’s efforts to cut $US500 million worth of costs in the 2009 financial year.

He cut deeply and quickly, shedding around 800 stores in the US and hundreds of more in its international networks.

However, it’s important to point out these were targeted cuts aimed at getting unprofitable stores out the network. During that 2009 fiscal year, Starbucks still opened 140 stores in the US and 170 around the rest of the world.

Bringing the romance back

The memo Schultz sent to senior staff back in 2007 underlined the fact he felt that many in the company had forgotten what it was all about – coffee.

He decried the fact that the company had moved to using bagged coffee rather than freshly ground coffee, which meant the “loss of aroma – perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer”.

He even raged at the height of the coffee machines which has blocked “the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista”.

Schultz has attacked this problem by resigning store, selling coffee paraphernalia in store again and bringing back freshly roasted coffee. But his most symbolic move – made in February 2008 – was to close all 7,100 US stores for a few hours to re-train baristas.

Instant success

Part of Schultz’s efforts to get more coffee-related products into Starbucks stores has involved the creation of a new instant coffee brand called VIA. Schultz’s motivation is pretty simple – he says the instant coffee market is worth $US24 billion a year around the world and as one of the most prominent coffee companies in the world, Starbucks should have a piece of that pie.

The range has been a success, with sales hitting $US100 million after 10 months. Earlier this year, Schultz also signed a deal with Green Mountain Coffee Roasters to sell the later company’s single-pour coffee products in its store.

The right measurement

Right around the world, same store sales are the key metric that analysts use to measure retail businesses, the logic being that it allows commentators to measure the underlying business without the distortion of new store opening.

But Schultz discovered that increasingly comparable sales had become a worrying obsession within the company.

The worst example he found was a store operator selling teddy bears. The bears were nothing to do with coffee, but they helped the operator get her same-store sales up.

“I thought, when I came back, that we had become linked internally to the comp-store sales number, and we started making decisions that were driving incremental revenue and perhaps were not consistent with the equity of the brand. I wanted to remove that albatross from the necks of the operators,” he told McKinsey Quarterly.

So he decided to stop reporting it to Wall Street. He expected an outcry, but it never came.

“Now, at the time, since we were not performing, I was accused of not being transparent and trying to hide things. But what I was trying to do was make sure that our people were managing the business for the most appropriate constituent, which is the customer.”

Not that Wall Street has stopped using the numbers – analysts now work them out for themselves.