Executive Insights | September 2011 | By Daniel P. Smith

Over the Hill: 40 Years of SBUX

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Enthusiasm bred entitlement. Confidence morphed into arrogance. Decisiveness and creativity stalled.

Starbucks’ obsessive quest for profit and growth covered the ills of declining store traffic and market cannibalization.

“When many of us at Starbucks became swept up in the company’s success … [we] ignored, or maybe we just failed to notice, shortcomings,” Schultz writes in Onward, his 2011 book detailing Starbucks’ turbulence.

At the start of 2008, just after Starbucks reported its worst three-month performance as a public company, Schultz returned as CEO—this time to resurrect, not to build.

Promising to neither cast blame nor dwell on the past, Schultz instituted his Transformation Agenda, a seven-pronged approach to repair the business, reignite the emotional attachment with customers, and create a more sustainable corporation.

Characteristic of the dismal times was Schultz’s February 2008 decision to close all of the company’s 7,100 domestic stores to retrain staff. It was an admission, Schultz would later acknowledge, that Starbucks was no longer good enough.

Over the next two years, Starbucks went on the offensive to resuscitate the brand.

It began slowing U.S. store openings and shuttered hundreds of existing units. Starbucks introduced new products, such as the Pike’s Place Roast and Vivanno Smoothies; reshuffled its executive team and eliminated positions throughout the ranks; upgraded systems and processes, including POS and labor scheduling; unveiled national advertising; introduced its first-ever loyalty program; and focused on an emerging health and wellness platform.

And still the numbers plunged.

Throughout 2009 and into 2010, the company redoubled its efforts: redesigning the company’s cost structure; embracing more strategic international expansion; revamping the supply chain and overhauling IT systems; closing additional stores; and further trimming the workforce. It leveraged digital and social media to control the Starbucks story and looked to other revenue streams, including licensed stores and packaged goods, such as VIA instant coffee, to boost the bottom line.

In the third fiscal quarter of 2009, Starbucks finally saw some positive news: The company had earned $152 million, its first earnings growth since early 2008.

“One quarter does not make a trend, but … results give us tangible evidence that our transformation initiatives are beginning to be reflected in our financial and operating performance,” Schultz said on the third-quarter earnings call.

Momentum regained, Starbucks’ ascent continued into 2010 and 2011, the company’s 40th year. In its second quarter of fiscal 2011, the most recent release, the total net revenues increased 10 percent to $2.8 billion. The global store count, both company-owned and licensed, now approaches 17,000.

“It is possible to rise, fall, and rise again,” Schultz says.

With the lessons of the past fresh in their memories, company leaders are committed to growth through innovation. The company looks to create a portfolio of $1 billion brands; develop its Seattle’s Best Coffee arm; maximize its consumer packaged goods (CPG) business; craft new products, such as the Starbucks Reserve line of premium coffees; and construct strategic relationships that deliver a sustainable future.

In July, the company announced that it would realign its top management with an eye on international growth. The shift created three global regions—Asia, the Americas, and Europe/Middle East/Africa—as opposed to its longstanding U.S. and international divisions.

Schultz said the change would help Starbucks, which has about 6,000 stores outside North America, capitalize on opportunities in emerging nations, such as China, India, and Brazil. Such a move honors the company’s movement into international quarters and CPG since the recession.

“We will continue to innovate and deliver the highest quality coffee and the Starbucks Experience to our customers in all aspects of our business,” Starbucks vice president of CPG marketing Michele Waits says.

As the rain slows and the sun peeks through the clouds above Chicago, the constant lines at the two neighbor Starbucks locations in Park Ridge stand testament to the brand’s appeal and resonance with customers 40 years into its existence.

“Grande caffe mocha,” a customer says.

“Grande caffe mocha,” the barista repeats to his colleague preparing orders.

And so it goes, over and over throughout the day.

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