Curing what ails Starbucks

Updated: Jan 29 2008, 05:54am hrs
To: Howard Schultz

From: Joe Nocera

Re: Your, er, return

Dear Howard,

Its been almost a year since you wrote that famous memo to your executive staff, the one that caused such an uproar when it found its way onto a Starbucks-obsessed website, Starbucksgossip.com, and was quickly picked up by the national media. You know which one Im referring to, dont you The one in which you bemoaned what you called the watering down of the Starbucks experience. The one where you defended each decision that had led to that diminished experiencelike the switch to automated espresso machinesyet still urged your executives to find a way to recapture the romance and theater that was once Starbucks.

Starbucks stores, you wrote, no longer have the soul of the past and reflect a chain of stores vs the warm feeling of a neighbourhood store. As a hard-core Starbucks customer, I couldnt have agreed more.

So whats happened since then Well, lets see. In 2007, Starbucks expanded by an astonishing 1,700 storeshardly the path a company takes if its serious about recapturing its soul. Youre now up to 15,000 stores, and from what Ive read (alas, I couldnt get you on the telephone this week), you still think you can someday get to 40,000 stores, a number no one has ever come close to. How do you train enough people to staff 40,000 stores How do you maintain quality How do you keep your 40,000 stores from becoming just another nondescript chain You dont.

Meanwhile, despite adding more than four new stores a day, your growth rate slowed, same-store sales started slipping, and your stock was absolutely hammered: in the months after the memo, Starbucks shares dropped more than 40%. Starbucks was destroying value, not creating it, said Howard Penney, an analyst with FBR Capital Markets.

So what did you finally do Earlier this week, you canned your chief executive, Jim Donald. Then you installed yourself as chief executive, a title you havent held in years, while still holding onto your post as chairman of the board. Like Steven P Jobs, Michael S Dell and Charles R Schwab, youre hoping to be that rarest of birds: the founder who brings his baby back from the brink. As one analyst said on the conference call Starbucks held after the announcement: Welcome back.

Except you never really left, did you Even after stepping down as chief executive in 2000, you never stopped acting like the guy who was running Starbucks. That door that separated your office from Donaldshow often did you swing through it each day Five times Six You were the one who went on CNBC to promote Starbuckss latest quarter. You were making the big strategic decisions. And you most decidedly were pushing for growth at all costs.

I hear that after Nikes founder Phil Knight fired his newly installed chief executive, William Perez, a few years ago, Donald started asking you every day whether he was doing a good job. That is hardly the sign of a chief executive confident of his ability to set the strategic direction.

Thus the inevitable question: Are you really the right guy to bring Starbucks back I have my doubts. On the one hand, your return has a certain undeniable appeal. You are so closely associated with the brand, and so trusted by both the rank and file and the investment community that as Penney put it, as long as Howard is alive he is the only person to do it. The day after the announcement, the price of Starbucks shares rose over 8%the Howard rally, Wall Street was calling it. At Starbucks- gossip.com, Starbucks employees weighed in ecstatically. I have faith in Howard, wrote one.

On the other hand, what I kept hearing all week was that you're not a very good manager. Most of the core executives, the ones who bled French Roast, have left, many in frustration. You complained in the conference call that the company spends too much time on process and focusing on the internal. Good managers know how to keep bureaucracy from congealing. People who have been in meetings with Starbucks executives in recent years say that there is often a sense of confusion over what the company is trying to do.

NY Times / Joe Nocera