Magazine

Howard Schultz's Grande Challenge


His return as chief executive jazzed Starbucks' stock, but some question whether he has the right recipe

There was joy in coffeeville when Howard Schultz returned as CEO of Starbucks (SBUX) on Jan. 7. "Uncle Howie to the rescue!" wrote one visitor to Starbucksgossip.com, a blog popular with the coffee chain's baristas. Wall Street echoed the sentiment. After a year of declines, shares rose by more than 8%, to $19.86, on Jan. 8.

It's a favorite business world fairy tale: the company in distress saved by the return of a visionary founder. The key, of course, is whether the leader's vision is the right one. Steve Jobs' triumphant return to Apple (AAPL) may be the dream, but there's also the story of Ted Waitt, the ponytailed Gateway founder who took back the CEO job in 2001 only to see his baby eventually gobbled up by competitors after sticking to old ways of doing business. While many Starbucks watchers think Schultz is the right choice, some wonder whether he has a strategy that will jump-start growth.

That's a pertinent question, given that Schultz never entirely left. A vocal chairman since 2000, Schultz chimed in on earnings calls, penned memos to top managers, and regularly appeared on CNBC to talk coffee. Meanwhile the company's stock is down by 44% over the past year, and though overall sales are up, Starbucks has had trouble boosting business in its existing stores. Through it all, Schultz continued to occupy the same spacious office he held as CEO. Schultz declined to comment.

Familiar Strategy

No surprise, then, that much of the strategy Schultz outlined to analysts on Jan. 7 sounded familiar. Among his plans: to slow new store openings in the U.S. while investing overseas and focusing on "reigniting" the connection with consumers through new products and better store design.

Starbucks has already signaled that it plans to add fewer U.S. stores. International expansion has long been a priority. In a famous Feb. 14, 2007, memo, Schultz urged the company to restore the romantic coffee shop atmosphere of Starbucks' early days. The biggest news in his Jan. 7 conference call was his vow to shutter some struggling stores and to streamline management. He promised to give more details when the company announces earnings on Jan. 30.

A returning founder has more freedom to play with the formula than a hired CEO. Schultz, after all, has shown he can leverage the Starbucks brand in new ways, such as his idea to use the stores to introduce new music to customers. But founders' memories of the early days also can hinder change. Nostalgia can be dangerous, says Jeffrey Sonnenfeld, senior associate dean at Yale University's School of Management. "[A company] is not a museum. It's not a religion."

Big Macs and Baristas

The challenges Starbucks faces today are much steeper, too. McDonald's (MCD) plans to add coffee bars and baristas throughout the U.S. (BusinessWeek.com, 1/10/08). And it's not easy being romantic when you're a $9.4 billion chain with 15,011 outlets.

At least one analyst thinks that Schultz's plans are wrongheaded. "Their business model still appears to be building stores to grow, and if they just [build more slowly and] become more relevant to consumers, everything will work itself out—I think those are all dangerous premises," says Marc Greenberg, a Deutsche Bank (DB) analyst. "The runup in shares on Jan. 8 was a 'Hooray, Howard' rally, but does it say anything to the fundamental prospects of next year? No."

With Brian Hindo in New York

Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus