Starbucks Shuffle

It was announced on Tuesday, January 8 that Chairman Howards Schultz is reclaiming the chief executive's chair as part of a major restructuring initiative to slow the company's U.S. growth, ramp up expansion overseas and improve offerings for its customers.

Ousting CEO Jim Donald, accompanies plans to close some U.S. stores and slow the opening of new ones, comes after the world's largest chain of coffee houses watched its stock plummet 50 percent over the last year amid declining traffic in domestic stores. Starbucks has yet to specify as to how many poorly performing stores would be closing, or to detail its revised growth plans before it reports fiscal first-quarter earnings on Jan. 30.

Along with the leadership shuffle there will be a series of other initiatives that include introducing new products and store designs, and improving training for baristas. The company plans to use some of the capital originally intended for U.S. store growth and use it to accelerate its international expansion.
Schultz, who served as CEO from 1987 to 2000, is said to remain the company's top executive "for the long term" and plans to streamline the company's management. Donald had been CEO since March 2005, when he was promoted from president of the company's North American division to replace Orin Smith, who retired.

Starbucks has struggled in recent months as consumers have cut back on spending amid declining home values and higher fuel prices. Meanwhile, competitors like Dunkin' Donuts and McDonald's Corp. have cut into Starbucks' customer base with their own lines of gourmet coffee. McDonald's plans to add coffee bars with baristas serving cappuccinos and iced coffees at its nearly 14,000 locations, dipping their toes in the market Starbucks has dominated for years.
Will this hurt Starbuck's sales? Schultz has acknowledged the competition has gotten fierce and said the company will focus on making changes that will differentiate Starbucks from its growing field of rivals. But he argued competition; rising dairy prices and a faltering economy aren't the company's main problems.
Schultz has credited several mistakes made by the company to its current challenges, and has said that Starbucks spent the last several years "trying to invest ahead of the growth curve _ in people, process, infrastructure, roasting plants, coffee buying," which has taken attention away from the experience of customers in its stores..."this is a problem that I think we've created, and as a result of that, that we can fix."

Starbucks has stretched the real estate too far during this economic time, so it doesn't surprise me that they plan to dial it back. They need to scale back, but not with the purpose of changing the growth trajectory of the company. Schultz for one lamented in an infamous leaked memo last year that the company's rampant growth had led to a "watering down of the Starbucks experience." Yet Starbucks has stuck to its ambitious long-term goal of having 40,000 stores worldwide, which is possible if the company adapts to the ever changing demand.

McDonald's aside, Starbuck's possess one of the most loyal customer bases in the market. Starbucks currently has more than 15,000 stores worldwide, and said in November that it plans to open 2,500 stores this fiscal year, 1,600 of them in the United States. That's about 100 fewer U.S. stores than it originally planned.

While the company hasn't stated how many stores would close, it has said the number of store closures would be "significantly lower" than the slowdown in U.S. store openings, and that Starbucks has no plans to pull out of entire markets. The growth potential is less and the cache has changed to some extent -it's more of a chain than sort of a cozy coffeehouse, Schultz could turn out to be the right person to do the job, but it's going to be tough.

At the age of 54, Schultz is equipped for the task ahead. He joined Starbucks in 1982 as director of retail operations and marketing, and then left three years later to start his own company, Il Giornale. The venture was meant to bring the Italian espresso bar home to the U.S. When the company went public in 1992 and had nearly 300 stores by the end of the following year. That drive with a new focus will prove the medicine Starbucks is in need of. Investors would be smart to put their bets on this company, because the international stores will make big, and rescue this company from its own mistakes.