Faith Lambeth

Questions

1. So, what does Starbucks need to do to return to growth and profitability? Should it lower prices? Should it expand its menu? What should be its strategy?

2. As founder, Schultz brought enormous success to Starbucks. But is he the right leader for Starbucks now? Should he continue as CEO? Is he meeting his basic responsibilities as Starbucks’ top manager? What key mistakes is he making?

3. Finally, how should Starbucks counter its new competition, McDonald’s and Dunkin’ Donuts? If you were CEO of Starbucks, what would you do?

Twenty years ago, if you said, “Give me a venti, vanilla, nonfat latte, no room, three Splendas,” people would have thought you were speaking a foreign language. And you would have been because Starbucks was just getting started. It began with 4 stores in Seattle in 1987, and today there are over 17,000 stores in 40 different countries. That means Starbucks has opened an average of 8 new stores per day! Unfortunately, with profits now a thing of the past, Starbucks has closed 800 stores and laid off 25,000 workers.

Starbucks clearly over expanded, providing fodder for late-night TV comedians who have cracked jokes about Starbucks opening new stores inside existing stores. Customer Leslie Miller said, “Starbucks was stupid. They put them right next to each other.” Because managers focused on opening new stores for new customers, they paid less attention to existing stores where same-store sales dropped by 3 percent. While that doesn’t seem like much, Starbucks has to lose only 6 to 8 customers per store per day to see a 1 percent drop in a store’s sales. In other words, small changes in customer buying habits make a big difference in Starbucks’ growth and profitability.

Consumers are stretching their dollars, which means Starbucks is fighting the perception—some would say reality—that Starbucks is a luxury. McDonald’s coffee is undoubtedly cheaper, but Starbucks points out that half of its coffee drinks are less than 3 dollars, while one-third are less than 2 dollars. Moreover, Starbucks coffee isactually less expensive than Dunkin’ Donuts coffee after adjusting for the small serving sizes at Dunkin’ Donuts. Most consumers, however, don’t see it that way. Graduate student Amy Osbourne has cut her monthly Starbucks budget from $60 to $30. Said Osbourne, “I haven’t been going as often. I’ve been making my tea at home.”

When Starbucks’ board of directors fired CEO James Donald, it asked founder Howard Schultz to take charge again. Even though he had stepped down as CEO to become the board’s chair in 2000, he stayed involved in such operational details as deciding the color of holiday cups. Schultz has always been a detail-oriented, hands-on boss, a perfectionist who demands a lot of last-minute changes. When Starbucks launched its new Pike Place Roast

coffee, he selected the logo and then had it redesigned right before going to market. He even rewrote the press release. Schultz is revered at Starbucks and workers sometimes applaud when he enters meeting rooms or stores. He is such a legend within the company that “What will Howard think?” drives nearly all decisions. Not surprisingly, that creates a tremendous amount of anxiety among managers and employees. Schultz recognizes that this isn’t a good thing. Said Schulz, “It’s not healthy for the organization if everyone’s waiting for me to tell them what to do.” Still, Stanley Hainsworth, who was a vice president under Schultz, would have to tell people, “You’re not meeting with the king.” Said Hainsworth, “A lot of people were nervous, so if Howard asked them what they thought, they would tell him what he wanted to hear.”

Schultz’s return has unfortunately not yet produced a turnaround in sales or profits. Shultz, who is feeling the pressure, told employees, “We have to defend our position; we have lots of companies small and large who want to take a piece of our business away.”