Starbucks Looks for a Fresh Jolt

Howard Schultz is back at the helm of the company that turned coffee into an iconic brand. Will his magic work a second time?

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John Keatley / Redux for TIME

The Starbucks executive team at the Starbucks coffeehouse at Starbucks Support Center, Seattle Washington.

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In 1992 Starbucks went public with 140 stores, and from practically the very beginning, the company expanded at a breakneck pace, growing store count 40% to 60% a year. It wasn't just about coffee. Starbucks took care of its employees as well as its beans. In an almost unheard-of move for a food retailer, the company offered health insurance, a costly policy that Schultz insisted on; as a child, he had watched his family's finances crumble when his father suffered a broken ankle at his job as a delivery-truck driver.

Eventually, though, Starbucks had to grow up and get professional managers. In 2000 Orin Smith ascended from president to CEO; Schultz stayed on as chairman of the board. During Smith's five-year tenure, Starbucks maintained its mind-blowing growth, but at the same time, it introduced sophisticated testing and R&D and took steps to boost efficiency and sales, like installing automated Verismo espresso machines. By no longer having to scoop and tamp coffee for each shot, baristas could make a drink 40% faster, moving customers through lines more quickly. Drive-throughs became standard, and the company released its first CD. Smith's successor was a Wal-Mart veteran, Jim Donald, who took the company into books, movie promotions and oven-warmed breakfast sandwiches, which added about $35,000 to the average store's $1 million annual sales.

Tensions over what Starbucks was becoming--cluttered, corporate, soulless--were rising within the company even before the Valentine's Day memo. "These were real conversations we were having," says Michelle Gass, whom Schultz promoted in January to head of global strategy. "A lot of last year was figuring out what really matters to our customers."

At the same time, the slowing economy started to dent sales. "They finally got to the point where their customer base was so broad it wasn't recession-proof," says Bear Stearns analyst Joseph Buckley. The summer of 2007 was particularly bad because of consumers' growing boredom with Frappuccinos, which make up about 15% of sales, according to UBS analyst David Palmer. Then, in the quarter ending in September, traffic at established U.S. stores fell 1%, the first drop ever. The next quarter, traffic dropped again--down 3%--and comp-store sales fell 1%, the first time Starbucks had ever swung negative.

On Jan. 7, the board reinstated Schultz as CEO to revive the coffee empire. "It's a time for reinvention, and there's no one better to do it than Howard," says Howard Behar, who ran Starbucks' international operations throughout the late 1990s and as a board member voted to reinstall Schultz. The stock rallied 8%, and baristas went wild. "Woooohooooo!" read two posts on "Welcome back, Howie!!! All of Starbucks missed you, and we can't wait to see where you take us," read another. More than a few posts skeptically pointed out that Schultz had never gone far (his office was next to Donald's), but overall the tone was jubilant.

Schultz is no less messianic. "I came back because it's personal," he says. "I came back because I love this company and our people and feel a deep sense of responsibility to 200,000 people and their families." On the afternoon of Jan. 7, he gathered the 4,000-some people who work at Starbucks headquarters. "I said, 'We need everyone in this room to believe in the mission of the company, and if you don't, there's nothing wrong, but you shouldn't be here,'" Schultz recalls.

And it's not just Schultz who's back. It was as if he were reassembling the band: Roberts, the merchandising guru; Wanda Herndon, who left in 2006 but returned to run global communications; and Arthur Rubinfeld, the company's first vice president for store development, who has known Schultz since the two were in their 20s. Schultz holed up with them and others he'd promoted from within at the Palace Ballroom in downtown Seattle for three days of 14-hour strategy sessions. The retreat started by listening to Beatles music and talking about how great icons reinvent themselves.

Schultz moved swiftly. On Jan. 30, he announced that Starbucks would close 100 underperforming stores and curtail U.S. store openings to about 1,175 in 2008, down 34% from the prior year. The breakfast sandwiches were toast in North America. To get focused on the long term, it would stop reporting comp-store sales to Wall Street. Then, at the March 19 annual meeting, the company laid out its initiatives to reinvigorate the "coffee experience." Some of the projects had been kicked around, but with Schultz back in the CEO chair, everything started to get done more rapidly. "The rate at which we're making these moves is far and away faster than anything I've experienced the last few years," says COO Martin Coles.

Some of the changes Starbucks is making are big, risky bets. By giving people with a registered Starbucks card free upgrades on lattes, for instance, the company could be leaving as much as 30¢ to 70¢ per drink on the table. When I ask Coles how much that program, which also includes free drip refills, will cost the company overall, he simply says, "We believe it's worth it."

The Founder's Dilemma

Only a figure like Schultz can pull off such bold action, says Rüdiger Fahlenbrach, an assistant professor of finance at Ohio State University's Fisher College of Business who has studied the return of founder CEOs. "A founder may come in, and because he started the company, people more readily accept these things," says Fahlenbrach. That's clearly what's happening at Starbucks. "Howard, frankly, is the only person who could do what we needed to do," says global strategy head Gass. That courage was on full display on Feb. 26, when Starbucks closed all 7,100 of its company-owned U.S. stores (4,000 licensed locations remained open) for three hours to retrain 135,000 baristas. Part of the training involved the correct way to pull an espresso: into a shot glass, not a paper cup, a shortcut that had evolved to move the line more quickly. It was a strong statement that Starbucks cares about quality--with a clear shot glass, a barista can make sure the espresso correctly settles into three layers--and isn't led by a fast-food-style obsession with throughput.

By restoring the smell of freshly ground coffee to stores and working in visual cues about how Starbucks sources its coffee--Roberts is jazzed about a series of prints from artists in Rwanda, where Starbucks is opening a regional farmer-support center--the company is trying to re-emphasize its heritage. "We haven't been as good at telling our story as we once had in the past," says Schultz. "The good news is, unlike many other companies, this is not a story that has to be invented. It's real."

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