Added On: Tuesday, January 08, 2008

Starbucks Replaces Chief With Chairman

With the stock plummeting and competitors on the attack, Starbucks Coffee said Monday that it was bringing back its top barista to help turn the company around.

The chairman, Howard D. Schultz, who joined Starbucks in 1982 when it had just four stores and engineered the company’s rise, will immediately assume the additional role of chief executive. He takes over for James L. Donald, a grocery executive who joined Starbucks in 2002, who will leave the company.

Mr. Schultz said he would bring a “laser-like focus” in making sure that the “Starbucks experience” is significantly different from rivals like McDonald’s and Dunkin’ Donuts Coffee, which have lured away customers.

While higher commodity costs and a slowing economy have hurt Starbucks in the United States, Mr. Schultz said the bigger problem was the company itself, by expanding too quickly and losing its coffee-shop cache. In short, he said, the company had gone from being “quintessentially entrepreneurial” to becoming “soft.”

“Successful fast-growing businesses can sometimes find that their success had unintended consequences,” Mr. Schultz said in a conference call. “We lost the focus on what we once had, and that is the customer.”

But Mr. Schultz reiterated that there was “no short-term fix, no silver bullet.”

The announcement comes as shares of the company have fallen from $36.29 in January 2007 to $18.38 Monday, after more than a decade of nearly continual growth. Shares rose nearly 9 percent in after-hours trading.

Starbucks has more than 15,000 stores in 43 countries and $9.4 billion in annual sales. It still plans to expand to 40,000 stores worldwide, though growth in the United States will be slowed.

Mr. Schultz sounded both angry and exasperated Monday. For instance, he complained that the company had only produced variations of new products in recent years, rather than blockbuster new products, a problem he vowed to remedy. But he acknowledged that he played a role in the company’s current woes.

The problems that Mr. Schultz laid out reflect many of the concerns that he outlined in a Feb. 14, 2007 memorandum to Mr. Donald that was leaked to the media. Titled “The Commoditization of the Starbucks Experience,” Mr. Schultz said that rapid growth had “led to the watering down of the Starbucks experience.”

For instance, by moving toward flavor-lock bags for coffee, “we achieved fresh roasted coffee but at what cost? The loss of aroma — perhaps the most powerful nonverbal signal we had in our stores; the loss of our people scooping up fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage?”

Mr. Schultz said he would slow the growth of Starbucks in the United States and would close some underperforming restaurants, though he declined to provide more specifics.

Some of the money slated for expansion in the United States would be shifted overseas, where store openings will be accelerated. Mr. Schultz said the company was not given enough credit by Wall Street for its success overseas, where it operates 5,000 restaurants and where the excitement reminded him of the early days in the United States.

He said some of the practices that have succeeded in Britain and Canada would be brought back to the United States, though he would not elaborate.

Though he acknowledged increased competition, he emphasized that the problem was with Starbucks itself. Everything else, he said, was “just noise.” “Starbucks is not a broken company,” he said. “Just as we created this problem, we will fix it.”

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