Starbucks is steaming hot again after change in philosophy

SEATTLE - In the four years since Howard Schultz swooped in to rescue it, Starbucks has grown up. Then, with the stock and housing markets bombed and people eating meals and drinking coffee more at home, Starbucks' future was in question. Sales were sliding, and the stock sank so low that the Colombian National Coffee Growers Federation called for coffee-producing nations to make a bid for it.

Shortly after returning as CEO, Schultz stood before shareholders, drawn and contrite.

"We have kind of lost our edge," he said at the company's March 2008 annual meeting. "I promise you, this will not stand."

He was right on both counts.

Starbucks ultimately closed nearly 1,000 cafes worldwide and slashed tens of thousands of jobs. It spruced up remaining stores and lowered the cost of opening new ones, which is now happening at the more sober pace of 800 stores a year.

Through painful soul-searching, Starbucks found ways to make money without adding seven stores a day, as it had in 2007. It looked to impress Wall Street without boasting it was aiming for 40,000 locations.

The world's largest coffee-shop chain has bounced back stronger than anyone predicted.

In the fiscal year ended Oct. 2, Starbucks' profit rose 32 percent to $1.25 billion, and the stock trades at all-time highs, above $50 a share. The company has started paying dividends.

And Starbucks got serious about the future.

"There's a lot more thought put behind their initiatives now," said R.J. Hottovy, an analyst at the Chicago-based research firm Morningstar.

"Our innovation had become less innovative," said Chief Financial Officer Troy Alstead.

During its overheated growth, Starbucks sometimes heralded new flavors of Frappuccino as innovative, Alstead said. "And while innovation around Frappuccino is a wonderful thing, it's not the kind of hallmark innovation we needed," he said.

Starbucks now concentrates on building international markets and improving sales in grocery stores -- areas that could yield enormous profits and that, until the recession, took a back seat to U.S. expansion.

"International was viewed as a little bit riskier, especially when the economy was strong in the U.S., and that flipped a few years back," said Dan Geiman, an analyst at Seattle-based McAdams Wright Ragen.

Starbucks has fewer than 7,000 stores in foreign countries, compared with 11,000 in the U.S. Of the 800 stores it plans to open this year, 600 will be in international markets. About a quarter of those will be in China, where the chain last fall opened its 500th store.

"The economics in China are ridiculously good for Starbucks," said Sharon Zackfia, an analyst at William Blair & Co. Costs such as labor and rent are relatively low, making the company's profit margins for stores there its highest in the world, she said.

Chinese consumers also love the brand, an "affordable luxury" for the country's emerging middle class.

Later this year, Starbucks plans to open its long-awaited first store in India, where it hopes to tap an emerging middle class, as in China.

In the U.S., that picture is flipped, with a shrinking middle class and persistently high unemployment worrying even the best-performing retailers.

That's where Starbucks' consumer-products strategy might help. The company's smallest division has long been a unit that sells coffee beans, bottled Frappuccino, coffee ice cream and other products in grocery stores -- a more recession-proof business because people never stop grocery shopping.

The "laser" focus Schultz now talks about suggests a maturity from his earlier inclinations to take on every idea that came up.

But Alstead balks a little at the notion that Starbucks is "mature."

"The only thing I don't like is that people hear 'mature,' and think you're done. We're mature and yet we have so far to go," Alstead said.

Schultz, who led the scattershot approach at the 2008 annual meeting, said: "We're not going to allow ever again at Starbucks for growth to cover up mistakes. We're not going to have unbridled growth that turns into a strategy as opposed to a purpose."


Distributed by Scripps Howard News Service, via the The Seattle Times

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