Schultz Faces Challenges at Starbucks

123jump.com Staff
08 Jan, 2008
New York City

Starbucks appointed its founder and chairman Howard Schultz as its new chief executive replacing Jim Donald. Starbucks stock jumped 10% on the appointment but has lost nearly 50% of its value in the last year. Starbucks has been a victim of too many stores in less than desirable locations competing against each others and rising operating costs. A cup of latte at Starbucks costs more than a gallon of oil in the U.S.

[R]2:00PM New York - The founder Howard Schultz returns to Starbucks as chief executive as stock declines 50% and same store sales falter at domestic locations.[/R]

Howard Schultz has bounced back as Starbucks Corp chief executive replacing Jim Donald who has been asked to leave.

Schultz, currently chairman of the leading coffee retailer, immediately pledged to overhaul the business.

Starbucks said Tuesday that this was part of restructuring plan to streamline under-performing domestic stores and cut expenditure on new store openings. Globally, the retailers would continue expanding, however.

Schultz's return, eight years after his departure (1987 to 2000) was precipitated by a declining domestic sales and the relentless decline in the share price.


In a letter published on the company web site Schultz said, “I am returning to the position of chief executive officer to help our partners build upon our heritage and our special relationship with you, and lead our company into future.”

Not all companies have been turnaround from the return of founders. While Apple has benefited from the return of Steve Jobs but Dell is struggling to regain its footing in a competitive market. Recent appoint of Jerry Yang as a leader of Yahoo is still playing out in a competitive online world.

Starbucks stock has fallen 50% in the last twelve months as its domestic same store sales have been on the decline. During Schultz's reign as CEO, the stock rose 1,300%.

In the early morning trading on Tuesday, however, Starbucks stock ((SBUX)) gained $1.92 or 10.5% to $20.34. Over the past 52 weeks, Starbucks has traded in the range of $36.61 to $18.

Analysts surveyed by Thomson Financial had targeted a one-year price of $28.69 which may be too high. Since then the economy has been on the skids, consumer spending is likely to fall, and prices of milk and coffee have jumped.

Schultz explained that he's going to ""fix"" the internal business at Starbucks, which had become bureaucratic and ""soft"" under recent leadership. He did not blame the departing CEO for current problems.

Other initiatives will include new products and store designs and improved staff training.

Starbucks also plans to shift some of the money it was going to spend to open new stores in the U.S. to open stores in the international markets.

Starbucks has been struggling in the U.S., as consumers hit by several macro-economic pressures, such as high fuel prices, have reduced spending on small luxuries like expensive coffee.

A cup of Starbucks latte in the U.S. costs more than a gallon of gasoline at pump stations.

Disposable consumer spending is expected to decline as consumers face rising cost of fuel and heating bills, and falling values of homes. December month unemployment rate jumped to 5% after economy created only 1.3 million net new jobs in 2007 sharply lower than 2.3 million in 2006.

Schultz in a letter to partners highlighted that, “Improving the current state of the U.S. business: by giving our store partners better training and tools, launching new products – some of which will have an impact as significant as Frappuccino® products and the Starbucks Card – and introducing new concepts in store design, among other enhancements to the Starbucks Experience. At the same time, we will slow the pace of our U.S. store openings and close a number of underperforming locations, so we can renew our attention on store-level unit economics and be laser-focused on flawless execution.”

Competition also has stiffened for coffee dollars. Dunkin' Donuts and McDonald's are ready introducing their own lines of gourmet coffee at cheaper prices than at Starbucks.

Schultz will come face to face with increased competition, and the need to attract new customers and regain old ones.

Schultz will also have to deal with rising prices of coffee, milk and a consumer backlash on rising coffee prices at Starbucks. Starbucks has also suffered from too many stores in less than desirable locations. Starbucks has also come under fire for the lack of cleanliness and rising employee turnover at stores.

A cup of coffee at Starbucks cost at least $1.75 but coffee farmer gets less than 15 cents. When a customer buys a cup of latte, which generally cost $3 a cup, he is also paying for milk that costs nearly $28 a gallon.

Starbucks operates over 15,000 stores worldwide, and has a target to raise that to 40,000 globally.