Why I back Starbucks to bounce back

Aug 22, 2008 Business Daily, Strategy

“On July 1st (Starbucks), based in Seattle, said it would close a further 500 stores in America (in addition to the 100 closures it announced earlier this year) and reduce its workforce of roughly 172,000 by around 7%.
A remarkable 70% of the stores due to close were opened after 2005, which seems to confirm the comment made by Howard Schultz, when he returned to the helm of the company in January, that most of Starbucks’ wounds were self-inflicted. As it expanded at a breakneck pace, the company opened too many Starbucks in subprime locations.”

The Economist ( July 5th 2008)

For many years, Starbucks was the poster-child of retailing. It arrived from nowhere and gave the world the $5 coffee – and against all expectations, grew like crazy. More than two dozen books have been written about it in its brief history. Starbucks grew profit every year from 2000 onwards – but announced its first ever quarterly loss as a public company last month.

What was the problem? Success in retail is all about location, we are always told. Starbucks seemed to forget that first law of shopping, and expanded into unsuitable locations in the US. The word ‘subprime’, which has become a part of the world’s business vocabulary of late, can be applied to retailing as well. It seems that too much success builds a head of expectation that sends leaders and managers to seek growth from anywhere and everywhere. In addition, the slowdown in the US economy means that pricey coffees are not on every consumer’s menu anymore.

But please note: Starbucks is not shrinking overall. It is closing 600 stores in the US, yes: but it is also opening new stores at the same time, both at home and abroad. The company targets 900 net new openings in fiscal 2008 in the US, and 825 internationally. It also still expects to make capital expenditures of US$ 1 billion in 2008. If that is shrinkage, bring it on! In fact, I see this as a cleansing and am willing to back Starbucks to bounce back. Why? Two reasons, and the only two that matter: employees and customers.

Starbucks legendary CEO, Howard Schultz, has just taken the wheel again. His famous statement – “We never set out to create a great brand; our goal was to create a great company” – says it all. Starbucks is famous for its obsessive focus on human capital. It has a comprehensive training and promotion system; provides medical cover for all staff, including part-timers; and shares equity with staff. Schultz claims that human values are always paramount at Starbucks.

Equally, Starbucks is about customers. Schultz means to take the company back to its focus on product and service quality. Soon after his return, he closed all American stores simultaneously for a brief retraining session for all staff. Now, the focus is on staff competence and demeanour, and on store cleanliness and comfort. It’s all about the basics, in other words – and I love it. Good business is not a mystery, nor is it advanced science. It simply requires happy people serving happy customers, recession or no recession.

Simple – but not easy!