Starbucks, which recently had its first quarter during which US same-store sales were down, and which has seen its stock price decline by 48 percent during the past year as new competition emerged for the nation’s premium coffee dollar, announced yesterday that its chairman, Howard Schultz, is taking back the CEO position.
Jim Donald, the former Pathmark and Wal-Mart executive who joined Starbucks in 2002 and became CEO in 2005, is leaving the company, effective immediately. Schultz described Donald as “a passionate and tireless advocate for Starbucks, and his contribution to our company cannot be overstated.”
Schultz said he plans to cut down on the infrastructure that created too much bureaucracy, slow the pace of US store openings, close underperforming stores, and accelerate the company’s global expansion efforts.
"There are no overnight fixes," Schultz said in a conference call. "It will take big changes. ... We have to get back to big, bold ideas."
In an email to employees, Schultz said, “If we take an honest look at Starbucks today, then we know that we are emerging from a period in which we invested in infrastructure ahead of the growth curve. Although necessary, it led to bureaucracy. We will now shift our emphasis back onto customer-facing initiatives, better aligning our back-end costs with our business model. We are fortunate, though, that the challenge we face is one of our own making. Because of this, we know what needs to be done to ensure our long-term future success around the world.”
Schultz was CEO of Starbucks from 1987 to 2000, and was primarily responsible for the company’s transformation from Seattle coffee shop to a global phenomenon.
In addition to competition, Starbucks also has faced other issues, such as increased labor and materials costs, even as it worked to expand its food offerings. The company also has gotten a lot of attention for forays into the music and film businesses, some of which (“Akeelah and the Bee”) have been less successful than others (Ray Charles’ “Genius Loves Company”).
In his email to employees, Schultz wrote that a major priority is “re-igniting our emotional attachment with our customers by restoring the connection our customers have with you, our coffee, our brand, and our stores. Unlike many other places that sell coffee, Starbucks built the equity of our brand through the Starbucks Experience. It comes to life every day in the relationship our people have with our customers. By focusing again on the Starbucks Experience, we will create a renewed level of meaningful differentiation and separation in the market between us and others who are attempting to sell coffee.”
MarketWatch writes that “By tapping Schultz to be chief, Starbucks is taking a page from the playbook of Charles Schwab Co. and Dell, two companies that called on their former top executives when they were struggling.
“Charles Schwab returned as chief of his discount brokerage in July 2004; the stock is now up 160%. Michael Dell came back to the helm a year ago. Since then, Dell shares have fallen 20%.”
The Seattle Times writes this morning that “most analysts said Schultz shared the blame for Starbucks' problems but said he will make a better CEO.
"It's not as if Howard was MIA during this process. I'm sure Howard had input, but the buck always stops with the CEO," Sharon Zackfia, an analyst at William Blair in Chicago, tells the paper.
Jim Donald, the former Pathmark and Wal-Mart executive who joined Starbucks in 2002 and became CEO in 2005, is leaving the company, effective immediately. Schultz described Donald as “a passionate and tireless advocate for Starbucks, and his contribution to our company cannot be overstated.”
Schultz said he plans to cut down on the infrastructure that created too much bureaucracy, slow the pace of US store openings, close underperforming stores, and accelerate the company’s global expansion efforts.
"There are no overnight fixes," Schultz said in a conference call. "It will take big changes. ... We have to get back to big, bold ideas."
In an email to employees, Schultz said, “If we take an honest look at Starbucks today, then we know that we are emerging from a period in which we invested in infrastructure ahead of the growth curve. Although necessary, it led to bureaucracy. We will now shift our emphasis back onto customer-facing initiatives, better aligning our back-end costs with our business model. We are fortunate, though, that the challenge we face is one of our own making. Because of this, we know what needs to be done to ensure our long-term future success around the world.”
Schultz was CEO of Starbucks from 1987 to 2000, and was primarily responsible for the company’s transformation from Seattle coffee shop to a global phenomenon.
In addition to competition, Starbucks also has faced other issues, such as increased labor and materials costs, even as it worked to expand its food offerings. The company also has gotten a lot of attention for forays into the music and film businesses, some of which (“Akeelah and the Bee”) have been less successful than others (Ray Charles’ “Genius Loves Company”).
In his email to employees, Schultz wrote that a major priority is “re-igniting our emotional attachment with our customers by restoring the connection our customers have with you, our coffee, our brand, and our stores. Unlike many other places that sell coffee, Starbucks built the equity of our brand through the Starbucks Experience. It comes to life every day in the relationship our people have with our customers. By focusing again on the Starbucks Experience, we will create a renewed level of meaningful differentiation and separation in the market between us and others who are attempting to sell coffee.”
MarketWatch writes that “By tapping Schultz to be chief, Starbucks is taking a page from the playbook of Charles Schwab Co. and Dell, two companies that called on their former top executives when they were struggling.
“Charles Schwab returned as chief of his discount brokerage in July 2004; the stock is now up 160%. Michael Dell came back to the helm a year ago. Since then, Dell shares have fallen 20%.”
The Seattle Times writes this morning that “most analysts said Schultz shared the blame for Starbucks' problems but said he will make a better CEO.
"It's not as if Howard was MIA during this process. I'm sure Howard had input, but the buck always stops with the CEO," Sharon Zackfia, an analyst at William Blair in Chicago, tells the paper.
- KC's View:
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There was a phrase in the Wall Street Journal story about the change of command at Starbucks that made me stop short:
Mr. Donald led with a folksy management style and liked to single out individual employees for accolades. Starbucks said the management change will take effect immediately.
One can only wonder what sort of style Starbucks will be changing to, since it seemed to me that Jim Donald was doing exactly what they hired him to do, and was extraordinary at making people in the company feel as if they were vital to the enterprise. That wasn't just posturing for him; he always liked to say that one of his rules was “never to be bigger than the front line.” It was like a religion for him.
In an interview with the Seattle Times last year, Donald said that one of his goals was “to keep it small as we grow. I've always said, in whatever job I had, that I'd know I was successful if the day I died, all the front line [employees] came to the funeral. To me, that's a sign of success.”
And he acknowledged that this could be difficult: “The difference is that now we're moving quickly every day. To retain the heritage and the history of this company, it is work to reach out and connect, to hire, to train, to keep the coffee culture within this company.”
I mention all this because over the last few years, I got to know Jim Donald a little bit. He is a great guy and, I believe, utterly genuine. He was (and, I hope, remains) a fan of MorningNewsBeat. I’d shared several cups of really, really good coffee with him in his office. And when my son became a Starbucks barista, he was exceptionally kind to him, shooting him the occasional email to check up on him, and even sending him a note at college to inquire how things were going in his first year away from home.
When I traveled and, inevitably, went into the local Starbucks for my “fix,” I’d always take note of the people behind the counter. Jim liked it when I’d send him an email about a terrific barista in Munich or Chicago or wherever, and I know he reached out to those folks to tell them that they were appreciated. In the Seattle Times interview, he said that he’d signed 33,000 letters to Starbucks “partners” during the previous year – which anyone would view as being an extraordinary commitment to being authentic.
The management change will take effect immediately.
Some baseball manager – I can’t remember which – once said that “managers are hired to be fired.” That’s probably true for many executives, too.
It is hard to know exactly what is going to change at Starbucks with Howard Schultz in the CEO’s chair. It seems to me that at least part of the problem has to do with expectations – once a company gets on that roller coaster, promising ever greater thrills, ever higher sales, profits and share prices, it is almost impossible to maintain over a long period of time.
It’s like what Woody Allen once said in some movie, explaining to his wife why he’d stopped being so attentive after courtship ended and they got married: “I would have had a stroke.” Catering to shareholders and stock analysts is like a courtship that never ends, and eventually, almost inevitably, somebody is going to have a stroke.
I’d guess that it was easier to make the CEO change because Howard Schultz was ready and willing. He understands the culture because he helped create it, and he knows that Starbucks cannot regain past momentum by morphing into McDonald’s or Dunkin’ Donuts or any of the other competitors nipping at its heels. The only way to regain past glory is to be a better Starbucks … though how to achieve that may be problematic in an atmosphere where a single quarter of declining same-store sales can cost the CEO his job.
It seems to me that what we have here is the classic confrontation between efficiency and effectiveness, one that is faced by many companies. On the one hand, Starbucks’ investors and leadership wanted to create a juggernaut, blanketing the globe with coffee shops and dominating the category. But in doing so, infrastructure had to be created and, inevitably, some compromises had to be made. Howard Schultz complains about the fact that coffee is now being shipped to stores in vacuum packaging instead of in barrels, and that the stores have lost touch with their roots by using automated machinery. Those may be valid complaints, but size requires efficiency and some level of automation. Choices had to be made….and while the economy was cooking and everything looked good, there weren't a lot of complaints. But the tide turned, and suddenly the cultural compromises looked too great.
The interesting thing is this. I know retailers that have expanded from one to two to three to four stores, and they have dealt with precisely the same issues – albeit under less of a media spotlight – that Starbucks is dealing with right now. It can be difficult for culture and commerce to thrive within the same crucible.
Tell you this, though. While it won’t be quite the same, I’ll still be getting my venti skim lattes at Starbucks, doing my best to rebuild those same-store sales. And I’m glad that my son continues to be a Starbucks employee, because it has been a terrific and formative experience for him, and likely will continue to be, even as it works to regain its footing.
One final thing. There’s always a job at MorningNewsBeat for Jim Donald. Anytime.
