Wednesday, January 16, 2008

Me, My Wife, and Howard Schultz

Starbucks chairman Howard Schultz is returning to his old CEO job after firing Jim Donald. I think that’s a good thing. Margins are being squeezed, the stock is down, and same-store sales have suffered. One reason is that my wife and I stopped going to our local Starbucks. It used to be a cool place, or should I say, a warm, inviting place. It was a place that beckoned us with easy familiarity, a place we could hang out in comfort. No longer. The couches and sofa have been removed. A few small tables and wooden chairs remain, pushed to the edges of the room. The baristas no longer seem to know the customers. The whole vibe of the place reeks “fast food”. Get people in, pump them for multiple sales, take their order, get ‘em out. This is not an isolated situation. It’s a predictable consequence of Starbucks’ strategic obsession over the past few years—which has been all about unbridled growth. Launch more stores in more places, full speed ahead! Four new stores per day in 2007, as it turned out, with an intermediate goal of 40,000 stores (from the current 15,000) worldwide I’m all in favor of growth as a strategic priority, but when it becomes the strategic obsession, there’s a real danger that a company will lose its distinction and its soul. That’s what happened to Starbucks. First, a little history. As numerous business and management books have noted ad nauseum, the remarkable success of Starbucks was its capacity to pump compelling value into what used to be a high volume low margin commodity “coffee” industry. That value, of course, revolved around the unique experience that Starbucks offered the customer: a diverse menu of high-end global coffees and a comfortable friendly environment that served as a refuge from the woes of the external world.The trouble is, the experience became less and less unique as an increasing number of providers—from Dunkin’ Donuts and McDonald’s to ma-and-pa enterprises—began to offer their own versions of designer coffee and comfort. When a McDonald’s spokesperson recently declared that high-end coffee has become “democratized”, you know that what was once a unique value proposition has become commoditized. Meanwhile, as part of its growth zeal, Starbucks itself accelerated the commoditization process. The strategic decisions revolved around leveraging a static Starbucks experience to an ever increasing number of locations in order to increase volume, revenue, and share. If the best people weren’t hired or properly trained, and if the furniture and amenities weren’t revitalized—so be it. Size and scale ruled. You can’t have it both ways. You can’t demand that your people and culture obsess about corporate growth as “the” top priority and at the same time expect them to continually enrich the customer experience in order to maintain the sense of uniqueness and “gotta-have-it”. It won’t happen.Schultz himself recognized this. A year ago, he wrote a controversial memo to staff that bemoaned the increasing “dilution of the experience” and the “commoditization of the brand” as adverse consequences of Starbucks’ growth imperative. He should have stepped in back then as CEO, rather than simply fretting, because today the chickens have come home to roost. Starbucks has become a big, “mature” company with declining differentiation, buzz and market cap. My wife and I go to a funky local “coffee shop” around the corner to get our espresso fix, and a entry concludes that Starbucks “will never be cool again.” Maybe, maybe not. Schultz is following the precedent set by Michael Dell and Charles Schwab, both of whom founded companies which thrived, both of whom left the companies to others while assuming the non-operating “Chairman” role, and both of whom returned to their CEO roles when the doo-doo hit the fan. Schultz is obviously hoping that he can help Starbucks find the soul it has lost. As a woo-able customer, and as a long-term investor, I selfishly wish him well.


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