At the company’s annual meeting March 25 in Seattle, executives of Starbucks Corp. made it abundantly clear to share-holders that the company is not standing still. At the same time they said they are mindful of painful lessons from missteps in the past. The company’s executive team led by Howard D. Schultz said successes of recent years have not tamped down ambitions for far greater achievements ahead.
Mr. Schultz, who is chairman, president and chief executive officer, did not brush off the financial successes achieved in recent years. With a total shareholder return (share price appreciation adjusted for dividend payout) of 38% in the year ended Sept. 30, 2012, Starbucks has demonstrated that its position as a leading U.S. growth company has been reestablished. The impressive gains of fiscal 2012 followed heady advances of 46% in fiscal 2011 and 32% in 2010, when the company was still recovering from stumbles earlier in the 2000s.
Suggesting investor confidence has been restored, the share price advance eclipsed impressive gains in operating results in fiscal 2012, including a 14% rise in global revenues to a record $13.3 billion, a 7% gain in comparable store sales, a 16% gain in operating income and a 20-basis point improvement in operating margins, to 15%.
Mr. Schultz identified other ways to measure the company’s progress, including its discovery earlier this year it had been named the fifth most admired company in the world by Fortune magazine.
He explained, “Now, the people that work with me know that my first response was, ‘Who are the four before us?’ And I can tell you that one day, we’ll stand here before you, and we will be the most admired and respected company in the world. That is our ambition.”
To achieve this objective, Starbucks will need to surpass the likes of Apple, Google, Coca-Cola and Amazon.com. As lofty as the goal may seem, it is worth noting that Starbucks was not in the top 10, was not even in the top 50, when
Mr. Schultz became c.e.o. for the second time in January 2008.
At the time of his return, Mr. Schultz, who had been complaining as chairman that the company had lost its way, offered a blueprint for recovery with a handful of key points:
•Improving the current state of the U.S. business by refocusing on the customer experience in the stores, new products and store design elements;
•Slowing the pace of U.S. store openings and closing underperforming U.S. store locations;
•Making the business more coffee-centric once again;
•Realigning the company’s organizational structure;
•Accelerating non-U.S. growth.
“Taken together, these initiatives will help transform Starbucks and drive the company’s enduring success,” Mr. Schultz said at the time. “We know that we can improve our performance by getting back to the essence of what drove Starbucks’ past success — our passion for the business and a complete focus on the customer and our relationship with our people.”
At its most basic level, Starbucks was looking to restore the vitality of its core U.S. market as a precondition for tapping into the greatest growth opportunity — global expansion.
While using terms like “emotion” and “passion” to explain Starbucks’ decision to tighten a focus on coffee as a key to its recovery, Mr. Schultz said the cold economics of the coffee business were compelling as well. In an interview with Fortune just after becoming c.e.o. again, he challenged critics who suggested Starbucks had “saturated” the market.
“The size of the prize is still huge,” he said. “We sell less than 10% of the coffee consumed in the U.S. and less than 1% outside the U.S. The momentum will come from international. Slower growth in the U.S., accelerating growth overseas. The response to the Starbucks brand has been phenomenal in our international markets.”
In the years that followed, the heightened focus on coffee at Starbucks has taken many forms, some highly visible and others less so.
Weeks after his return, 7,100 Starbucks stores around the United States were closed for 3½ hours so baristas could be retrained to make the perfect cup of espresso.
A few months later, Mr. Schultz jettisoned a step taken by the company, in the name of efficiency, to use pre-ground coffee at its stores rather than beans for its brewed coffee. Mr. Schultz said the change had dimmed the sense of “romance and theater” for customers, adding that the loss of aroma represented the most powerful nonverbal signal the company has at its stores. Similar thinking was behind a decision to stop heating breakfast sandwiches, which he said overwhelmed the aroma of coffee.
Also beginning in 2008, Starbucks began replacing its existing espresso machines with a Swiss-made “high performance” Mastrena machine.
Initially, the stock market appeared decidedly unimpressed by several of the company’s steps. While the share price of Starbucks climbed as much as 14% in New York Stock Exchange trading the day after his return as c.e.o. was announced, the enthusiasm proved short lived. Shares in Starbucks plunged by two thirds from $21.01 per share to $7.06 in November 2008. In addition to restoring the company’s financial strength, Starbucks was trying to swim against the tide of an extraordinary bear market and a weak economy. Same-store sales, which fell 3% in fiscal 2008, declined 6% in 2009.
Still, over time steps the company took appeared to bear fruit. A range of new product introductions in the coffee area were quickly launched, beginning with the company’s VIA instant coffee and continuing with the introduction of Pike Place roast, a single coffee to be brewed every single day (before then, the company would rotate through its brewed lineup). More recently the company has introduced Blonde roast coffees, targeted toward the 40% of Americans who prefer a lighter roast coffee. Other innovations included the November 2011 introduction of Starbucks K-Cup servings for the single-serve category.
In addition to strengthening its coffee focus, Starbucks took many other steps to bolster its business, including the 2009 closing of 600 stores, eliminating 7% of its global workforce. A 2011 profile in Business Week also cited the updating of its in-store technology with the replacement of cash registers and computers, the engagement of outside counsel (e.g., McKinsey and Co. and the addition of Sheryl Sandberg, a top Facebook executive and formerly a top Google executive, to the Starbucks board) and new store designs.
More recently, the company has seen rapid growth from areas that almost certainly were not envisaged by Mr. Schultz in 2008. The company’s My Starbucks Rewards program had 6 million active members as of March 2013, a figure projected by the company to grow to 9 million by October. The Starbucks app is being downloaded at a rate of more than 10,000 per day with 3 million mobile payments transacted every week. The company estimated that more than 30% of in-store transactions are pre-paid. In fiscal 2012, $2.8 billion were loaded by customers onto new or existing cards.
“It is hard to overstate the collective power of Starbucks’ 54 million Facebook fans, 3 million Twitter followers, 14.6 million loyalty program members, and 7 million users of our mobile applications, who pay this way 2 million times each week,” Mr. Schultz said at the annual meeting. “We also gave our customers another quick, mobile way to pay by forging a partnership with Square (a mobile payment platform).”
Two other areas in which the picture in 2013 is very different than in 2008 are the company’s attitude toward U.S. store openings and its view of the role food plays at Starbucks.
“The U.S. business right now is as healthy as it ever has been,” Mr. Schultz said at the annual meeting. “And if I look at some of the research reports for some of the articles that were written in 2008, 2009 when people thought that perhaps Starbucks had lost its way and we were reaching saturation and now you look at the situation today, nothing can be further from the truth. The U.S. business and specifically the stores that we open in calendar ’12 and fiscal ’13 to date are some of the best performing stores in the history of the company in terms of unit economics, profitability and the qualitative aspect of how we’re dealing with our customers. And that has given us great confidence to accelerate the growth in our U.S. business.”
With this assessment in mind, Mr. Schultz announced plans for new store openings, mindful, though, of the overly aggressive building that led to the 2009 closings.
“Over the next five years, we plan to open 3,000 new stores in the Americas region alone,” he said. “Unlike a period in our past, I assure you that our growth today is highly disciplined.”
Perhaps the greatest about-face from 2008, though, is in the role food is expected to play in the growth ambitions of Starbucks. Mr. Schultz was blunt in his comments about food in the 2008 interview with Fortune.
“We rely on others for food, because we don’t want to be in the bakery business and some of it isn’t as good as it should be,” he said. “We don’t want to be a food company.”
Since then, the company has made three acquisitions reaching well beyond the coffee space.
In November 2011, Starbucks bought the small upscale juice maker, Evolution Fresh, Inc. In June 2012, Starbucks acquired Bay Bread L.L.C., a California-based baker, and later in the year, purchased the Teavana tea chain.
“With La Boulange bakery products, we have begun the transformation of the selection, taste, and quality of the fresh food in our stores,” Mr. Schultz wrote in the 2012 annual report. “Second, adding Evolution Fresh to our brand portfolio fulfills our commitment to health and wellness, and not just by bringing high-quality premium juices to our customers but by extending the Evolution Fresh brand to an exciting new store concept. With Evolution Fresh juice products currently in more than 2,200 Starbucks stores as well as 1,500 grocery locations, we are on our way toward nationwide distribution.
“Finally, with the acquisition of the high-end Teavana brand, we’ll apply our competencies in retail operations and hot and cold beverage creation to expand Teavana’s 300-store footprint as we reinvent the tea category, in part by bringing tea bars into Teavana stores and applying learnings from our own Tazo brand. Long term, our intent is to significantly grow Teavana’s global store presence, transforming tea just as we have transformed coffee.”
Still, from a corporate perspective, the gains the company has achieved outside the United States continue to signal the greatest potential for growth going forward, company executives said.
The company currently operates in 61 countries. Mr. Schultz was present in India recently when he said Starbucks “had our most successful launch ever, in India.”
Starbucks enjoyed strong growth in the China and Asia Pacific region in fiscal 2012, lengthening a period to 11 consecutive quarters of double-digit comparable store sales growth. Gains also have been achieved in the Middle East, where the company had a modest presence for many years.
“Respecting and reflecting regional customs and cultures so we may be locally relevant” was cited by Mr. Schultz as a key in the region, helping fuel 9% growth in the Europe Middle East Africa division.
All told the company’s growth has been steady. With all of the changes implemented in recent years and an improved economy, same-store sales were up 7% or 8% in each of the past three years. A recent closing price of $57.70 was up more than 700% from the November 2008 low.
While confident the company remains firmly on a path to growth, Mr. Schultz also told shareholders the lessons of its earlier difficulties have not been forgotten.
“We have learned never to take our success for granted,” he said.