Worry is healthy, even at Starbucks

It appears that Starbucks Chairman Howard Shultz woke up in a cold sweat recently, and wrote an 800 word memo to his senior execs in what appears to be a lament:

His observations, summarized from the WSJ:

“Starbucks Corp. built its broad appeal on what Chairman Howard Schultz labeled an “experience,” including baristas who know customers’ orders by heart and an atmosphere that entices patrons to linger for hours. That experience has enabled the coffee chain to charge the premium prices that fuel its robust earnings growth.”

“[Has the] drive for growth and efficiency has diluted that experience?”

“Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead [sic] to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand,” Mr. Schultz wrote in the memo.

“Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces.”

Starbucks’ steady sales and earnings growth have made the company’s shares soar since it went public in 1992. Starbucks said net income for the quarter ended Dec. 31 came to $205 million, or 26 cents a share, up 18% from $174.2 million, or 22 cents a share, a year earlier. Sales rose 22% to $2.36 billion from $1.93 billion.

In his memo, Mr. Schultz wrote that when in recent years the company switched to automatic espresso machines — which have been used in some stores for at least five years and currently are in thousands of outlets — “we solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre.” Starbucks used to have all its baristas pull espresso shots by hand.

That move “became even more damaging” because the new automatic machines “blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista,” he wrote.

Mr. Schultz wrote that Starbucks switched to “flavor locked packaging” for its coffees that eliminated the task of scooping fresh coffee from bins in stores and grinding it in front of customers. “We achieved fresh roasted bagged coffee, but at what cost?” Mr. Schultz wrote. “The loss of aroma — perhaps the most powerful non-verbal signal we had in our stores.”

Mr. Schultz also wrote that streamlining the store-design process had created “stores that no longer have the soul of the past….Some people even call our stores sterile, cookie cutter,” he wrote.

Some Starbucks stores no longer have coffee grinders or coffee filters. “In fact, I am not sure people today even know we are roasting coffee. You certainly can’t get the message from being in our stores,” the memo says.

“While the current state of affairs for the most part is self induced, that has lead [sic] to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness…and loyalty of people who previously have been Starbucks customers. This must be eradicated,” he wrote.

At the end of his memo, Mr. Schultz said he took full responsibility for the decisions Starbucks has made. “We desperately need to look into the mirror and realize it’s time to get back to the core,” he wrote. “I have said for 20 years that our success is not an entitlement and now it’s proving to be a reality.”

There aren’t any bigger fans of Starbucks than me, and I’ve followed the Peter Lynch investing school and SBUX makes up part of my RRSP. The brand is everywhere, but then not everywhere enough – which is why they’re trying to grow the footprint from 13,000 to 40,000 stores. And children can learn to identify the logo as young as the age of 18 months.

Despite their overwhelming success, the top executive of one of the most successul consumer brands in the world still worries about where the business is going, and what the management team needs to do to keep the path up and to the right. The memo even warranted an L.A. Times editorial.

Introspection is always good, and something that CEOs can never do enough of on a regular basis: “What made up succeed? What do we have to do to keep it up?”

MRM