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QUESTIONS & ANSWERS

What Starbucks' CEO has brewing

Howard Schultz talks about how the coffeehouse chain is dealing with the recent economic jolt

May 31, 2008|Jerry Hirsch | Times Staff Writer

Back in 1987, when coffee entrepreneur Howard Schultz and a group of Seattle investors purchased Starbucks, the chain had just 11 stores. Now it has more than 16,000 spread across 44 countries.

Schultz, Starbucks' chief executive, is credited with launching that tremendous growth in the chain, and in the process creating the mass-market gourmet coffee business in the United States. Now there's either a Starbucks or a competitor in nearly every shopping mall or strip center.

On Wednesday, the UCLA Anderson School of Management handed Schultz its inaugural John Wooden Global Leadership Award, which will be given annually to a business leader who like Wooden, the legendary basketball coach, exhibits exemplary leadership.

Through his strength of personality and vision for the business, Schultz has had "a disproportionate impact on the growth" of Starbucks Corp., said Judy Olian, dean of the management school.

The award for Schultz, however, comes at a time when the coffee business isn't percolating as well as it once did. Starbucks logged its first decline in profit and is seeing fewer customers in its stores. The company's stock has plunged almost 38% over the last year, closing at $18.19 on Friday.

After serving the last eight years as chairman, Schultz, 54, started a second stint as CEO in January, charged with reigniting growth at the business.

Schultz spoke to The Times about the challenges Starbucks faces and the future of the company.

What do you say to these family-budget advisors who suggest that the best way to save money to pay for higher-priced gas and food may be to cut out that latte, that daily trip to Starbucks?

We have to be ultrasensitive to providing value for our customers. And 50 million customers a week are coming through Starbucks stores.

We have to innovate and provide more value to the customer, but the customer comes into Starbucks not only for coffee, [but also] the sense of community, the sense of humanity in our stores. We really have become this third place between home and work. We have managed through different downturns in the economy before, and we will again.

This year you had your first decline in profit. Why?

For 15-plus years we have led a pretty charmed life.

For the first time in our history . . . we have less traffic in our stores this year than we did last year. The frequency of visits is being directly linked to the consumer not having as much disposable income as they did in years past. If you talk to the economists -- people much smarter than me -- they are saying that the next six to 12 months could be worse than the last six to 12 months.

Across the board, consumers have less money than they had before, they are quite concerned . . . and as a result we have to be better than we were before to capture that market and to satisfy the customer.

The question everybody asks about Starbucks is, why are there so many?

The strategy for growth was based on demand.

When we went public in 1992 with under 25 stores, the more stores we opened the more successful we became. Many of our stores got so busy that we started opening up stores nearby. It wasn't through any research or analysis or any scientific model. We just thought the market would support more stores in an area, and as a result of that we began to open up more stores. But we never imagined that it would become as big as it became.

Tell us ways you are demonstrating to the customer new value, possibly new initiatives, new products.

There's more innovation coming at Starbucks over the next six to 12 months than we've had in the last five years.

In July we will introduce a fantastic new summer product in Los Angeles. . . . We found a fantastic new cold-beverage platform in Italy, and as a result of that we are bringing it to the market. It is a product that is both indulgent and refreshing. . . . It is steeped in Italian heritage. I can't tell you more than that.

In the coffee business, everyone is gunning for you. How do you defend your turf?

The size of the market is much, much larger than people have initially realized. Despite how big Starbucks has become, we only have 8% of the total U.S. coffee market in terms of cups that are consumed. There is a big market out there, and that's why you see other players trying to capture it.

It is harder to maintain leadership in many ways than to become the leader.

One of the things we have tried to do over a long period of time is really build a company that has a conscience, that achieves a balance between profitability and a level of benevolence. People sometimes miss that because the headline is so often the ubiquity of the company, the growth of the company. But we have also done things that no other company has done before in the way we have tried to build the business.

It is not an accident that Starbucks tried to do something that was never done before . . . equity in the form of stock options and comprehensive healthcare for part-time workers.

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