Rebuilding Competitive Advantage at Starbucks
Howard Schultz’s Second Act
The growth of Starbucks is the stuff of business legend. In the 1980s, when the company had only a handful of stores, the company’s director of marketing, Howard Schultz, returned from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later purchased the company and became CEO, persuaded the owners to experiment with the coffeehouse format, and the Starbucks experience was born. The strategy was to sell the company’s own premium roasted coffee and freshly brewed espresso-style coffee beverages, along with a variety of pastries, coffee accessories, and other products, in a tastefully designed coffeehouse setting. The idea was to transform the act of buying and drinking coffee into a social experience. The stores were to be “third places,” where people could meet and talk, or relax and read. The company focused on providing superior customer service. Reasoning that motivated employees provide the best customer service, Starbucks’ executives devoted much attention to employee hiring and training programs, and progressive compensation policies that gave full time and parttime employees stock option grants and medical benefits.
This formula was the bedrock of Starbucks’ competitive advantage. Starbucks went from obscurity to one of the bestknown brands in the United States within a decade. Between 1995 and 2005, Starbucks added U.S. stores at an annual rate of 27%, reaching almost 12,000 total locations. It also expanded aggressively internationally. Schultz himself stepped down from the CEO role in 2000, although he remained chairman.
By 2008, however, the company was hitting serious headwinds. Competitors from small boutique coffeehouses to chains like Tully’s and Peet’s Coffee, and even McDonald’s, were beginning to erode Starbucks’ competitive advantage. Although the company was still adding stores at a break neck pace, same store sales started to fall. Profitability, measured by return on invested capital (ROIC), slumped from around 21% to just 8.6% in 2008. The stock price tumbled.
At this point, Howard Schultz fired the CEO, and again reclaimed the position. His strategy was to return Starbucks to its roots. He wanted the company to reemphasize the creation of value through great customer experience, and he wanted the company to do that as efficiently as possible. He first closed all Starbucks’ stores for a day, and retrained baristas in the art of making coffee. A number of other changes followed. The company redesigned many of its stores to give them a contemporary feel. It stopped selling breakfast sandwiches because Schultz thought that the smell detracted from the premium coffeehouse experience. Instead of grinding enough coffee for an entire day, he told employees to grind more coffee each time a new pot was brewed to create the aroma of freshly brewed coffee. He gave store managers more freedom to decide specific things, such as the type of artwork that would be displayed in the stores. Starbucks also dramatically expanded its fair trade policy, purchasing its coffee beans from growers who adhered to environmentally friendly policies, and it promoted this to customers.
