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Starbucks chairman Schultz returning as CEO

Starbucks Corp. said Monday it is bringing its chairman and former chief executive, Howard Schultz, back to lead a major restructuring initiative, replacing CEO Jim Donald.
Image: Howard Schultz
Howard Schultz says he is returning to the CEO role “for the long term.” His agenda will include streamlining the company’s management and accelerating expansion outside the U.S.Elaine Thompson / AP file
/ Source: staff and news service reports

Starbucks Corp. Chairman Howard Schultz said Monday he is taking back the role of chief executive, replacing CEO Jim Donald as part of a plan to turn around the struggling chain of coffee houses.

Schultz, in a letter to employees posted on the company's Web site, said Starbucks would slow its U.S. growth and close underperforming locations, restructure its management organization and continue to expand globally.

The move comes as Starbucks has seen its stock plummet 50 percent over the past year as the chain has come under increasing pressure from competitors like McDonald's and Dunkin' Donuts. Starbucks' announcement late Monday sent the stock up about 9 percent in after-hours trading.

"If we take an honest look at Starbucks today, then we know that we are emerging from a period in which we invested in infrastructure ahead of the growth curve," Schultz wrote in his letter. "Although necessary, it led to bureaucracy. We will now shift our emphasis back onto customer-facing initiatives, better aligning our back-end costs with our business model."

Schultz said he is returning to the CEO role "for the long term" and that his agenda will also include streamlining the company's management.

Schultz, 54, previously served as CEO from 1987 to 2000.

Donald had been CEO since March 2005, when he was promoted from president of the company's North American division to replace Orin Smith, who retired.

“I’m not surprised that Jim’s leaving,” RBC Capital Markets analyst Larry Miller said. “We just met with them in December, and he’s normally a very energetic guy. He looked pretty deflated.”

The coffee giant has struggled in recent months as consumers have cut back on spending amid declining home values and higher fuel prices. Meanwhile, competitors like Dunkin' Donuts and McDonald's have cut into Starbucks' customer base by launching their own lines of gourmet coffee.

In his letter, Schultz said the "transformation agenda" will include:

  • Improving the current state of the U.S. business.
  • Re-igniting emotional attachment with our customers.
  • Building for the long term.
  • Expanding the company's presence around the world.

"Looking ahead, the reality we face is both challenging and exciting.  It’s challenging because there are no overnight fixes," Schultz wrote.

“Howard Schultz was instrumental in building this business from the ground up, so he is eminently qualified to be the CEO,” Morningstar analyst John Owens said. “Starbucks has to justify the premium that they charge. I think Schultz realizes that.”

Some analysts have questioned whether the company has saturated certain markets as it opens an average of six stores a day.

Starbucks has more than 15,000 stores worldwide and has stuck to an ambitious long-term goal of having 40,000, but in November it announced a slight scaling back of U.S. store openings, among other moves aimed at improving operations.

The company said then that it plans to open 2,500 stores this fiscal year, 1,600 of them in the United States.

Schultz in February 2007 warned Donald and other executives that automatic espresso machines, bagged coffee and “cookie cutter” store designs had led to a sterility at the chain that had invited competition from fast-food companies and others.

“We have had to make a series of decisions that, in retrospect, have (led) to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand,” Schultz wrote in the memo.

Earlier in the day, Starbucks was hit with a salvo from McDonald's. The fast-food giant announced it will expand the beverage lineup at its U.S. restaurants with cappuccinos, lattes and other drinks.

In the past year, Starbucks shares have fallen 48 percent on investor fears about slowing U.S. sales growth, soaring dairy prices and increased competition from McDonald’s, Dunkin’ Donuts and other fast-food rivals. McDonald’s stock, meanwhile, has climbed 33 percent as extended hours, demand for breakfast offerings and other new products have fueled U.S. growth.

Schultz was not a founder of Starbucks but catapulted it to global prominence with an ambitious growth agenda that was propelled by its initial public stock offering in 1992.

Schultz joined Starbucks in 1982 as director of retail operations and marketing, then left three years later to start his own company, Il Giornale, hoping to take the Italian espresso bar mainstream in the U.S. Il Giornale acquired Starbucks in 1987.

According to the company's latest proxy report he owns 31.6 million shares of Starbucks stock, worth about $580 million at current prices.