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Tuesday, January 8, 2008 - Page updated at 10:28 AM

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Starbucks shake-up: Schultz back as CEO

Seattle Times business reporter

 

Howard Schultz: "I am dissatisifed ... "

 

Jim Donald, CEO for nearly three years, was ousted.

Enlarge this photo

ELAINE THOMPSON / AP

Howard Schultz, right, gives a pat to Jim Donald at the annual Starbucks shareholders meeting in Seattle March 21. Starbucks fired Donald as CEO; Schultz returned to the position Monday.

Howard Schultz and Starbucks

1981: Howard Schultz visits the company that's buying so many drip coffeemakers from the Swedish company he represents and falls in love with it.

1982: He becomes Starbucks' director of retail operations and marketing.

1987: Leads a group of investors to buy Starbucks when it had fewer than 20 stores and plans to open 125 new stores in five years.

1992: Takes the company public. Starbucks ends fiscal year with 165 stores.

2000: Steps down as CEO, a title that goes to Orin Smith. Schultz remains chairman. Ends fiscal year with 3,501 stores.

2005: Smith retires and is replaced by Jim Donald. Starbucks ends fiscal year with 10,241 stores.

2008: Schultz reclaims CEO position and Donald leaves the company. More than 15,000 stores worldwide.

Howard Schultz, Starbucks' chairman and the man responsible for turning it into the world's largest coffee-shop chain, returned as chief executive on Monday and laid out plans for a turnaround.

The board of directors ousted Jim Donald, 53, who was chief executive of the Seattle company for almost three years and spent most of his career in the grocery industry. He was not available for comment.

Schultz, 54, has not been Starbucks' CEO since 2000, when it had 3,500 stores. Now it has more than 15,000 locations in 43 countries and competitive threats from such chains as McDonald's and Dunkin' Donuts.

Many investors say rapid growth is to blame for Starbucks' foundering financial performance and stock price during the last couple years, and Schultz agreed. He said he also wants to revive innovation and create a stronger bond with customers.

"I'm here to tell you that just as we created this problem, we will fix it," he said during a conference call with analysts Monday afternoon. "Growth and size can hide mistakes."

Schultz said Starbucks will slow its growth and close some stores in the U.S., and accelerate growth in other countries where new stores will be more profitable. He would not give precise growth projections until Jan. 30, when Starbucks announces first-quarter earnings. As of November, it planned to open 2,500 stores worldwide in fiscal 2008.

"I've been here 25-plus years, and I've seen every aspect of growth and development of the company, and I am dissatisfied perhaps more than anyone on this call with where we sit today," Schultz said, adding that his reputation depends on getting it right.

His statements Monday echoed a memo he wrote to top executives last Valentine's Day mourning the loss of Starbucks' passion and romance for selling coffee. He listed decisions that moved the company away from its roots, including the way it ships coffee beans and its switch to automated espresso machines.

Reversing those decisions now would be costly, and it might be impossible for a large chain to ship and store coffee beans in sacks or barrels rather than flavor-locked packages. But Schultz said Monday that nothing is sacred.

Some customers were glad to hear it. "Everybody is trying to copy Starbucks, and it hasn't come up with anything new. It's the same settings, the same drinks," said Amber Perry, 19, a former Starbucks barista who works at Macy's in downtown Seattle.

Starbucks also went overboard with its expansion, she thinks. "You go down to Bonney Lake, and there's a Starbucks everywhere, in every grocery store, even in the parking lots of grocery stores. That's a little much."

Wall Street cheered the moves.

"People at Starbucks love Howard, and they will have a renewed sense of direction and energy. If he's going to focus 100 percent of his time on Starbucks, that's a really good thing," said Howard Penney, managing director of consumer research at Friedman, Billings & Ramsey in New York.

He wrote in November that Starbucks' top management could lose control of the company if they didn't make big changes, including ending a "growth at any cost" strategy.

Penney expects the company to write off restructuring charges as it cuts through layers of bureaucracy and closes some stores.

Analysts pointed to the slowing economy as one reason for Starbucks' recent troubles, but Schultz said he won't use that as an excuse or let it stand in the way of making improvements.

"We can advance our business despite the headwinds," he said. "You will see in the near future that we will not sit still, we will not embrace the status quo. We have other assets to bring to bear on our renewed relationship with customers."

Most analysts said Schultz shared the blame for Starbucks' problems but said he will make a better CEO.

"It's not as if Howard was MIA during this process. I'm sure Howard had input, but the buck always stops with the CEO," said Sharon Zackfia, an analyst at William Blair in Chicago.

Starbucks stock shot up after the announcement, which followed the close of regular trading. After climbing 27 cents to $18.38 in regular trading, it leapt $1.65 to $20.03 in after-hours trading.

The research firm Morningstar figures the stock is worth $36. It has traded between $18 and $36.61 over the past year.

"I don't think anyone is more qualified than Howard Schultz to turn around this business," Morningstar analyst John Owens said. "I don't believe anyone has more credibility to push through those changes and rally the troops."

Melissa Allison: 206-464-3312 or mallison@seattletimes.com. Seattle Times business reporter Amy Martinez contributed to this report.

Copyright © 2008 The Seattle Times Company

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