Schultz Says Starbucks Can Retain Coffee-House Nature

By Mary Jane Credeu
Bloomberg
April 5, 2007

Starbucks Corp. Chairman Howard Schultz says he can preserve the chain's coffee-house nature even as he adds seven new stores a day.

``This is really hard to do,'' Schultz said in an interview at the Seattle headquarters of the world's largest coffee-shop chain. ``And because very few people have done it before, they're out there waiting for us to fall.''

Schultz's concern about damaging what he calls ``the intimacy of the experience'' at Starbucks surfaced in February, when a memo he wrote was published in newspapers and on the Web. In it, he urged executives to re-think decisions such as using automatic espresso machines instead of having baristas draw shots by hand. He said such moves could lead to a ``watering down'' and ``commoditization.''

``He's rightfully questioning things like whether the restrooms are clean, and how long the lines are,'' said Reed Bender, who helps manage $300 million at Robert Bender & Associates in Pasadena, California. ``Now is a good time to be thinking about these things, especially as they add all these new stores.''

The firm has held Starbucks shares for more than 10 years, and recently bought more stock.

``I've written hundreds of memos,'' Schultz said in the interview on ``Conversations with Judy Woodruff,'' which airs on Bloomberg TV starting tomorrow. ``There's a common thread to all of them, really sharing with our own people that success is not an entitlement.''

`No Slowdown'

The memo doesn't signal that Starbucks will temper its growth plans, he said. ``There's no slowdown,'' he said. ``There's no erosion of the equity of the brand.''

Founded in 1971, Starbucks grew to 13,168 stores at the end of 2006. The company plans 10,000 new stores in four years, and has a long-term goal of 40,000 worldwide.

Starbucks shares were sliding before the Valentine's Day memo on investor concerns about higher coffee and labor costs, and competition from McDonald's Corp. and Dunkin' Donuts. The shares have dropped 20 percent in the past 4 1/2 months and rose 6 cents to $31.40 in composite trading at 4 p.m.

Profit for the year that ended in October rose 14 percent, the smallest increase in six years. Sales at older stores rose 7 percent, the worst showing in four years. Sales were hurt by long lines in July and August caused by unexpected demand for icy Frappuccino drinks that take longer to make than coffee and espresso drinks.

New Stores

Starbucks will continue to open new stores in densely populated areas to put more locations near neighborhoods and offices, Schultz said.

``People complain there's not enough stores in Manhattan,'' he said. ``We have over 200. We have over 2,000 stores in California. Our customers want more.''

He declined to comment about a recent Consumer Reports survey that said McDonald's coffee tasted better than Starbucks' brew. The world's biggest restaurant chain began selling a premium coffee last year.

``If Consumer Reports believes that McDonald's coffee is better, I'll leave it up to them,'' Schultz said. ``The customer votes every day.''

To spur growth, the company has increased its sandwich offerings and is selling music and books, including a memoir by a former Sierra Leone child soldier titled ``A Long Way Gone.''

Paul McCartney

Starbucks's new Hear Music record label, formed with Beverly Hills, California-based Concord Music Group Inc., last month signed former Beatle Paul McCartney as its first artist. A new McCartney album is scheduled for June.

One of Starbucks's fastest-growing expenses is health-care insurance for its employees, including many part-timers, Schultz said. The company has had ``double-digit'' increases in health- care costs for four straight years, he said.

About 65 percent of U.S. employees were eligible for health insurance through Starbucks last year, according to the company's corporate responsibility report. Starbucks has 150,000 employees worldwide.

Health care will probably be a ``significant component'' in the 2008 presidential election, Schultz said, declining to say which candidate he supports. He wants to see some form of universal health coverage, and said government must be involved.

``Nothing is more damaging and more significant than the fact that almost 50 million Americans don't have health insurance,'' Schultz said. ``Until we fix the problem with the uninsured, the health-care system in America is not going to be solved.''
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To contact the reporter on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net .