Starbucks Brews Up Changes

April 7, 2008 — -- Starbucks showed coffee drinkers the difference between a cappuccino and a latte and then taught them how to order one by saying "grande" instead of medium.

Consumers drank it up and in return made Starbucks the world's largest coffee chain.

When Starbucks went public in 1992, it had 125 stores. Today there are more than 15,000 stores in 44 countries, and billions in sales. But now after years of spectacular growth, the nation's leading premium coffee roaster has found its coffee going cold.

"We have challenges that we haven't had in quite some time in our company," said Howard Schultz, Starbucks' once-again leader.

In 2000 Schultz stepped down as CEO after 13 years to focus on larger projects and become the company's chairman. But in January the company fired then-CEO Jim Donald and Schultz returned.

To meet the battle brewing over coffee, Schultz quickly announced a series of initiatives to refocus Starbucks on how it all started: It's the coffee, "one cup of coffee at [a] time."

On Tuesday, consumers will get their first taste of the "new" Starbucks as the company launches a blend of coffee called Pike Place Roast, with free cups of coffee served nationwide from noon to 12:30 p.m. ET.

From then on, the coffee will be served every day in every store, brewed fresh every 30 minutes.

"The goal is to reinvent brewed coffee in America," Schultz told ABC News "Nightline" anchor Terry Moran during an exclusive interview in the company's first store in Seattle.

Watered-Down Coffee

Despite continued growth and strong sales overall, the last year has been a tough one for the nation's largest coffee chain.

The company has been battered by a combination of higher dairy prices, consumers spending less in a slowing economy, tougher competition from McDonald's and Dunkin' Donuts, along with missteps Starbucks made as it became increasingly bureaucratic and corporate and less a neighborhood coffee shop.

"Some of the problems that have occurred over the last year or so have been somewhat self-induced," Schultz said. "I think we've allowed the lines between us and everybody else to be somewhat blurred in terms of what we do."

In the last three months of 2007, sales dropped 1 percent at stores in the United States open for more than one year, a first for the company. The company's stock price has dropped more than 40 percent from a year ago.

"I think it became too corporate," said portfolio manager Patricia Edwards with Seattle-based Wentworth Hauser & Violich. "It used to be that you could go in, you could get coffee, you could get an espresso drink, that was pretty much it. And over time they added food, they added hot sandwiches, they added teddy bears, they added cups."

With so much for sale beyond just coffee, Edwards believes the company lost its unique café experience. "I think that's where their downfall has been."

The company recently announced that it would open only 2,150 stores worldwide in 2008, down from a planned 2,500. In the United States, the company will open 1,175 instead of the originally planned 1,600 stores.

In addition, Starbucks will close 100 stores that have performed poorly and cut its work force by nearly 600 jobs.

Back to the Future

Schultz, the man who made Starbucks a part of America's national culture, is back in charge again, and he's now taking decisive actions to reclaim the company's roots as a small, Seattle-based coffee roaster.

By measures large and small, he wants to put that heritage into the company's more than 15,000 stores and in the minds of its consumers.

"Our customers have forgotten that we are a coffee roaster and not all coffee is equal around the world," he said. "There are many people making claims about coffee. They are not coffee roasters and the art of what we do, that story has not been told in a very long time."

It starts with the name of the new coffee, Pike Place Roast, highlighting the company's first store, opened in 1971, in downtown Seattle's outdoor marketplace of the same name.

Next, Starbucks baristas will regularly grind beans to fill the cafés with the aroma of coffee and they'll also make fresh pots every 30 minutes. Gone are the breakfast sandwiches that, when heated, often overpowered the smell of coffee.

Starbucks will also install a new espresso machine called the Mastrena in every store by 2010. The Mastrena has a lower profile so baristas and consumers can see each other and connect during the espresso-making process.

To bring back some of the theater in brewing coffee, Starbucks also bought a small coffee manufacturer that developed a machine called the Clover, a sort of automated French press. A barista scoops out a precise amount of roasted beans, grinds them and puts them in the machine to make a single brewed cup of coffee.

"I'm more energized and excited about the future than I have been about the past," said Schultz reflecting on his goal to reclaim the past as the company rolls out future innovations.

Economic Worries

Those steps to reinvigorate the Starbucks' experience come, however, at a tough time for consumers as a whole.

Nationwide, depending on who is asked, the economy has either sunk into a recession or teeters on the edge of one. In either case, consumers are spending less. Retail sales in February fell 0.6 percent compared to January.

Schultz knows the timing is tough for Starbucks.

"We have a head wind now the likes of which we haven't seen in some time, and the consumer is in a recession," he said. "It's harder now to be relevant and important in the lives of the consumer. We have to earn that right and we have to earn their respect."

Part of the coffee chain's strategy is the focus on brewed coffee. It sells for less than $2, below the average price for espresso-based drinks.

In addition, for the first time, Starbucks will offer a loyalty card to its customers to bring them into the stores. Customers can receive free syrup flavors in their espresso drinks, free coffee refills and free coffee with the purchase of beans.

"We're in a tougher economic time and we need to do things a little bit differently," said Schultz.

Despite all the obstacles confronting Starbucks, investment strategist Edwards thinks Schultz can succeed in recapturing the soul of Starbucks. "Today, they are focused on being the best espresso in the neighborhood and that's important."

For the Brooklyn-born Schultz, he is ready to confront the challenges ahead for the company he has led for so long.

"It's easy to say we're down and they're never going to come back," he said. "There's part of me, I don't wish this, but there's part of me that kind of likes the position of people counting us out and being the underdog again, because we are going to prove them wrong, I promise you."