Ailing Starbucks Brings Back Its Architect

Jim Donald was ousted as president and chief executive of Starbucks, which saw its stock value drop nearly 50 percent in 2007. The company is expected to pare back its expansion.
Jim Donald was ousted as president and chief executive of Starbucks, which saw its stock value drop nearly 50 percent in 2007. The company is expected to pare back its expansion. (By Mark Lennihan -- Associated Press)

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Tuesday, January 8, 2008

With Dunkin' Donuts serving lattes and McDonald's winning coffee taste tests, Starbucks had to give its java a jolt. Yesterday, it brought back its chairman, Howard Schultz, to his former job of chief executive and put him in charge of a major effort to beat back the competition.

Schultz, who joined the Seattle coffee company as director of retail operations in 1982 and presided over its first latte in 1984, was chief executive from 1987 to 2000. Now he takes the job back from Jim Donald, who had been president of Starbucks' North American division before being promoted in March 2005. Donald will leave the company.

Starbucks said the leadership shuffle was part of a series of initiatives to increase shareholder value -- shares fell nearly 50 percent last year -- and would include closing underperforming U.S. stores and slowing the pace of store openings. The company said it planned to take some of the capital originally intended for U.S. store growth and use it to accelerate its international expansion.

Starbucks, which essentially created the market for gourmet coffee and became the world's largest chain of coffee shops, has slipped recently as consumers have restricted spending. Meanwhile, such competitors as Dunkin' Donuts and McDonald's have cut into Starbucks' customer base by launching their own lines of gourmet coffee.

Last year, McDonald's beat Starbucks in a Consumer Reports taste test. McDonald's now plans to add specialty coffee counters in nearly 14,000 U.S. stores, serving frappes, lattes and cappuccinos, company spokeswoman Danya Proud said yesterday in an interview with Bloomberg News.

McDonald's increased U.S. coffee sales by 39 percent in the first nine months of 2007 after introducing a stronger blend in 2006 to compete with Starbucks in the $60 billion-a-year beverage market.

In November, Starbucks cut profit and sales forecasts as U.S. customer visits fell for the first time after it raised prices 9 cents a cup.

"You see the stock price get cut in half, something needs to change," said James Walsh, who helps manage $1.1 billion, including Starbucks shares, at Coldstream Capital Management in Bellevue, Wash. "The buck does stop at the top."

Starbucks's announcement after regular markets closed sent the company's shares up $1.67, or 9 percent, in after-hours trading. The shares had gained 27 cents to $18.38 in the regular session.

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.

Most of the company's problems were "self-induced," Schultz said yesterday on a conference call with analysts and investors.


© 2008 The Washington Post Company

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