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Fri, Feb 01, 2008 - Page 10 News List

Starbucks unveils turnaround plan

NY TIMES NEWS SERVICE , NEW YORK

At the very least, Starbucks will smell like coffee again.

As part of a turnaround plan, the beleaguered coffee giant said on Wednesday it would discontinue warm breakfast sandwiches at its stores and focus instead on healthy breakfast options and high-quality baked goods.

"In short, the scent of the warm sandwiches interferes with the coffee aroma in our stores," company chairman and chief executive Howard Schultz said.

Schultz also announced that his company would close 100 underperforming locations in the US, while scaling back the rate of store openings domestically. At the same time, Starbucks will move more aggressively to open stores overseas, where business remains robust. He did not identify the locations that will be closed.

In all, Starbucks will open 1,175 new restaurants in the US this budget year, down from its previous goal of 1,600. The company will open 75 more stores abroad than originally predicted, for a total of 975.

Schultz's comments came as Starbucks reported anemic sales growth of 1 percent at stores open at least a year -- the worst three-month performance in the company's history. US sales have been battered by a weak economy and increased competition from the likes of McDonald's and Dunkin' Donuts. Same-store sales for US stores declined 1 percent.

Adopting a risky tactic that may alienate Wall Street, Schultz said the company would no longer provide same-store sales numbers, at least temporarily, as he moves forward with his turnaround plan.

He said the company's decisions had been too driven by improving same-store sales rather than consumer needs and that same-store sales numbers would be "erratic" during the transformation.

A similar decision in 2006 by Home Depot chief executive Robert Nardelli infuriated Wall Street analysts. The decision turned out to be the beginning of the end of Nardelli's reign.

Starbucks reported earnings of US$208 million in the first quarter of its budget year, which ended on Dec. 30, a 2 percent gain over the same period a year ago.

However, Schultz warned that the coming year would be difficult owing to the reorganization and a weakening economy.

What remains unclear is how Schultz will recapture the cachet that made Starbucks a customer favorite and Wall Street darling. On Wednesday, he said many details of his plan, "including bold innovations that will reassert our coffee leadership, redefine the in-store experience and introduce core brand-building initiatives," would be announced at Starbucks' annual meeting next month.

Schultz, who served as chief executive from 1987 to 2000 and is widely credited with Starbucks' success, was brought back as chief executive earlier last month to try to restore the company's luster.

Harvey Hartman, founder and chief executive of the Hartman Group, a food consulting and market research firm, said it was smart to get rid of breakfast sandwiches and revive the smell of fresh coffee.

He also applauded Schultz's decision to focus on consumer needs rather than Wall Street demands.

"What we hear from consumers more than anything else is, `It's not that I don't like Starbucks,'" he said. "`It's that they are no longer as relevant to me as they used to be because I've changed, and they haven't changed with me.'"

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