Starbucks recently announced plans to open 3,000 new outlets in the Americas — 1,500 of them in the U.S. — and more in China. That may seem like business as usual for the world’s largest coffeehouse chain, which already has more than 18,000 locations around the globe. But just a few of years ago, Starbucks closed hundreds of stores – and it wasn’t just the burgeoning economic crisis that forced the coffee chain to retrench.
At the time, Starbucks seemed to have lost some of its magic, expanding too rapidly (some would say recklessly) while venturing into questionable new products, beverages, and food items. Starbucks seemed off-course, creating an opening for former CEO Howard Schultz to step back into day-to-day management after an eight-year hiatus and, eventually, revive the brand. Given that history, it’s hard not to wonder if Starbucks’ latest expansion plans — new stores and new products — are just a repeat of past mistakes.
When Howard Schultz returned to run Starbucks in 2008 — he had stepped aside as CEO in 2000 — he inherited a company that had lost its way. Some believed it vulnerable to a takeover. At the time, Starbucks operated about 16,000 stores, having grown at an astonishing pace of 1,300 new stores a year in both 2006 and 2007, according to financial firm Edward Jones. Instead of lauding its coffee, more people seemed to be talking about how many Starbucks stores you could fit in one photo.
As the economy worsened, same-store sales figures fell close to 10% as the company itself seemed to lack focus on the one product that made it successful. Rather than concentrating on coffee, the chain began selling music CDs, breakfast sandwiche,s and frillier and more elaborate drinks alongside other new food items (Strawberries & Creme Frappucino ice cream, anyone?).
But Schultz changed a lot of that. While he didn’t actually get rid of the breakfast sandwich, the recipe was changed so the smell of eggs wouldn’t overwhelm the smell of coffee. He closed down every Starbucks location for three hours on one day to retrain every barista on the art of pulling espresso shots. He upgraded all of store’s espresso machines. Suddenly, it seemed to be all about the coffee again.
Schultz also was forced to close down more stores than he ever thought he would — 900 in all, many of which were in low-performing areas that often competed with, well, another Starbucks down the street.
These moves made Starbucks into one of the true turnaround stories of the last several years. Last month the chain announced fourth quarter revenues of $3.4 billion, up 11% year-on-year. Same-store sales are up in the U.S. and worldwide, and Starbucks shares have risen 10% since fourth-quarter earnings were released.
And now, once again, the chain is expanding — not just locations but the items they sell as well. So it may just seem that Starbucks is retracing its mistakes in the years before Schultz pulled the company back into the black.
This time, however, it does appear that Starbucks has learned some lessons. For one, the chain isn’t growing nearly as fast as it did before the recession. While Starbucks was opening 1,300 new stores a year in the U.S. before 2008, they’re opening closer to 300 a year this time. Edward Jones analyst Jack Russo says Starbucks was opening stores too quickly and too close together, completely misreading how many Starbucks the market could handle. That pace also likely caused problems in properly training the staff (no wonder Schultz shut down stores to retrain baristas).
Plus, while the 3,000 stores it now plans to add may sound like a lot — indeed, those stores would increase Starbucks’ global presence by 13% — the chain is doing it over five years, or about half the pace of its previous expansion.
Additionally, Starbucks will also likely be much pickier in where it opens those new stores. For years, Starbucks’ primary focus seemed to be adding more and more outlets. But the company now has additional areas of growth outside of U.S. store revenue. Starbucks’ expansion, particularly into Asia, has lessened the company’s drive to grow domestically. And the brand is a growing presence in homes now. In September, the company introduced a single-cup coffee machine to compete with the increasingly popular Keurig K-Cup brewers. Sales of single-cup machines grew by 143% last year alone, and Starbucks is just now beginning to enter the home consumption market competitively.
The one area that may seem like the Starbucks of old is its new emphasis on expanding product offerings, specifically tea and juice. One reason Starbucks appeared off course when Schultz returned in 2008 was the coffeeshop’s focus on sandwiches and elaborate drinks. Russo says the new stores won’t necessarily be traditional coffee shops and could be standalone juice or tea shops. But will consumers go to Starbucks for beverages other than coffee?
“It’s hard to say on the success rate,” says Russo. “Time will tell. These guys are smart and they have bought their way into these businesses, so they must feel like there is long-term potential there.”
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Overall, the coffee chain seems to be taking a much more balanced approach to expansion plans this time around. The uptick in the economy certainly helps, as do lessons learned from its overly adventurous expansion a few years ago. It’s certainly not the halcyon days of 2006, when it seemed as if Starbucks could expand anywhere and make a profit — but that’s probably a good thing.