Starbucks 2008: Schultz Returns

Situation

It is January 8, 2008. Howard Schultz, who stepped back from the Starbucks CEO role in 2000, has just returned as CEO after the board asked Jim Donald to step down.

The company Schultz is inheriting is in trouble — not from an external crisis, but from success. Starbucks grew from 1,000 stores in 1996 to 15,000 stores globally by 2007 — a 15x expansion in 11 years. That growth required a relentless focus on speed: speed of store opening, speed of customer throughput, speed of hiring and training.

The cost of that speed is visible in every store:

1. The coffee experience is broken. To speed up service, Starbucks switched from manual espresso machines to automatic ones in 2000-2001. The manual machines required baristas to watch and feel the espresso pull — 25-30 seconds of craft attention per shot. The automatic machines produce espresso in 14 seconds without barista skill. The quality difference is real, and the ritual of craft — which is part of what customers were paying for — is gone.
2. The store atmosphere is commoditized. Drive-throughs, grocery-store partnerships, and airport locations have distributed the Starbucks brand into contexts where no one experiences the "third place." The brand no longer clearly means what it used to mean.
3. Breakfast sandwiches are killing the smell. Schultz had objected for years to expanding hot food, because the smell of warmed egg and cheese overwrites the smell of fresh coffee — a sensory cue that triggers the "Starbucks experience." The food revenue won the internal argument.
4. The stock has collapsed. Starbucks stock fell from $36 in early 2007 to ~$15 in early 2009 — a **60% decline**. McDonald's has launched McCafé, directly attacking Starbucks' coffee premium positioning.

In January 2008, before Schultz has addressed the press or analysts, he does something remarkable: he closes every US Starbucks store for 3.5 hours on a Tuesday afternoon to retrain all 135,000 baristas on espresso preparation. The company loses ~$6M in revenue in one afternoon. It is the most expensive brand signal in Starbucks history.

The decision moment

It is Q1 2008. The full turnaround plan is not yet public. Three decisions face Schultz:

1. Close stores. Starbucks has too many stores — in some markets, company-owned Starbucks are cannibalizing each other. Closing 600-900 underperforming stores (announced August 2008) will result in ~12,000 layoffs and write-down charges. But it will concentrate the brand in locations where the experience can be controlled. Does the financial pain of closing stores hurt the brand more than keeping underperforming stores open?
2. Reintroduce manual espresso machines. The automatic machines are faster and consistent. The manual machines produce better espresso but require training investment. Switching back fully is expensive and slow. Is the quality difference meaningful enough to matter to customers who buy 3-sugar-pump lattes?
3. Defund the breakfast food expansion. The hot breakfast sandwich line is a revenue generator — estimated at $1B+ annually. But it dilutes the coffee-forward brand. Do you sacrifice $1B in revenue to restore brand clarity?

You are Howard Schultz.

Key financial datapoints (for reference)

Frameworks invoked

• Brand Management. A consumer brand is not just a logo — it is a consistent set of sensory and emotional cues that customers associate with a reliable experience. Starbucks' brand promise ("third place," craft coffee, community) was diluted by operational choices made for efficiency. Brand repair requires restoring those cues, even at financial cost.
• Operational Excellence. Closing 600 underperforming stores is not a retreat — it is precision. It concentrates resources on locations where the experience can be executed to standard. The worst version of Starbucks is not a neutral — it is a brand liability.
• Customer Experience Design. Schultz's diagnosis: the Starbucks experience is the product, not the coffee. The coffee is the signal of the experience. Every operational decision (machine type, food smell, barista training) is a design decision about what customers feel in the store.
• Growth at the Cost of Core. The Starbucks case is the canonical example of a consumer brand that grew so fast it outpaced its ability to deliver the core product promise. Growth is not inherently good if the marginal store delivers a below-standard experience that dilutes the brand for all stores.

Discussion questions

1. Schultz closes every US store for 3.5 hours on a Tuesday to retrain baristas. The financial cost is ~$6M. The brand signal value is enormous. How do you value a brand signal that generates no direct revenue — and how do you justify it to a board watching a declining stock price?
2. The automatic espresso machines are more consistent, faster, and require less training. The manual machines produce better espresso but vary with barista skill. Which is the right choice for a 15,000-store global chain — and does the answer change at 1,000 stores?
3. Starbucks closes 600 stores and lays off 12,000 employees to restore brand quality. Is this a failure of strategy (shouldn't have opened them), a failure of execution (should have maintained quality as they opened), or an appropriate response to an operational problem?
4. McDonald's McCafé attacks Starbucks from below — at lower price points. How should Starbucks respond to a competitor that can undercut on price while offering comparable coffee quality to the mainstream consumer?
5. Schultz says the breakfast sandwiches "dilute the brand." The breakfast food generates $1B+ annually. How do you make a $1B brand vs. revenue decision — and who gets the final call?

The real outcome (revealed at session end)

February 2008: The 3.5-hour training closure happens. The press ridicules it. Within 6 months, barista satisfaction scores improve measurably.

August 2008: Starbucks announces closure of 600 underperforming US stores. Charges of ~$400M. ~12,000 jobs eliminated.

2009: Global financial crisis hits. Starbucks comp store sales turn negative for the first time. Schultz sticks to the plan.

2010: Starbucks comp store sales return to positive growth. The turnaround is working.

2011-2013: Starbucks launches Starbucks Reserve (premium single-origin coffee) and expands internationally (China becomes the most important growth market). The breakfast food line is kept — but repositioned as a "complement" rather than a feature.

2014: Starbucks stock reaches $40+ — more than double the low. Schultz is named Fortune's "Businessperson of the Year."

The lesson: The fastest path to destroying a consumer brand is to grow it faster than you can maintain the core experience. The fastest path to repairing it is to make operationally painful decisions before the financial results force you to — and to signal, through visible acts of conviction, that you are serious about quality.

Sources

• Howard Schultz, Onward: How Starbucks Fought for Its Life Without Losing Its Soul (2011).
• Howard Schultz, Pour Your Heart Into It (1997).
• Starbucks Annual Reports 2007-2014.
• Kellogg case: "Starbucks: Delivering Customer Service" (various editions).
• HBS case: "Howard Schultz and Starbucks Coffee Company" (2015).