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Buck stops here

Lessons from Starbucks’ turnaround


Gene Baldwin

Having to close underperforming stores is a bitter pill to swallow, especially when your name is being removed from 600-plus storefronts all over the U.S.

Over the last several months we have been following the comprehensive and widely publicized turnaround strategy of Starbucks. I am continuing to follow this story for two reasons: Starbucks is popular and visible, and because of that visibility many people are watching and commenting on every move the company makes to improve operations and increase shareholder value. The second reason is that, so far, the CEO Howard Schultz has engaged in typical and prudent turnaround strategies. The steps Starbucks is taking have broad application and can be applied to many retail situations.

Let's review what has been done to date in the first two phases of the turnaround strategy. The first phase of the strategy was to focus on operations and restore the main corporate competency of making those signature coffee products. At the heart of this phase was the decision to close all Starbucks for a three-hour period in February 2008. During that time, employees were retrained in the art of making exotic coffee drinks. Schultz felt this core competency was either lost or badly damaged. The lesson for all of us is that before we can truly see an improvement in financial results, operations must be upgraded and everyone in the company must excel in executing the core competencies.

In the next phase of the turnaround, Schultz implemented a strategy to encourage trial (or retrial) by giving customers a compelling reason to shop at Starbucks. To do that, Schultz offered a core product at a compelling price and communicated that offer through a strong advertising campaign. Pike Place Market coffee was introduced and customers were offered a free cup of coffee on Wednesday through a major print advertising promotion. The goal here was to improve guest counts, even at the expense of profitability. In the early stages of a turnaround it is more important to focus on customer count growth than sales growth.

The third phase of the turnaround involved ridding the company of unprofitable retail outlets and product lines. Closing unprofitable locations has a number of benefits. The obvious initial benefit is that the cash-flow drain from poor performing stores is over. However, it is true that the company will need to deal with its rent obligation for some period of time and a plan must be developed and executed to mitigate ongoing real estate costs.

As a side note, Starbucks took the unusual step of publicizing its 600-plus store closings in national publications and got a very public negative reaction in some quarters. There are significant benefits from store closings that are not so obvious. Those benefits include the ability to consolidate management and reduce non-store costs. By closing those locations, Starbucks freed up 600-plus store managers. The best can now be redeployed into more profitable Starbucks locations to replace less effective managers. As you know, good, store-level management is a significant positive factor in retail profitability. Having access to a large population of trained managers is a dream come true for operating executives.

Another less obvious benefit is the ability to reduce field supervision and back-office overhead. Many regard these as a fixed cost of the business. I agree with that idea except where the footprint of the chain is significantly reduced. By radically reducing the number of operating units, management should be able to reduce field and back office overhead substantially. In the case of Starbucks, reducing the footprint of the company by 600 locations allowed them to reduce at least 1,000 non-restaurant employees.

The second element of this turnaround phase was to eliminate unprofitable products. For Starbucks this meant eliminating the entertainment initiative. One can see where production and sale of music would be a natural brand extension for a coffee shop. You can also see where movie production could be a nice tertiary line of business. In fact, Starbucks Entertainment had some success in producing the movie "Akeelah and the Bee." However, when the core business is weak, secondary and tertiary activities must be curtailed or eliminated. My guess is that the top line of Starbucks Entertainment was growing nicely and there were many creative projects in the planning process. It is also my guess that the bottom line of Starbucks Entertainment was not good and management did not have the desire to financially support this startup operation while trying to improve the performance of its core business.

Starbucks turnaround strategy is well underway and the company is employing proven and effective methods to improve its sales and profitability. Stay tuned, there will be more to come. As we all know these processes take time and patience.

Gene Baldwin is a partner in CRG Partners Group, LLC, a national turnaround consultancy that brings new life to distressed companies through operational and financial restructuring.  Gene can be reached at 316-371-2908 or at gene.baldwin@crgpartners.com


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