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Critical Thinking

Why Howard Schultz Stepping Down Is Good News for Starbucks

By Critical Thinking FOXBusiness

The only difference between a visionary and a lunatic is that, in hindsight, the visionary turned out to be right.

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When a marketing executive returned from a trip to Milan with a crazy idea of opening a national chain of espresso cafes like the ones he saw all over Italy, his bosses said no thanks. So Howard Schultz embarked on his crazy new venture while his former company focused on coffee beans. The result was Starbucks.

That was 40 years ago, give or take. I guess we’ve all had plenty of time to figure out whether Schultz was a lunatic or a visionary. Today, Starbucks is one of the most recognized brands in the world, employing more than 250,000 people in 25,000 locations. The company has a market cap of $83 billion.

Last week, the biggest name in coffee announced that Schultz will be stepping down as chief executive officer to focus on another new venture: a chain of high-end coffee shops designed to boost sales and distinguish the brand from an ever-growing list of competitors, from Tully’s and Peet’s to Dunkin’ Donuts and McDonald’s.

Current president and COO Kevin Johnson – a former Microsoft executive and CEO of Juniper Networks – will take over as CEO while Schultz will take on the new title of executive chairman next spring.  

All eyes will be on Schultz and Johnson on Wednesday, when the coffee giant will host its 2016 Investor Day. Investors are justifiably nervous about losing the visionary who has kept the company at the forefront of innovation and steered the ship through some pretty rough competitive and economic waters worthy of its namesake, from the pages of Moby Dick. It’s hard to forget what happened the last time the native New Yorker gave up the helm.

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In 2000, Schultz bumped himself up to chairman, ostensibly to focus on global strategy. But with day-to-day operations in the capable hands of long-time company executive Orin Smith, Schultz went off to run a sports franchise, the NBA’s Seattle Supersonics.

For five years, that configuration seemed to work remarkably well. Revenues exploded as the number of stores tripled. So did the stock. But Smith retired in 2005, handing the reins to supermarket veteran Jim Donald. Within a couple of years, however, it became apparent that the company had expanded too far and grown too fast. 

In early 2007, Schultz penned a memo to his CEO decrying what he called “the commoditization of the Starbuck’s experience.” He said the sights, smells and warmth of a neighborhood cafe had been replaced by the sterile, cookie cutter mechanization of a chain. He felt that the company had lost its its soul. That it was growing for growth’s sake. That its leadership had succumbed to hubris. 

The timing couldn’t have been worse. As the housing bubble burst and the world plunged into economic crisis, what shareholders had come to expect as a recession-proof growth machine began to falter. Same-store sales declined and profits plunged as consumers flocked to lower-cost competitors. In January of 2008, Starbucks fired Donald and brought back its founder.  

The next two years were brutal. Besides the inevitable cost-cutting and shuttering of thousands of stores, Schultz redesigned the remaining cafes to reinvigorate the customer experience and retrained staff to focus on quality. He took 10,000 managers to hurricane-ravaged New Orleans to do community service, remind them of their values and galvanize the company’s leadership. And he doubled-down on innovation.

Many pundits and analysts were skeptical of his turnaround efforts. I didn’t think he could pull it off. I also thought that Via instant coffee was a bad idea that would further erode the brand. But having grown up in public housing with working class parents, Schultz was no stranger to adversity. He trusted his intuition and proved us all wrong. 

Now the visionary who first taught us the difference between good and bad coffee is going to try the chairman thing again. Should we give him the benefit of the doubt? I think so, for several reasons. 

First, I’m sure Schultz would do just about anything to avoid another experience like the last time he stepped down as CEO. I don’t see him taking his eye off the ball this time. I think the new title of executive chairman speaks to that.

Second, the company is again starting to plateau. It makes sense for its chief visionary to get to work on reinvigorating the Starbucks growth engine, as he’s apparently adept at doing.  

Lastly, there’s his new strategy of creating a Starbucks Reserve brand of coffee that would sell for as much as $12 a cup. To me, that seems sort of nuts. But every time I’ve second-guessed the guy, I’ve been wrong. I’m not going to make that mistake again. 

What do you think?

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