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UPDATE: Schultz details plan to perk up Starbucks

SEATTLE Promising to “reignite the emotional attachment” with customers, Starbucks Corp. chairman Howard Schultz stepped back into day-to-day operations of the coffee giant on Monday, signaling a back-to-basics shift for the chain.

In a flurry of communications with shareholders, financial analysts, employees and even customers, Schultz sketched out a strategy for strengthening what he called “the Starbucks Experience” while simultaneously bolstering the company’s financial performance. Among the “transformative events” he previewed were closing underperforming stores, slowing domestic expansion while channeling more capital to openings abroad, introducing new customer choices “as significant as Frappuccino products and the Starbucks card,” and streamlining management to un-do what he called a “bureaucracy.”

In the communication directed to “all partners,” Schultz noted that the company’s board had chosen him to lead the transformation. He stopped short of saying it had lost confidence in Jim Donald, the grocery-industry veteran whose titles of president and chief executive were assumed by Schultz on what was described as a long-term basis. Schultz bluntly mentioned that Donald had left the company.

Donald had assumed the posts three years ago. During the past year, Starbucks’ stock price plummeted, and in reporting results for the fourth quarter that ended Sept. 30, the company said it was forced to reduce its fiscal 2008 per-share earnings outlook and same-store sales expectations. For the fourth quarter of fiscal 2007, Starbucks posted a 1-percent drop in domestic same-store transactions, though comparable sales rose 4 percent for the quarter on a 5-percent bump in check averages. The decline in transactions was the first reported by the company since it began disclosing traffic figures in 2004.

In a conference call Monday evening with analysts, Schultz pledged to focus on domestic sales and apply what the company had learned in high-performing international markets such as Canada and the United Kingdom.

“We will also be better able to focus our efforts on improving the customer experience at current stores, as well as to take a closer and more detailed look at our plans, by market, to ensure we are capitalizing on the opportunities we have, and not cannibalizing our existing business,” Schultz said.

Though Starbucks boasts annual sales of more than $10 billion worldwide and an operating income of more than $1 billion, the coffeehouse giant has suffered from the same macroeconomic ills that have challenged the entire industry.

Between Jan. 3 and Dec. 31, 2007, the 15,000-unit chain saw its stock price drop 42 percent. Starbucks also faces increasing competition from traditional fast-feeders such as McDonald’s Corp. and Dunkin’ Donuts. McDonald’s is poised to roll out espresso-based drinks and other beverages that are projected to add $1 billion in sales.

Schultz said the overhaul began last February, after he said in a memo leaked to the public that the company’s aggressive growth was responsible for “watering down the Starbucks experience.” He sounded a similar theme in one of his communiqués on Monday.

“We invested in infrastructure ahead of our growth curve. Although necessary, it led to bureaucracy,” he wrote. “We will now shift our focus back to customer-facing initiatives, better aligning our back-end costs with our business model.”

Schultz on Monday acknowledged that he played a role in creating Starbuck’s current challenges, but he also said he was “the first to recognize that, despite our terrific financial performance, the company’s heritage was being lost in the shuffle.

“The most serious challenge we face is of our own doing,” he said.

“We will fix it,” he added. “We are changing the organization now and for the future.”

Schultz had previously served as CEO from 1987, when he purchased the company, to 2000. He had joined the company, which he discovered while supplying it with coffee urns and other supplies it retailed to the public, when it numbered four stores. Starbucks went public in 1992 with 119 stores.

Donald joined the company in 2002 and was named president and chief executive in 2005. Schultz wished him well, describing Donald as a “passionate and tireless advocate” of the Starbucks brand.

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