Starbucks Makes the Right First Step

Marek Fuchs

What follows is a short look by The Business Press Maven at how everything has changed in the past year for Starbucks(SBUX Quote - Cramer on SBUX - Stock Picks), even though chances are, nothing will change. This piece is part of a two-part series on Starbucks. The series includes a book review that examines the prospects for the company's turnaround, through the observations of a worshipful author writing at the height of the company's power.

Simply put, it's probably hard to sell $4 cups of coffee with competition finally creeping up behind you at every turn. It is, after all, nothing short of a miracle of modern commerce that Starbucks went so many years without serious competition in the coffee business. Even if the likes of McDonald's(MCD Quote - Cramer on MCD - Stock Picks) and Dunkin' Donuts don't compete directly, the pricing pressure they put on Starbucks probably means that the days of jet-thruster growth are over.

All that said: Starbucks at least laid the groundwork for a comeback this week.

How do we know? Compare the public accounting of their troubles at this year's annual meeting vs. last year's. At their annual meeting this year, the company was open as a book. And while openness hardly guarantees full recovery, we do know it's the ante you put up if you even want to hold out hope. Moreover, if you are not open about troubles during troubled times, it indicates self-delusion or worse and does not bode well. Look no further than What-Me-Worry? comments from Angelo Mozilo of Countrywide(CFC Quote - Cramer on CFC - Stock Picks) before that firm became the seat of a massive fire, or the same with Bear Stearns(BSC Quote - Cramer on BSC - Stock Picks) this very month, with management declaring no liquidity trouble days before the firm was taken over for a song ... because of liquidity trouble.

Starbucks, a legitimately brilliant and ethical operator, should not otherwise be mentioned in the same breath as Countrywide and Bear Stearns. But it is important to note a distant similarity. You can then appreciate how far Starbucks has come this year by comparing it to where they stood last year.

Last February -- on Valentine's Day, no less -- Howard Schultz, then the company chairman and its spiritual leader, wrote a memo (soon leaked) that took the company's direction to serious task. At the end of the day, everything he wrote about would come to the fore as an acknowledged problem in customer service and experience within, but at that time Starbucks management ran from the memo at full tilt. All they would say was that Schultz was being Schultz, motivating employees with the Starbucks equivalent of dirty talk, as only he can.

Turns out, of course: Schultz was being honest. But the truth was shown the door and, as management disavowed the memo, the business media dutifully forgot about it too.

Then, rather than centering the annual meeting around the issues spelled out in the memo, the company made a splashy introduction of Paul McCartney, the Beatle who was becoming the center of their recording effort that had little to do with the future of their profitable coffee business.

I wrote about it in an article: Starbucks' Ticket to Ride.

Guess what? Few questions about their emerging competition or spruce-ups needed in stores and service were asked or answered. And McCartney worked as a tool of distraction. Most of the business media coverage focused on the Beatle, not the bean business.

Enter Schultz, this year, armed with a grab bag of solutions to the company's troubles -- troubles that he readily acknowledges while standing in front of thousands of shareholders.

"This," he said, "is the first time the U.S. business is under pressure. It's a character test." He also pointed toward the weakened economy, but did not use it as the complete escape hatch many do. He pointed the finger in no uncertain terms at company operations: "We somehow evolved from a culture of entrepreneurship, creativity and innovation to a culture of, in a way, mediocrity and bureaucracy."

Best of all, there was no trotting out of Ringo to a swooning assembly of business media, who would then spend much of their allotted space talking about something other than store operations.

Whether Schultz's collection of solutions, from soliciting customer criticisms to starting the caffeinated beverage version of a frequent flier program, will stem the tide is an open question. But if we've learned anything from Countrywide, Bear and to a much lesser but still legitimate degree Starbucks last year, it's that Starbucks -- unlike like its two ugly sisters -- took a good first step back.

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