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Howard Schultz Wants Starbucks to Be the IBM of Coffee

Shareholders weren't laughing. Between Schultz's departure as CEO in 2000 and his return in 2008, Starbucks revenue grew nearly fivefold to $10 billion but profits lagged, only growing roughly 75% to $315 million, indicating falling margins reflected in a 50% share slump. During that time, stores also grew faster than profits, roughly doubling to nearly 16,700 by 2008 from less than 8,600 as of 2004.

Black's humor contained the wisdom that Starbucks was testing the limits of a store-driven growth initiative, while diluting its brand. The timing couldn't have been worse; it came amid a wave of competition from lower-end competitors including McDonalds (MCD - Get Report) and Dunkin Brands (DNKN), and high-priced local boutique roasters.

"Starbucks was being squeezed to the middle, and that is an undesirable place for us to be," Schultz conceded in a 2010 Harvard Business Review interview that covered his return to the company he founded and named after a character from Herman Melville's Moby Dick.

Since his second stint as Starbucks CEO began in 2008, Schultz has pointed to a recommitment to employee training and a focus on intangibles like "culture" and "values" as a key to Starbucks recovery -- likely important moves. The company also halted its store growth, shuttered some locations, and has only added 323 stores in the past four years as net income has grown to $1.25 billion from $315 million, and revenue has risen over 12%.

Starbucks also is increasingly diverse in its in-store wares, serving up new foods and drinks, and as Starbucks halted store growth, its consumer products business of frappuccino bottles, packaged coffee and Tazo Tea bags doubled sales. Those brands and recent launches like Via instant coffee, K-Cup packs and Starbuck's own K-Cup style home brewing system will be a staple of Starbucks stores and distribution agreements with supermarkets and foods giants like Kraft (KFT).

Starbucks La Boulange bakery is just the latest example of Schultz's comment from November, "[We've] cracked the code on growth plans." When buying Evolution Fresh last year, Schultz said Starbucks will sell new juices in its coffee-selling chains outlets, and by the end of 2012, it will use the deal to introduce a new health and wellness line of stores.

"[Even] though this is a small acquisition in size, it is a significant strategic decision and direction for the company," Starbucks said in a statement, adding that the deal taps a $1.6 billion super-premium juice market and is a big step entering a larger $50 billion "Health and Wellness" sector. To make the investment pay off relative to expectations, Starbucks said it will also invest in the distribution and growth of juices products.

With the bakery deal, Starbucks will sell the La Boulange breads in existing stores and expand the chain nationally, at once adding to its food proposition in existing stores, while growing non-Starbucks branded stores. In talking about building the La Boulange brand as a premium retail bakery café, Schultz noted that one-third of Starbucks visitors now buy food.

"Now is the time for us to invest into the core business and take full advantage of the position we occupy," Schultz said. "If you go back a year and a half ago, when we began to see the success of Via, I think this is exactly the same play run a different way. We believe that we have a unique opportunity to create sub-brands and categories within our stores," said Schultz, who also highlights the company's home brewing initiative.

The company will also be growing its store count through non-branded La Boulange and Evolution Fresh stores, in contrast to the epic Starbucks store expansion that a decade ago served as an albatross. In fact, one day three Starbucks owned stores may be able to exist on a street corner without giving Louis Black a heart attack.
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