Q&A: Starbucks Can Smell Growth

Two years ago, Starbucks was floundering. For the first time in its history, the company that made coffee part of our social scene saw U.S. same-store sales drop. Then the recession hit. Founder Howard Schultz, who had retired as CEO years earlier, took back the helm. His challenge: to rebuild Starbucks in the midst of a severe downturn.

Where do things stand now?
In any situation like this, there is no finish line. Having said that, we feel very positive about how we've transformed the company. We took out almost $600 million of cost. We closed underperforming stores. This has also been a dynamic period of innovation, with Pike Place Roast, the reinvention of food, the Starbucks rewards program and engaging with customers through social media. We are more nimble and disciplined, and customers are coming back. We are ready to start growing the company again.

Has the financial crisis permanently changed how people spend money?
People much smarter than me talk about the new normal. It remains to be seen how far the pendulum swings back, but I think one thing is true: consumer companies have a burden to provide real value and a compelling reason for a customer to be loyal.

In the fall, you started selling instant coffee in stores like Costco and Target, which is quite a departure. Why?
The largest segment in all of coffee is instant soluble — worth $21 billion worldwide — and it hadn't had any innovation to speak of, except for package design, in 50 years. The Frappuccino was born in Starbucks stores and then became a billion-dollar brand in bottles in the grocery channel, but that wasn't by design. Now, for the first time, we are going to market with a strategy that is much more comprehensive. We're just getting started with our portfolio of products.

But doesn't that mean competing in the grocery aisle against Procter & Gamble and Nestlé?
It's a humbling effort. We are the small, underdog company. But we think our product, our price point and the consumer interface we have from our stores give us a compelling proposition and an opportunity to do something others can't.

You've started selling another of your brands, Seattle's Best, in Subway sandwich shops. What's the strategy there?
Seattle's Best has been under the shadow of Starbucks, and as we began to transform the company, we realized that it should be managed for its own destiny. We think we're sitting on a billion-dollar brand, and we want to unleash Seattle's Best to do things that Starbucks can't do. It has more of a mass appeal. It's a more approachable coffee in terms of its taste. There are a number of [fast-food] companies that want to get into the breakfast business and don't have a coffee solution. Subway is just the first.