Jan. 16 - Smell the coffee - again. That tops a list of suggestions retail and strategy experts have for Howard Schultz as he retakes the helm at Starbucks Corp.
Slowing U.S. sales combined with growing competition pulled Starbucks' charismatic founder back as chief executive Jan. 7. He vowed to refocus on the company's customers and return bold "innovation" to U.S. stores.
While Starbucks declined to reveal specifics, returning coffee aroma to stores, redesigning coffee bars, tinkering with the WiFi program and enhanced training at food-service partners could help restore U.S. store luster, experts say. Store clutter should be exiled, and drive-in customers should be lured inside occasionally, they add.
"I don't think Starbucks has an easy fix - there is no 39-cent taco here," said David Gallagher, managing director and head of the consumer-products practice at Boyden, an executive-search firm. "They have lost that uniqueness with the consumer, and with all the other options out there, it's pretty easy for the fringe users of Starbucks to trade out of the category."
After 15 years as a financial juggernaut, Starbucks saw average transactions in U.S. stores dip 1% in its 2007 fourth quarter, the first decline since Starbucks started reporting this statistic about three years ago.
Starbucks announced major changes Jan. 7, including CEO Jim Donald's departure, slower U.S. store growth, underperforming store closures and more focus on international growth.
But in a call following the announcement, Schultz said Starbucks' real challenge is not slower consumer spending or higher dairy prices. "I strongly believe much of the problem we have has been self-induced," Schultz said, adding that he will focus on customers' store experience.
Schultz sounded the alarm nearly a year ago in a Feb. 14 memo to Donald, saying the company's drive for growth had diluted the Starbucks "experience."
Because Starbucks didn't keep its customer focus, Schultz said last week, competitors created new levels of price and convenience that were "intercepting our traffic." Competition will be heightened with McDonald's Corp.'s (MCD) plan to open espresso bars in its nearly 14,000 U.S. stores this year.
Starbucks will find it harder to come by innovations as dramatic as the Starbucks card, but restoring coffee aroma to U.S. stores is a priority, experts say.
"Aroma is the strongest of the senses, and if you don't smell the coffee when you go in, it very well may be a negative," said Dennis Lombardi, executive vice president of food-service strategies for WD Partners, a retail and restaurant design and development firm.
The coffee smell vanished when Starbucks installed automated espresso makers using preground coffee. "It definitely affected the quality of the coffee; it diluted the richness of the flavor," said Robert Toomey, an analyst with E.K. Riley Investments.
The machines sped up the drink process but diluted the store ambiance and the ability of the espresso-making baristas to connect with customers, said Paul Argenti, professor of corporate communications at Dartmouth's Tuck School of Business. "The problem is you can't tear down all the walls in front of the baristas and put back all the old machines," Argenti said.
The company could display bulk roasted beans on the bar, ask baristas to offer samples or even work with an equipment maker on a hybrid machine that grinds coffee yet speeds up the drink process, experts said.
The automated machines also block some customers' view of baristas, limiting their view of the drink-making process and the opportunity to connect. A redesign of bar areas could improve sightlines and communications, said Dan Geiman, an analyst with McAdams Wright Ragen.
While a growing number of restaurants and public areas have free WiFi access, Starbucks offers customers WiFi through an agreement with T-Mobile costing $6 per log-in for the first 60 minutes for non-T-Mobile customers. A Starbucks spokeswoman said the company can't disclose its T-Mobile contract terms.
Rival McDonald's offers WiFi in 9,000 of its 13,700 U.S. stores, charging $2.99 for two hours. But McDonald's stores in the United Kingdom now offer free WiFi, an innovation that could cross the Atlantic, analysts say.
To compete, Starbucks should consider a WiFi loyalty program that stresses security and offers frequent users a reduced rate, experts said. It could even offer a dedicated Starbucks WiFi network. "There are intermediate steps between totally free and exactly the way it is now," Lombardi said.
Enhanced barista training at Starbucks stores licensed to food-service and grocery-store operators would also help the company's image. "When the Starbucks isn't run by Starbucks, it's even harder to get the Starbucks experience out of employees that are really working for someone else," Lombardi said.
Experts also suggested allowing managers more leeway in tailoring stores to local tastes and emphasizing the company's environmental and fair-trade policies.
Improving stores inside won't help much if a growing number of customers are driving through, Gallagher said. "When you go through the drive-through, you are buying a cup of coffee and driving on; that's not what Starbucks was built on," Gallagher said. "Howard is going to have to get people to come inside again."
The good news for Schultz is that the gourmet coffeeshop outlook is promising. Coffee is the No. 1 beverage consumed in America, and about 80% of coffee consumed in the morning is still made at home, said Harry Balzer, vice president of NPD Group, a marketing and research firm.
Schultz also retains the support of a key constituency - the Starbucks board.
"At the end of the day, it's all about the people," said Howard Behar, who worked with Schultz to build the company and who has been a board member since 1996. "Howard knows that as well as anybody, and he'll see the people will get heard and make it happen."