Howard Schultz, Starbucks’s public face, wrote an emotional letter to employees on Monday to announce his plans to leave the Seattle company on June 26 after some 40 years, saying, “I would like to humbly remind you not to lose sight of what matters most: your fellow partners and our customers.”
Schultz, who will leave his position as Starbucks’s executive chairman, continued, “Success is not an entitlement; it must be earned every day through hard work and teamwork.”
A good reminder that was. Starbucks, under Schultz, has been a success story.
The company has expanded from 11 stores in 1987 to 28,000-plus, in 77 countries, becoming the world’s No. 1 coffeehouse chain thanks to its “Third Place” pitch as a community spot for people between home and work. The company’s stock has jumped 21,000% since its 1992 IPO, and Starbucks was ahead of curve in offering employee benefits including comprehensive health care and free college tuition.
It also has become a poster child for corporate activism and social consciousness. And with mobile phones fast changing consumer behavior, Starbucks was also ahead in building a mobile payment and rewards system that’s given it coveted customer insights.
Starbucks’s share in the $58 billion global specialty coffee shop market rose to about 46% last year, from 41% in 2014, according to Euromonitor. Its share in the nearly $25 billion U.S. market surged to more than two-thirds, from 61%, during the same period, Euromonitor data shows.
However, as much as Starbucks, or Schultz, can take pride in those accomplishments, the reality is that what once set Starbucks apart has been widely replicated and, in some cases, outdone. Just look at the crop of gourmet coffee shops like Think Coffee, Gregorys Coffee, Blue Bottle Coffee and Stumptown Coffee Roasters, which have suddenly mushroomed in cities like New York and beat Starbucks at its own game.
Starbucks is also facing growing competition on the low end, led by McDonald’s, and increasingly has to respond to the trend of consumers’ brewing more high-end coffee at home or buying more ready-to-drink coffee on the go. A recent Mintel study, for instance, showed ready-to-drink coffee has posted five straight years of double-digit sales growth, outpacing the specialty coffee shop sales growth tracked by Euromonitor.
Meanwhile, as Starbucks has grown, it has faced the mounting challenge of training its employees and maintaining the same level of customer service and experience. For instance, even though the company recently shut its more than 8,000 company-owned U.S. stores to train nearly 175,000 employees on unconscious bias after a Philadelphia manager called the cops on two black men, the response from both employees and customers has been mixed. (Just look at Starbucks’s painstaking responses to each Facebook post applauding or faulting it for the move.)
With its recent move to officially declare its Use of Third Place policy to welcome anyone, paying customer or not, to its stores, the chain also needs to figure out who and how it wants to please without alienating its loyal customers.
The warning signs started coming even before the Philadelphia incident. A Market Force Information study of U.S. coffee, bakery and donut shops in February found Starbucks’s composite loyalty index, which measures things such as customers’ satisfaction and their likelihood to recommend a restaurant, actually declined to 49% this year, from 58% in 2017. This ranked Starbucks below rivals including Krispy Kreme and Panera Bread.
In yet another cautionary sign, in KPMG’s 2018 U.S. Customer Experience study, which was released Tuesday and covers 250 brands of various sectors, Starbucks actually came in a less-than-impressive 80th place. Among those categorized as restaurants in the study, it fell behind chains like Chick-fil-A, In-N-Out Burger and Krispy Kreme.
Starbucks, which has also been hurt by declining U.S. mall traffic, has seen the Americas region’s comparable sales, or sales at company-owned locations open for more than 13 months, slow each year to 3% in fiscal 2017 from 7% in fiscal 2013. Even in Asia, where Starbucks has identified China as a big growth driver, comparable sales have slowed over that time.
That’s not even counting the fact that growth elsewhere likely won’t come fast enough to move the needle and eclipse the U.S.-dominated Americas region, which represented 70% of fiscal 2017 sales versus Asia’s 14%.
“Never embrace the status quo,” Schultz, whose upcoming departure from Starbucks has sparked speculation of a possible presidential run, wrote in his letter. “Have the curiosity to look around corners and the courage to push for reinvention. … Change is inevitable, and the world has become a more fragile place since we first opened our doors.”
Starbucks needs to take those words to heart. After all, the world has not only become a more fragile place; it’s also become a more fickle place.
