Schultz seeks to perk up Starbucks

Starbucks Corp Chief Executive Officer Howard Schultz may introduce a plan for a loyalty program to stanch declining US sales at a shareholders meeting today.

Schultz will probably offer free coffees or discounts to customers using prepaid Starbucks Cards to entice the chain's most frequent customers to visit more and avoid competitors led by McDonald's Corp, said Joseph Buckley, an analyst at Bear Stearns & Co who recommends holding the stock.

Schultz, who built the Seattle coffee chain into a corporation with almost 16,000 cafes, is trying to boost sales at existing shops while opening fewer locations. He returned as CEO in January after a seven-year hiatus.

First-quarter sales growth slowed to 17 percent, the smallest gain in two years, on price increases and competition from McDonald's lattes and cappuccinos.

"Clearly the Starbucks Card is going to be an important component to getting people in the store and keeping them coming back," Howard Penney, an analyst at Friedman Billings Ramsey in New York, said. "You want your most loyal customers to come back more often."

The company may also say it will lower prices on food and drink combinations to win back customers hurt by the slowing economy, said Penney, who recommends buying the shares.

"We look forward to unveiling several bold consumer-facing elements to further enhance the Starbucks experience and deepen the relationship with our customers," said Brandon Borrman, a Starbucks spokesman.

Starbucks has already started using the prepaid card to offer deals to customers, saying last month that it will give out two hours of free AT&T Inc wireless Internet access every day to Starbucks Card holders.

The chain reported its first quarterly drop in US customer visits last year. Profit in the three months ended Dec 30 rose 1.5 percent to $208.1 million, or 28 cents a share, the slowest growth in five quarters.

Starbucks expects to open 2,150 stores in the year through September, 350 fewer than previously planned. It will also close 100 locations.

Since taking over, Schultz, 54, has brought back former executives, naming Arthur Rubinfeld, executive vice-president for store development from 1992 to 2001, as head of global development last month. This month, he appointed Cliff Burrows to run Starbucks' US stores.

Last month, the chain closed 7,000 company-run US locations for more than three hours to teach its baristas the art of espresso making.

'Cleaning house'

"He's coming in to clean house," said James Walsh, who helps manage $1.1 billion, including Starbucks shares, at Coldstream Capital Management Inc in Bellevue, Washington. "That's a really positive thing you want to see. He's out there doing what he needs to be doing."

Starbucks fell 13 cents to $17.26 on Monday in NASDAQ Stock Market composite trading. The stock has lost 6.1 percent since Schultz's Jan 7 return after plunging 42 percent in 2007, the worst annual performance since the company sold shares to the public in 1992.

"People are pricing in the destruction of Starbucks," Walsh said on March 13. "It's a little amazing."

To compete with McDonald's and Dunkin' Brands Inc's Dunkin' Donuts, Starbucks may introduce a value offering that combines baked goods such as scones and cupcakes with coffee drinks, Penney said.

Free refills

The chain may also discuss a renewed focus on drip coffee, which currently accounts for about 12 percent of sales, Buckley wrote in a Feb 28 report.

Starbucks last month offered an eight-ounce, $1 cup of regular coffee with free refills in the Seattle area as a test.

It also experimented with a 12-ounce cup of "fresh-pressed" coffee for $2.50. The chain charges $1.55 for a regular brew. A latte sells for $4.05 in New York.

US consumers have tightened spending amid rising gasoline prices and declining home values. Same-store sales at casual-dining chains fell 2.1 percent in the quarter ended November 2007, according to New York-based market researcher Knapp-Track.

"I'm looking for something that is going to get Starbucks customers excited in this difficult macroeconomic environment," said Sharon Zackfia, an analyst with William Blair & Co in Chicago who recommends investors buy the shares.

"More people are looking for recession specials, not $4 cups of coffee."

The challenge to McDonald's may eventually weaken the value of the Starbucks brand, according to Coldstream's Walsh.

"It just doesn't seem like a fantastic strategy for someone that's trying to be a premium brand to also try to be a value brand at the same time," Walsh said.

"That can cause difficulties. You have to pick your strategy and go with it."

While the annual meeting may highlight Schultz's renewed focus on improving Starbucks, it will probably take six months to a year before the initiatives begin to affect earnings, analysts and investors said.

"In the near term, the shares seem to be in a limbo state with a lower but yet-to-be-defined growth rate emerging," wrote Buckley, ranked as the top food and restaurant analyst by industry magazine Institutional Investor.

"It will take time for the brand transformation efforts to become more visible," added Buckley.

Agencies

(China Daily 03/19/2008 page17)