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Practicing the Pause - How Starbucks didn’t fall prey to Active Inertia


“At the very heart of being a merchant is a desire to tell a story by making sensory, emotional connections; once, twice, or sixteen thousand times.

Every Starbucks store should tell a story about coffee and what we as an organization believe in. That story should unfold via the taste and presentation of our products, as well as the sights, sounds and smells that surround our customers. Our stores and partners are at their best when they collaborate to provide an oasis, an uplifting feeling of comfort, connection, as well as a deep respect for the coffee and communities we serve.”

Starbucks was acquired by 34 year old Howard Schultz to be rebuild along the philosophies and vision as quoted above. He very delicately crafted his philosophy as a merchant into a full-fledged profitable company. Schultz pursued a strategy of aggressive expansion. By the time the company went public in 1992, it had 165 stores. By 1996, and it opened more than a thousand locations including, its first international cafes in Japan and Singapore. Growth was so rapid, that just three years later, Starbucks opened its 2,000 location. Once they found a business model that worked, that translated to other geographies, that gave them the opportunity to really accelerate growth.

But then, Starbucks hit a wall: 2007 financial crash.

The gross margin declined from 59.2% in 2007 to 57.5%. The growth in the number of transactions per store which is a key indicator of customer traffic rose by mere 1% year over year compared to a 5% in 2007. The stock price which was $40 until last year had suddenly fallen to $23.39, a 40% decline. The comp-store sales continued to decline at accelerating rates and ended up sliding into a negative territory. Revenues dropped while the operating expenses and occupancy costs rose.
The very strategy that helped Starbucks capture the market quick landed it in a situation of over saturation in urban locations which in turn has spread the sales thin. Because Starbucks had so many locations, customers didn’t have to be loyal to just one. Even if Starbucks overall sales were growing, its individual same-store sales were not reflecting it.

That’s when Schultz took the hard call. He put a pause to the rapid expansion of the stores, even shut down a few where required. He shut down cafes -more than 600 and 2008 and another 300 in 2009- and laid off around 6700 baristas. He ordered closure of all its U.S. locations for one afternoon so he could re-train more than 135,000 baristas about how to make its signature expresso. He brought back in-house grinding, infusing the cafe’s once again with that fresh coffee aroma and removed the automatic espresso machines. Schultz’s makeover worked. The company’s stock soared more than one hundred and 43% in 2009 and same-store sales rebounded. Starbucks has posted positive same-store sales ever since.

During Schultz’s makeover of the cafe’s, Starbucks barely opened any new stores. But the pace picked up again in 2012. By 2017, Starbucks opened to nearly 3,000 more locations, ending the year with 20,000 cafes around the world.

This is a classic example of how Starbucks held itself from clinging to the strategy which got it success in the past – rapid expansion. Instead it practiced the pause, reworked the strategy and brought new changes as per the changing dynamics of the system at that point in time.

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