Starbucks' CEO Refill

As part of a series of moves, the coffee chain, struggling of late, is replacing CEO Jim Donald with founder and former chief exec Howard Schultz

SEATTLE—Starbucks (SBUX) Chairman Howard Schultz is reclaiming the chief executive's chair as part of a major restructuring initiative to slow the company's U.S. growth and improve offerings for its customers.

The Jan. 7 ouster of CEO Jim Donald, coupled with plans to close some U.S. stores and slow down opening new ones, comes as the world's largest chain of coffeehouses has seen its stock plummet 50% over the last year amid declining traffic in its domestic stores.

Starbucks wouldn't say how many stores would close and declined to detail its revised growth plans until it reports fiscal first-quarter earnings on Jan. 30.

The company's announcement after regular markets closed Jan. 7 sent its shares up 9% in after-hours trading. The shares finished the regular session at $18.38, just above their 52-week low of $18.

New Initiatives

In a conference call with analysts, Schultz was blunt in making the point that Starbucks had lost sight of the mission upon which it was founded, losing for many customers "the romance, warmth, and theater" of visiting the retailer's stores. "Much of the problem we have is self-induced," he conceded. "We are going to fix it. There's going to be a comprehensive focus that hasn't existed around here for a long time," he said. "We have to get back to what has made this company great."

Starbucks said the leadership shuffle is part of a series of other initiatives that include closing U.S. stores which aren't performing well, introducing new products and store designs, and improving training for baristas.

The company said it plans to take some of the capital originally intended for U.S. store growth and use it to accelerate its international expansion.

Schultz, who served as CEO from 1987 to 2000, said he plans to remain the company's top executive "for the long term" and that his agenda will also include streamlining the company's management.

Donald had been CEO since March, 2005, when he was promoted from president of the company's North American division to replace Orin Smith, who retired.

Fierce Competition

Starbucks has struggled in recent months as consumers have cut back on spending amid declining home values and higher fuel prices. Meanwhile, competitors like Dunkin' Donuts and McDonald's (MCD) have cut into Starbucks' customer base by launching their own lines of gourmet coffee.

The Wall Street Journal, citing internal McDonald's documents, reported Jan. 7 that the world's biggest fast-food chain plans to add coffee bars with baristas serving cappuccinos and iced coffees at its nearly 14,000 locations.

Schultz acknowledged the competition has gotten fierce and said the company will focus on making changes that will differentiate Starbucks from its growing field of rivals. But he argued competition, rising dairy prices, and a faltering economy aren't the company's main problems.

He told the Associated Press that Starbucks has spent the last several years "trying to invest ahead of the growth curve—in people, process, infrastructure, roasting plants, coffee buying," and that focusing so heavily on that has taken attention away from the experience customers are having in its stores. "This is a problem that I think we've created, and as a result of that, that we can fix," Schultz said.

Some analysts have questioned whether the company has saturated certain markets as it opens an average of six stores a day. Schultz brushed that theory aside, even while conceding it has grown too aggressively.

"I think perhaps we stretched the real estate too far during this economic time, and we're going to dial it back. But we're not going to dial it back with the purpose of changing the growth trajectory of the company," Schultz said.

Schultz's Task

In an infamous leaked memo last year, Schultz lamented that the company's aggressive growth had led to "a watering down of the Starbucks experience."

Yet Starbucks has stuck to its ambitious long-term goal of having 40,000 stores worldwide. Late last year, however, it announced a slight scaling back of U.S. store openings, among other moves aimed at improving operations.

The company, which has more than 15,000 stores worldwide, said in November that it plans to open 2,500 stores this fiscal year, 1,600 of them in the U.S. That's about 100 fewer U.S. stores than it originally planned.

Without providing details, Schultz said the number of store closures will be "significantly lower" than the slowdown in U.S. store openings, and that Starbucks has no plans to pull out of entire markets.

Robert Toomey, an analyst with E.K. Riley Investments, said Schultz has his work cut out for him.

"The growth potential is less and the cachet has changed to some extent—it's more of a chain than sort of a cozy coffeehouse," Toomey said. "I think Schultz is the right person to do the job, but I think it's going to be a tough job."

CEO Path

Before coming to Starbucks, Donald, 54, was chairman, president, and CEO for Pathmark Stores, a supermarket chain based in New Jersey. He has worked at other retailers, including Wal-Mart Stores (WMT). A Starbucks spokeswoman said Donald was not available for comment Jan. 7.

Schultz, 54, joined Starbucks in 1982 as director of retail operations and marketing, then left three years later to start his own company, Il Giornale, hoping to take the Italian espresso bar mainstream in the U.S.

Il Giornale acquired Starbucks in 1987, ending the year with 17 stores. The company went public in 1992 and had nearly 300 stores by the end of the following year.