Starbucks’ recipe for operational success: phase II
Gene Baldwin

In the April newsletter, we reviewed the first phase of Starbucks Coffee Company’s turnaround plan, designed to increase sales, improve operations, strengthen its brand and improve product quality. In this column, we will explore phase II of Starbucks’ turnaround strategy.

Once operational excellence had been restored, Starbucks’ CEO Howard Schultz was ready to implement phase II -- to encourage trial (or re-trial) by giving customers a compelling reason to shop at Starbucks. To be compelling, the offer had to center on a core product and the price had to appear extremely attractive. To be successful, the offer had to be delivered through a strong advertising strategy. These three elements were essential for Starbucks’ turnaround and they can be applied to improve sales in any industry. Let’s take a look at each of these components in more detail.

Offer your core product:
Naturally, Starbucks selected coffee as its core product. It introduced a new line of coffee called “Pike Place Market” as its featured selection. I cannot really tell what makes this label any different from the previous offerings -- is it a different coffee bean or does it have a different roasting method? Who knows or cares, just as long as it tastes good and is compatible with Starbucks’ traditional standards and flavor profile. It is important to note that Starbucks identified its core product and then made a compelling offer on it. Many times I see companies that are reluctant to make compelling offers on their core products or services. They will try to offer products that will give them the best margins but are not necessarily their core products. I can agree with that approach in many instances -- but not in a turnaround. To make the most impact in a turnaround, you must go after the customer with your best “punch”. That means you must advertise your core business. If margins suffer temporarily, so be it. Above all, you must regain traffic counts and restore customer confidence.

Select a compelling price:
Over the period of about two months, I saw over and over again an offer in USA Today for a free cup of Pike Place Market coffee with the presentation of the newspaper coupon on Wednesdays. You cannot get much more compelling than free. Because of its product cost structure, a free offer made sense at Starbucks. Not all retail businesses can do that, but you must make the offer so attractive that customers will react to it -- whether it’s free or otherwise. By only offering the free cup on Wednesdays (probably one of the slowest days of the week), the damage to sales and margins will be somewhat mitigated.

Implement a strong advertising strategy:
For the Starbucks offer, the advertising medium I saw most often was the newspaper. Since I travel often, I saw the advertisements for Pike Place day after day, after day in USA Today. Starbucks must have really stepped up its advertising budget with this campaign. Their ingredient for success was to spend enough in advertising to make the customer aware of the offer and then compel them to act on it. This tactic is vital in any industry and there are many resources available to convey the message. Examples include: loyalty cards, bounce-back coupons, in-store promotions, manager specials, banners, reader boards and e-mail clubs.

Another great resource is your company Web site. As the Internet becomes more interactive, many companies are encouraging their customers to become more interactive with their businesses, and Starbucks is no exception. This leads customers to feel more “ownership” of the brand, which further instills loyalty. One interesting feature of the Starbucks site is the cultivation of customer ideas. There is a button on the homepage that is almost too hard to pass up. You can present, vote on and discuss new ideas. If selected for implementation, you can see what Starbucks is doing to roll out those ideas.

Never stop learning:
In summary, the first phase of the turnaround was to get operations right. The second phase was to present a compelling offer on a core product to gain trial (or re-trial). I agree with both these approaches. Let’s keep track of Starbucks’ turnaround plan to see what we can learn next.

Gene Baldwin is a partner of CRG Partners. He is a frequent speaker at restaurant finance conferences and has authored numerous articles about the operational and financial management of multi-unit retail businesses. Read Gene’s column on Starbucks, phase I.
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FOR IMMEDIATE RELEASE

Corporate restructuring veteran Craig Boucher joins CRG Partners

BETHESDA, MARYLAND, JUNE 3, 2008 – Craig M. Boucher, an accomplished financial advisor and interim executive, has joined CRG Partners as a Partner in the Bethesda, Maryland office.

“We are extremely pleased to have Craig join our team, he is a proven leader who brings a demonstrated record of maximizing value to a wide range of clients,” said Scott Avila, a Managing Partner.

With more than 20 years of experience in corporate restructuring and crisis management, Mr. Boucher has worked in numerous industries and has particular expertise in the retail and consumer products industries. During his career, Mr. Boucher has developed and implemented numerous operational restructuring programs, which have substantially increased enterprise value for his clients. He has also served as a trusted advisor to management teams while they were restructuring debt and equity.

Previously, Mr. Boucher served as CFO of Jane & Company LLC, a privately held cosmetic firm with mass-market distribution. Prior to that, Mr. Boucher was a Managing Director of the Interim Management and Corporate Restructuring Division -- Retail/Consumer Products Industry Practice at XRoads Solutions Group.

Mr. Boucher holds a bachelor’s degree in accounting from New Hampshire College and is a certified CPA in the state of Maryland.

About CRG Partners: CRG Partners is a leading provider of operational improvement and financial restructuring services specializing in creating value for the stakeholders of underperforming companies. CRG Partners offers superior leadership and expertise of the restructuring process, while collaborating with clients’ management teams to quickly identify, develop and implement solutions that yield sustainable results. With an international presence and offices throughout the country, CRG Partners is one of the largest advisory and interim management firms in the U.S. For more information, call 800-656-5459.

The next phase of the credit crunch commences

The collapse of the sub-prime mortgage market and subsequent tightening of readily available credit has taken its toll on the U.S. economy, resulting in, among other things, severely depleted consumer confidence and an increase in corporate bankruptcy filings. Despite this, many issuers remain solvent, and for now, investor confidence continues to be high. But this confidence will begin to erode due to the maturing of significant corporate debt over the next 18 months.

While the recent increase of corporate bankruptcy filings is notable, the worst is yet to come. The $1.3 trillion sub-prime mortgage pales in comparison to the $3 trillion leveraged debt market, which has thus far remained relatively stable. The default rate on leveraged corporate debt increased for the sixth straight month in May, an early sign of instability. This trend is likely to continue as issuers encounter increased financial pressures for the remainder of 2008 and into 2009.

Many companies, who borrowed significant amounts of money over the course of several years, have been insulated from the credit market slump over the past year because their debt had yet to mature. However, the amount of bonds maturing in 2009 will double to $28 billion, according to Moody’s Investors Service, as reported in the Daily Bankruptcy Review.

Until recently, at-risk companies had been able to refinance their debt obligations, delaying the maturation of their debt and contributing little to the debt coming due in 2008. Weak bond and loan covenants added additional flexibility that only masked deep operational issues. As the default rate increases, credit standards will become stricter and it will be increasingly difficult for companies with weak credit ratings to secure new loans.

In addition, the number of companies that will default on loans is expected to exceed historical averages over the next year, after an unprecedented low last year. In fact, the global default rate is predicted to be in the 5% to 6% range over the next 12 months due, as reported by Michael Anerio in the Daily Bankruptcy Review. In a recent article, Aneiro explained: “Years of easy borrowing have left credit markets in comparatively bad shape by historical standards, with a higher proportion of high-yield debt occupying the lowest tiers of the junk-bond ratings scale, reducing the cushion against possible default.”

Each of these factors -- an increase in bond maturation and loan defaults, stricter credit standards and a decrease in refinancing options, and more bankruptcy filings -- will compound one another, further eroding consumer and investor confidence and weakening a beleaguered economy.