Starbucks CEO Kevin Johnson reins in predecessor’s goals
Founder Howard Schultz had a vision of 1,000 new Reserve cafés selling premium coffee
Starbucks Corp. Chief Executive Kevin Johnson is scaling down some of founder Howard Schultz’s biggest initiatives as he seeks to revive sales in the chain’s core coffee shops.
Mr. Johnson is curbing ambitious plans for a related brand of upscale coffee shops that were central to the company’s growth strategy just two years ago.
Under Mr. Schultz’s vision, the chain had planned to open about a thousand Starbucks Reserve cafes, where baristas would brew more expensive coffee using the latest techniques, serve artisanal baked goods and even mix cocktails. In addition, at up to 30 giant Roastery stores, employees would do all those things, plus roast the coffee.
Mr. Johnson is taking a more measured approach to the Reserve and Roastery stores without committing to a grand total. “One thousand was an aspiration,” he said in a recent interview. Starbucks will test whether six to 10 Reserve stores can meet the returns needed before building more, Mr. Johnson said.
It is the latest move in Mr. Johnson’s nearly two-year tenure to unwind big portions of Mr. Schultz’s projects aimed at extending Starbucks beyond the coffee shops most familiar to consumers. Mr. Johnson said he is trying to bring more financial discipline to the business and return more cash to shareholders.
A former Microsoft executive and longtime Starbucks board member, Mr. Johnson became Starbucks’s operating chief in 2015 and stepped into the CEO job vacated by Mr. Schultz in April 2017. In his first months as CEO, he would often preface meetings by saying, “I’m not Howard, I’m Kevin,” according to a person familiar with the matter.
Starbucks is under pressure to grow sales in an increasingly crowded coffee market. The company for years posted quarterly U.S. same-store sales growth of 5% or higher but began missing sales targets in 2016.
Some analysts say slower traffic growth coincided with an acceleration in new-store openings as other high-end coffee shops were springing up in urban areas. Lower-priced rivals, meanwhile, became more aggressive in promoting better-quality coffee.
U.S. customer traffic at Starbucks declined for the past two consecutive quarters and was down for the 2018 fiscal year.
Mr. Schultz, who stepped down as chairman in June, had said opening new luxury shops would offset the drop in foot traffic to regular Starbucks cafes, which coincided with the rise of online shopping. With fewer people going to malls and big shopping centers, where many Starbucks are located, fewer people were stopping by Starbucks for their caffeine fix. The upscale Reserve stores, Mr. Schultz maintained, would give customers a worthwhile reason to leave home.
Mr. Johnson has sought to portray himself as more datadriven and analytical than his predecessor. “Certainly, I tend to bring a much more disciplined approach to picking the priorities,” he said at a conference two weeks after Mr. Schultz left.
That discipline has extended to store growth, which Mr. Johnson is slowing in the U.S. He is also working to improve customer service, pushing the company to develop more innovative beverages and expanding its reach in China. Starbucks has opened up its mobile-order app to people who aren’t members of its rewards program, and it is expanding delivery to nearly a quarter of its more than 8,000 U.S. companyoperated stores early this year.
Mr. Schultz built Starbucks into a global brand, was its public face for more than three decades and was widely known for making big decisions on intuition. He dropped the words “Starbucks coffee” from the company logo eight years ago.
Starbucks acquired Atlantabased tea retailer Teavana Holdings Inc. in 2012, and some four years later invested in the rights to develop and operate new Princi Italian bakery locations outside Italy and to sell Princi products in the Roastery and Reserve stores. Mr. Schultz said Starbucks also planned to open 1,000 stand-alone Princi bakeries around the world.
Three months after he became CEO, however, Mr. Johnson said Starbucks would close all 379 Teavana stores in malls because of underperformance. Meanwhile, just three stand-alone Princi stores have opened in the U.S. since 2016. Starbucks in May sold the rights to market its packaged coffee and tea in grocery stores to Nestlé SA so it could focus squarely on its coffee shops.
Mr. Schultz was so convinced the Roastery stores, measuring 15,000 square feet or more, would refresh the overall Starbucks brand that he stepped down from the CEO position to oversee it.
Until Mr. Schultz left the chairman position in June, Starbucks had said it was planning up to 30 Roasteries around the world. Four have opened so far, and Mr. Johnson is no longer citing a total target, referring only to two more under construction in Tokyo and Chicago.
As for the smaller Reserve stores, only one has opened in the past two years, on the ground floor of Starbucks headquarters in Seattle.
A Starbucks spokesman said Messrs. Johnson and Schultz shared the same goals for the new formats but that Mr. Johnson has laid out a disciplined approach for testing them.
“The company is in great hands with Kevin,” Mr. Schultz said in an email.
“Kevin and I speak often and he knows he has my complete support.”
Mr. Johnson’s approach is showing signs of progress. In the company’s fiscal fourth quarter, Starbucks posted progress in every operating metric it tracks globally, including sales. Investors, too, appear bullish on his plans. Starbucks shares rose nearly 15% in 2018 compared with a 6% drop in the S&P 500.
“This management team is moving to a more asset-light, cash-generating business model versus the previous management’s pedal to the metal on unit growth,” said Peter Saleh, an analyst with BTIG.
When Starbucks’s U.S. sales growth began to slow in 2016, Mr. Schultz vowed that same-store sales growth would return to its historic level of 5% or more. Now the company said it expects same-store sales globally to grow by 3% to 4% over the long-term.
The company had established a long-term earnings per share growth target of 15% to 20% under Mr. Schultz. Mr. Johnson recently hired a new finance chief who in December set a new target of at least 10%, down from a previous target of 12% or greater.
Tony Scherrer, portfolio manager at Smead Capital Management, which holds Starbucks shares, said: “This guy is methodical and the things he’s doing seem to be good for shareholders.”