Krista Miller sips a cappuccino at a Starbucks coffee shop in Seattle on Friday.

Starbucks hopes to bring back romance

SEATTLE — It's been almost a year since Chairman Howard Schultz' bitterly candid memo bemoaning "the watering down of the Starbucks experience" landed with a thud on the desks of the coffee chain's top executives.

Mincing no words, he complained that the company's unbridled growth had sapped the soul out of its stores — his rallying cry to shift the focus back onto the customer.

He sounded just as frustrated earlier this month after the company fired Chief Executive Officer Jim Donald, handing the reins back to Schultz as part of a sweeping plan to reinvigorate the company, which has seen its stock slide 50 percent since late 2006.

Without releasing specifics, Schultz said Starbucks will scale back growth in the U.S., close lackluster stores, bolster expansion overseas and focus on changes to "revitalize the romance, the theater and the warmth" inside its stores.

More detail will emerge on Wednesday, when the company reports earnings for its first fiscal quarter, which ended Dec. 30. Analysts polled by Thomson Financial are predicting profits of 28 cents a share, up 2 cents a share from the year-ago period, on $2.77 billion in revenue.

Analysts expect opening fewer U.S. stores will help the bottom line fairly quickly, and that a sharper focus on adding new drinks to the menu and sprucing up stores will be key to drawing customers back over the long haul.

High on the list of other moves many analysts say the company should make: Bring back the pungent coffee aroma, which has largely faded from stores since the company switched to flavor-locked packaging and automated espresso machines years ago.

"It just screams, 'Huh, yes. Duh, absolutely," said Piper Jaffray analyst Nicole Miller Regan. "I walk by the Cinnabon, it smells like cinnamon rolls. I walk into Yankee Candle, it smells like candles. I walk into McDonald's, it smells like burgers. ... There's no doubt that's the easiest way to appeal to the guest."

Miller Regan predicts Starbucks will get rid of some of the racks of coffee mugs, teddy bears and other trinkets taking up space that could otherwise be used to add another cushy chair or extra room behind the bar for baristas to whip up Frappuccinos.

Starbucks has had enough success selling music, Miller and other analysts doubt it will quit peddling CDs or digital tracks through its partnership with Apple Inc.'s iTunes store. "It's such a small piece of the puzzle, it's hard to suggest that's a major distraction," Miller Regan said.

In his memo, Schultz lamented some people find Starbucks stores "sterile, cookie cutter," and he's said the company will working on design changes that will give stores a more appealing feel.

Even as it continues opening drive-throughs, analysts say it will be crucial for Starbucks to stay true to its mission of being a preferred "third place" between work and home.

Reading a newspaper next to a gas fireplace at the Starbucks in downtown Helena, Mont., David Shepard, 41, said he's been a loyal customer in large part because it's become a convenient gathering place for his friends. "This is where we meet to plan motorcycle trips and talk," said Shepard, a service manager for a spa company.

Asked what he thought Starbucks should do to perk up business, he suggested lowering prices. Though the company is testing $1 extra-small cups of coffee with free refills in some Seattle stores, it has said it's not part of any new business strategy. Most analysts say the company shouldn't — and won't — cut prices.

"It cheapens your product. It's never a good thing," said Howard Penney, managing director of consumer research at Friedman, Billings, Ramsey & Co., Inc.

Michael Port, a 33-year-old corporate pilot from Milton, Vt., frequents Starbucks nearly every day and doesn't mind paying a little more than friends who go to Dunkin' Donuts. "It's 5 or 10 cents more expensive, but it's a zillion times better," he said.

Vermont is Starbucks' smallest market in the United States, with only four coffeehouses statewide. While many people spurn chains in favor of independents like Muddy Waters, plenty still gravitate to Starbucks.

Greta Sheldon, 19, of Shelburne, Vt., carries some guilt about it. "Starbucks is the evil, big corporation. I should be advocating for mom-and-pop bakeries or something," she said, sipping her usual large Americano at a Starbucks in a Burlington shopping mall.

Sheldon said she'd like to see Starbucks infuse more local flavor into its shops, hanging local art or hosting musical performances.

Between the independents and fast-food chains like McDonald's Corp. and Dunkin' Donuts, which have been expanding their lineups of premium coffee drinks, Starbucks faces increasingly serious competition.

Most analysts say there's more than enough demand to keep the cash registers ringing for Starbucks and its growing cadre of rivals. But for the granddaddy of the $4 coffee to bounce back, Starbucks will have to remind people why it's worth paying extra — anywhere from a few cents to $1 a cup more than at some competitors.

"If Starbucks does not reinvigorate the brand to justify the premium that they charge, then they're in real trouble," said Morningstar analyst John Owens.

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