Feb. 23 (Bloomberg) -- Howard Schultz, the founder of Starbucks Corp., told executives at the world's biggest coffee chain that the company's expansion to 13,000 stores is ``watering down'' its brand.

Decisions to streamline store design, for example, may be more efficient and financially responsible, Schultz wrote in a Feb. 14 memo to Chief Executive Officer Jim Donald and other executives.

``However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store,'' Schultz wrote. ``Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about coffee.''

Starbucks has said it will expand eventually to 40,000 stores worldwide, with half overseas. His comments come as the company faces increased competition from Dunkin' Donuts and McDonald's Corp., which introduced a premium coffee last year.

Schultz's memo was posted yesterday on the Starbucks Gossip Web site run by Jim Romenesko, who also oversees a journalism blog for the Poynter Institute. Its authenticity was confirmed today by company spokeswoman Valerie O'Neil.

Shares of Starbucks fell 26 cents to $32.75 at 4 p.m. in Nasdaq Stock Market composite trading. They have declined 7.5 percent this year after an 18 percent gain in 2006.

Wake-Up Call

Schultz said he took part in the decisions that have eroded the ``Starbucks experience,'' including a move to promote fresh-bagged Starbucks coffee that led customers to purchase pre-packaged beans and not get a chance to smell it while it was ground.

``I take full responsibility myself, but we desperately need to look into the mirror and realize it's time to get back to the core,'' he wrote.

Schultz occasionally sends out memos such as this to remind his senior management team to evaluate their decisions and consider new ways to grow the company, O'Neil said.

Schultz declined through O'Neil to comment further. Donald was on vacation and couldn't be reached, she said.

Brand Denigration

``The brand is all important to him and you cannot denigrate the brand,'' said Don Gher, chief investment officer at Coldstream Capital Management in Bellevue, Washington.

``I'm impressed they are not just sitting on their laurels,'' he said. Coldstream manages $1 billion in assets including Starbucks shares.

Earlier this month, Consumer Reports magazine ranked McDonald's coffee ahead of Starbucks, saying it tastes better and costs less.

Starbucks in October increased prices by about 5 cents a cup to counter higher coffee and store-operating costs. The company plans to open 2,400 new cafes this year, or about 6 per day, and expand in fast-growing markets including China, Brazil and India.

To contact the reporter on this story: Mary Jane Credeur in Scottsdale, Arizona, at mcredeur@bloomberg.net.

Last Updated: February 23, 2007 16:09 EST