Jan. 8 (Bloomberg) -- Howard Schultz was peddling a unique idea when he turned a Seattle coffee-bean roaster into a chain of U.S. cafes called Starbucks Corp. Now he is returning to lead a company battered by the competitive landscape it created.

Investors responded by sending the shares up the most in almost two years in U.S. trading.

Starbucks trained customers to demand better-tasting coffee. In the process, it spawned thousands of mom-and-pop imitators and enticed even McDonald's Corp., the world's biggest restaurant company, to open coffee counters.

By bringing back its visionary leader eight years after he stepped aside as chief executive officer, Starbucks is telling shareholders the challenges run deeper than labor costs or a drop in consumer spending. Schultz, who returns after Starbucks reported its first quarterly drop in U.S. customer visits, called the chain's problems ``self-induced'' and said Starbucks hadn't introduced enough ``exciting'' products.

``I'm here to tell you that just as we created this problem, we will fix it,'' Schultz, 54, said in a conference call yesterday.

Starbucks gained $1.48, or 8.1 percent, to $19.86 at 4:30 p.m. New York time in composite trading on the Nasdaq Stock Market, the biggest gain since February 2006.

Andrew M. Barish, an analyst with Banc of America Securities LLC, raised his recommendation on Starbucks to ``neutral'' from ``sell'' today.

``This could be the first step to Starbucks more consistently returning cash to shareholders,'' Barish said in a research note.

Stock Drop

Schultz, who was raised in federally subsidized housing projects in Brooklyn, replaces Jim Donald, 53, who ran Starbucks for less than three years. Schultz took over the Seattle chain in 1987 and was CEO until 2000. The shares jumped almost 13-fold during his tenure, as Starbucks expanded from a few Seattle espresso stands to 10,684 U.S. locations as of Sept. 30, among 15,000 worldwide in 43 countries.

The stock has declined in two of the past three years. Last year's drop, 42 percent, was the steepest since the company went public in 1992.

``The perception is that Starbucks is oversaturated in the U.S. and that the quality of the experience has deteriorated as they've grown,'' said Walter Todd, a principal at Greenwood Capital Associates LLC in Greenwood, South Carolina, which sold its Starbucks shares last year.

Starbucks cut profit and sales forecasts in November after it raised prices 9 cents a cup to offset higher food and labor expenses. Competition is growing, Schultz, who will retain his title of chairman, said yesterday.

McDonald's Coffee

``There are new levels of parity, new levels of convenience, new levels of price,'' he said. ``People around Starbucks are intercepting our traffic.''

McDonald's, whose U.S. coffee sales increased 39 percent during the first nine months of 2007, plans to add espresso counters at as many as 14,000 locations.

Consumer Reports magazine declared in March that McDonald's serves a better cup of coffee. The magazine's tasters called the Starbucks cup ``burnt and bitter enough to make your eyes water.''

``Howard coming back is absolutely the right strategy,'' Howard Penney, an analyst at Friedman Billings Ramsey & Co. in New York, said today in an interview on Bloomberg Television. ``Consistent with other companies that have seen pressure on profitability, someone has to pay the price.''

Expansion Strategy

Schultz said he will slow the pace of U.S. expansion and close some cafes. Money earmarked for the U.S. will go toward international growth, he said.

At the same time, he said, Starbucks has grown cautious, introducing variations of drinks instead of products that might attract new buyers. ``They have not been transformative, they are not exciting,'' Schultz said.

Penney said Schultz revealed a ``very significant change in how they view their cash flows'' that could lead to a dividend or share buyback program.

``You could see this company buying back easily $700 million to $1 billion a year in stock,'' Penney said.

Early Action

Yesterday's shakeup was hinted at in a February memo Schultz wrote to employees. He wrote he was worried about the ``commoditization of our brand.'' He said automated espresso machines and pre-bagged coffee beans made stores more efficient, yet removed the ``romance and theater.''

Schultz's return is welcome because it shows the company is taking action early to correct its drift, said James Walsh, who helps manage $1.1 billion, including Starbucks shares, at Coldstream Capital Management in Bellevue, Washington. As the main architect of Starbucks' expansion, Schultz is a motivated leader, he said.

``Nobody loves your baby as much as you do,'' Walsh said.

As of July, Schultz held 17.9 million Starbucks shares, or 2.45 percent, making him the eighth-largest investor, according to data compiled by Bloomberg.

Schultz reimbursed the company $400,919 for his personal use of the corporate aircraft last year, Starbucks said today in a U.S. regulatory filing. The company's audit committee approved the transaction, the filing shows.

$100 Per Month

Starbucks is still expanding. Fourth-quarter net income was $158.5 million, a 35 percent gain from the same period a year earlier. Revenue climbed 22 percent to $2.44 billion. The company's earnings forecast for next year suggests an increase of as much as 21 percent.

``You go into any Starbucks, and there's still a line,'' said Larry Miller, an analyst at RBC Capital Markets in Atlanta. ``They're not feeling sorry for themselves.''

Talk of decline was new to Pascal Tran, 46, who manages an optical shop a few blocks from the first Starbucks shop in Seattle's Pike Place Market. He buys as much as $100 of coffee a month and gives $10 gift cards as a treat to his 12-year-old daughter.

``The quality of Starbucks is the same wherever you go -- that's the best thing about them, the consistency,'' Tran said.

He allowed one drawback. He said it sometimes gets confusing when he schedules a meeting with friends or customers at Starbucks. There are three in his building.

To contact the reporters on this story: Peter Robison in Seattle at robison@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.

Last Updated: January 8, 2008 16:33 EST