Latte Questions for Starbucks' Execs

At its annual gathering, the coffee chain dealt with concerns about a leaked memo, a sagging stock, and a fair-trade tussle

Starbucks is no longer just a coffee chain—or a hot growth stock, either. With 13,500 stores in 39 countries, it's fast becoming a multinational heavyweight. And at its 2007 annual shareholder meeting in Seattle on Mar. 21, the company showed how it's dealing with its growing pains.

Recent problems with the Ethiopian government and a leaked Valentine's Day memo from Chairman Howard Schultz were among the major topics of discussion during the roughly two-hour presentation, which included speeches by Schultz, Starbucks (SBUX) CEO Jim Donald, and international operations head Martin Coles. Also on the agenda: talk about the company's ambitious expansion plans. And at the end of the meeting, Schultz confirmed that Sir Paul McCartney will be the first artist to join Starbucks' Hear Music record label, which was announced last week.

Thousands More Stores

The Mar. 21 event marked the first shareholder meeting in the company's history in which shares were trading lower than they had been the year before—almost 10% lower, at $31.68. Nevertheless, shortly after the meeting opened with a barista's acoustic guitar performance of a song with the chorus "Hallelujah for Me," Schultz launched into an impassioned explanation of why he and the company's executives remain optimistic.

"I'll be first to say I don't feel very good about [the stock's 12-month performance]…but whether you've been a shareholder for 15 years or 5 months, I'm telling you I believe there's never been a better time to be a Starbucks shareholder," Shultz told the caffeinated crowd. "We are building Starbucks for the long term, and I hope that after 15 years of demonstrating the kind of value that we've created for you, that you would give us the same trust today that you have in the past."

Starbucks shares on Mar. 21 ended up 89 cents, or 2.84%, at $32.27 a share.

It was left to executives Donald and Coles to outline the specifics of the company's growth plan for the 2007 fiscal year: revenue growth of 20%; expected sales of $9.3 billion; the opening of 2,400 new stores; and maintaining same-store sales growth in the 3% to 7% range. Schultz attempted to put the Valentine's Day memo he had written to Donald into context. After the memo was leaked on the Internet on Feb. 23, it caused shockwaves on Wall Street.

Strategic Humility

In the memo, titled "The Commoditization of the Starbucks Experience," Schultz expressed concern that moves to increase same-store sales with automatic espresso machines and flavor-locked coffee packages were removing the "theater and romance" of the original Starbucks stores.

"In 25 years I have written hundreds of memos, and if I look at the theme and the thread of those memos through the years, there is a common thread," said Schultz at the meeting. "It's self-examination, it's the pursuit of excellence, it's the willingness to constantly challenge yourself and not embrace the status quo… it is important we take a step back and ask ourselves a serious question, about whether or not we're as good as we once were, whether we're good as we need to be."

In a press conference following the meeting, Donald added that the memo was a response from Schultz after Donald had solicited thoughts that should be incorporated into the strategic plan for fiscal year 2008.

Differences in Ethiopia

Schultz and Donald also addressed problems in Ethiopia. In recent months, Starbucks has come under fire from human rights organizations for its opposition to the Ethiopian government's attempt to trademark the names of three regions in the country—Sidamo, Yirgacheffe, and Harrar—in order to command higher prices for the beans.

Both Schultz and Donald said that benefiting farmers and highlighting those regions was a goal for Starbucks, but that they believed a trademark wasn't necessarily in the best interests of Ethiopian farmers. And in an attempt to show that Starbucks is friendly with other African coffee producers, Rwandan President Paul Kagame took the stage to make brief remarks about the positive relationship his country's farmers have with Starbucks.

Not everyone was satisfied, however. When asked by one shareholder what the business case was for Starbucks' rejecting the government's move, Schultz said he worried that the government could sell the trademark and that the company couldn't be assured that beans marketed under those names would, in fact, be from those regions.

Big Target?

Schultz implied that Oxfam and other groups were attacking Starbucks because of its prominent brand. "We've learned that perhaps one of the reasons that the NGO (nongovernmental organization) is involved in this is because they're in a membership drive, and perhaps Starbucks is being used as a foil."

Oxfam denies that is the case. "To suggest that we would be supporting these farmers' organization in order for some sort of gain, financial or otherwise, is not true," responded Seth Petchers, Coffee Lead for Oxfam's "Make Trade Fair" campaign. "It seems like an attempt to distract from the negative publicity Starbucks is getting on this issue."

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