How IT Systems Can Help Starbucks Fix Itself

A management upheaval at Starbucks Coffee Co. led to the ouster of the company’s CIO and the installation of a new technology leader steeped in Seattle-based commerce. And it will be up to him and his colleagues to use IT systems to inject some caffeinated customer connections and wake up the retail giant.

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It was in early January when Starbucks announced that Howard Schultz was reclaiming the CEO duties from Jim Donald, who had taken over the reins from Schultz in 2000. Harry Roberts, a former Starbucks executive, was returning as SVP and chief creative officer.

And in addition to a couple of other promotions and departures, Starbucks named a new CIO: Chris Bruzzo. As vice president, CTO and acting CIO, Bruzzo was tasked with leveraging technology “to create innovative ways for Starbucks to connect with our customers and build loyalty programs,” the company said.

The changes acknowledged that the company had lost its way—its customer experience, merchandising and hypergrowth strategies appeared headed in the wrong direction and limited by layers of bureaucracy. “They were drifting,” says retail analyst Paula Rosenblum, a managing partner with Retail Systems Research (RSR). She adds that Starbucks “lost its focus and quality control.”

The Tyranny of Same-Store Sales

As a result, even though the company’s revenues ($9.4 billion) and earnings ($673 million) each climbed by about 20 percent in 2007, Starbucks’ stock price dropped almost 50 percent in the last year. In addition, the board watched as comparable-store sales, a critical benchmark in retail, plunged each year from 10 percent in FY 2004, to 8 percent, 7 percent and 5 percent for 2007.

“Same-store sales are really, really important, especially to Wall Street and especially if you’re in growth mode,” Rosenblum says. When a company is adding new stores and its comparable-stores’ (ones that have been open for more than a year) sales decline, that usually shows that the company is “probably cannibalizing existing stores’ sales with the new ones,” she notes. (Starbucks plans to release its first quarter fiscal 2008 financial results on Jan. 30.)

In addition, Starbucks’ efforts to improve business process efficiency led to a loss of store flavor. “In its zeal to efficiently open and operate tens of thousands of stores, it found ways to tightly and effectively seal massive quantities of coffee and install new, more efficient coffee-making machines,” Rosenblum writes in a report on Starbucks. “The result—the stores didn’t smell much like coffee and they didn’t feel intimate, unique or high-end anymore.”

One of Starbucks’ biggest problems was self-inflicted: It had opened too many U.S. stores, proving, as Rosenblum terms it, that “endless growth is as much a myth as the bottomless cup of coffee.” Good IT systems fueled that expansion to more than 14,000 Starbucks locations, Rosenblum says. “Starbucks made use of technology to expand quickly—in fact, better than most companies,” she says. “They had strong real estate, location management and selection systems to help identify demographics. That was how Starbucks used IT to gain bigger and bigger economies of scale.”

As a result, a corporate malaise set in. “We are emerging from a period in which we invested in infrastructure ahead of the growth curve,” Schultz conceded in a Q&A letter to Starbucks employees. “Although necessary, it led to bureaucracy.”

Schultz outlined his key tasks as: refocusing on the in-store customer experience and new products; slowing the pace of U.S. store openings and closing a number of underperforming U.S. store locations; reigniting the emotional attachment with customers; realigning Starbucks organization and streamlining the management to better support customer-focused initiatives; and accelerating expansion of Starbucks outside the U.S.

“Put simply,” Schultz proclaimed, “we are recommitting ourselves to what has made Starbucks and the Starbucks experience so unique.”

How IT Can Help

Now that retailing systems and applications have become more mainstream in the retail industry, it’s more than likely that Starbucks management will lean heavily on IT to help enable the turnaround.

Schultz clearly felt that Starbucks needed someone new to lead the baristas in the back office. As such, CIO Brian Crynes was out, and Chris Bruzzo was in. In looking at Bruzzo’s background and where the company wants to go, it’s easy to see why Schultz tabbed him.

Bruzzo was most recently Starbucks’ vice president of digital strategy. “I’m here to craft a digital strategy for Starbucks Coffee Company worldwide, creating digital extensions to the Starbucks experience,” he writes on his LinkedIn profile. Before joining Starbucks, Bruzzo held several senior-level marketing and PR jobs at Amazon.com. (Starbucks did not make Bruzzo available for an interview.)

RSR’s Rosenblum says that Bruzzo and his team need to help recreate that intimate “Starbucks experience” that its executives often refer to. His background in all things digital combined with Starbucks’ music endeavors—its partnership with Apple’s iTunes store to make music available via Wi-Fi hotspots in stores, its release of CDs by artists like Paul McCartney and the late Ray Charles—point to ways in which Bruzzo can do just that—expanding the Starbucks community into a much larger social network, Rosenblum says.

Schultz has stressed the significance of serving customers better and reigniting the connection that Starbucks has had with its customers.

One way for IT to make that happen is to aggregate and mine its data from customer payment cards (referred to as loyalty cards) and examine buying patterns. In turn, Starbucks can determine how employees can better serve customers and what new products customers will buy—and gain more share of their wallets.

“The goal is not get more trips to Starbucks but to raise the amount of the transactions per trip,” Rosenblum says. “To buy a latte and a biscotti. Buy the larger drink and not the smaller one. So, the same number of trips but a larger dollar value [for Starbucks].”

Most retailers—95 percent, according to RSR data—aren’t doing anything with this type of data right now. Rosenblum says that IT’s data can help with new product efforts, which is key to increasing the value of each transaction. In her report on Starbucks, Rosenblum writes that she is “thrilled to hear a retailer contemplate using its loyalty data to develop new and potentially location-centric products. Our research tells us that the smartest retailers are using customer data to inform their assortments and promotions.”

What’s Next?

Rosenblum compares the return of CEO Schultz and others to when Steve Jobs came back to rescue Apple. “It’s a ‘We know who we are, and we know where we stand,’ mind-set,” Rosenblum says. There’s a link between brand and CEO that can’t be duplicated, and IT needs to do whatever it can to reestablish that powerful connection.

Rosenblum is also impressed with how quickly Starbucks reacted to its recent woes. “Starbucks just got too big and stopped being interesting,” she says. “Potentially, they’ve caught it in time.”

Changes are already brewing. Starbucks has begun testing a $1 cup of drip coffee, with free refills, in its Seattle-area stores. The dollar charge is 50 cents less than what Starbucks normally charges for an 8-ounce cup of coffee. In a statement, a Starbucks spokeswoman said the pilot program “is not indicative of any new business strategy.”

But how will a dollar cup of joe mesh with Starbucks’ $3 and $4 grandiose line of hot beverages as executives’ effort to recreate the warm and connected feelings of the past in nearly 15,000 stores worldwide?

In the letter to employees, Schultz gave his view on how they could help in the transformation of Starbucks, which is great advice for new CIO Bruzzo. “Focus on the customer,” Schultz wrote. “Be creative. Be innovative. Don’t be afraid to bring up new ideas. And be excited about our future.”