SBUX Starbucks Corporation

By Julie Jargon 

Howard Schultz is stepping down as chief executive of Starbucks Corp. to lead an effort at the company to build high-end coffee shops that will charge as much as $12 a cup, his next attempt to revolutionize the way Americans consume coffee.

Mr. Schultz, 63 years old, is handing over the CEO role to Chief Operating Officer Kevin Johnson, who served as a director of the company for seven years before joining its executive team two years ago. Mr. Schultz, who is credited with taking the company from small beginnings to an international behemoth, began handing over daily oversight of the company to Mr. Johnson a few months ago.

Starbucks's move toward high-end coffee, a project referred to internally as "Siren Works" -- after the mythological creature in the coffee chain's logo -- is aimed at refreshing its brand, which has been facing increasing competition from specialty roasters such as Stumptown and Intelligentsia, as well as from mass coffee purveyors like Dunkin' Donuts, which has been introducing more drinks such as cold-brewed coffee.

While Starbucks continues to outperform the broader food retail industry, its sales growth has slowed in recent quarters.

Mr. Schultz will remain chairman of Starbucks after he steps down as CEO in April and said he has no plans to step away from the company. "This gives me the entrepreneurial freedom to do what I think I do best," he said in an interview.

But the big bet is based solely on Mr. Schultz's instinct that it is the right thing to do. "There was no research," he said. Convincing his board and senior management team to create another brand wasn't easy.

Mr. Schultz changed the way Americans drink coffee and even socialize, creating what he called a "third place" where people could gather outside home and work.

Starbucks showed Americans that coffee could be more ambitious than home-brewed Folgers. Mr. Schultz joined the original company as its marketing director in 1982 and, after a dispute with its then-owners, left in 1986 to open his own coffee shop, which he named Il Giornale. He later bought the Starbucks coffee business from the original owners, renamed his own shop Starbucks and went on to expand the brand to more than 25,000 stores across the globe.

Mr. Schultz said the move to opening high-end coffee shops marks the company's biggest strategic change since it began opening shops overseas 20 years ago. Mr. Schultz said the approach would provide an experience that would entice consumers, who are increasingly shopping online, to leave their homes.

Analysts see plenty of risks for the new venture. If the economy falters, they say, investors won't be too keen on Starbucks spending what some estimate will be roughly $100 million a year building fancy new stores that may draw few customers.

Mr. Schultz was encouraged in part by the outsize sales performance of the company's first such shop, the Starbucks Reserve Roastery and Tasting Room in Seattle. There, coffee is roasted and then brewed using a variety of methods by top Starbucks baristas recruited from around the country. A 12-ounce cup of small-batch coffee brewed using a process involving a siphon costs $12.

The Roastery is the 15,000-square-foot embodiment of an idea Mr. Schultz dreamed up seven years ago. In his journal, he scribbled the words "the Willy Wonka of coffee," thinking that someday he would build a grand temple to coffee. At that time, Starbucks was still the predominant place to buy a good cup of coffee. But the better-coffee market has since become crowded.

Nearly two years after the Roastery opened in an abandoned Volvo dealership in Seattle Starbucks is planning to open 20 to 30 more like it, including one twice its size in Shanghai next year.

The company plans to build as many as 1,000 smaller stores similar to the Roastery, minus the on-site roasting, under the Starbucks Reserve brand, with a logo that consists of a gold star and the letter "R." The first two stores are slated to open in Chicago and Seattle in the summer.

Starbucks is also remodeling many of its more than 25,000 Starbucks stores with Reserve-branded coffee bars where customers can get the same kind of coffee education and variety of brewing methods as at the Reserve stores.

Mr. Schultz said he built his case for the new operation by studying other companies that have successfully extended their brands, such as Porsche's creation of a luxury sport utility vehicle, which was initially met with skepticism, and Nike's creation of the Air Jordan brand.

Cliff Burrows, who left his role running the Americas division, Starbucks's largest business, to join Mr. Schultz on the new project, said: "I've worked with Howard a long time, and there are times he has a vision and clarity that those of us around him don't see but we accept it," he said.

Moving too far upscale could be a distraction to the operation of Starbucks's traditional coffee shops. Credit Suisse analyst Jason West said: "The menu is getting complex at Starbucks. If you're going to throw on top of that another level of premiumization and innovation and add an espresso bar, this could make things more challenging."

Write to Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

December 02, 2016 02:47 ET (07:47 GMT)

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