Starbucks CEO sees "tailspin," outlines change

SEATTLE (Reuters) - Warning of an economic "tailspin," Starbucks Corp SBUX.O outlined long-awaited plans to turn around its U.S. business on Wednesday, but details from new coffee machines to a rewards program for frequent customers failed to excite investors, who sent shares down 4 percent.

Starbucks Chief Executive Howard Schultz talks to shareholders at the Starbucks Annual Shareholders meeting at McCaw Hall in Seattle, Washington March 19, 2008. REUTERS/Marcus R. Donner

Chief Executive Howard Schultz told the company’s annual meeting there was no “silver bullet” for fixing Starbucks, whose stock has dropped 40 percent over the last 12 months.

The company’s blazing U.S. sales growth stalled in the most recent quarter, when a decline in traffic caused sales at domestic stores open at least 13 months to fall 1 percent -- the first quarterly fall in company history.

Schultz returned as chief executive in January, promising to change what he had called the “commoditization” of the brand, but John Langston, a senior analyst at Hodges Capital Management, said he did not hear anything that made him want to buy the stock again.

“I didn’t really hear anything that blew my skirt up,” he said.

Starbucks aims to woo consumers, who are rethinking their spending amid a broad economic downturn, by rolling out a new coffee blend, delving into energy drinks and investing in espresso equipment and high-end French presses. It said it had bought ‘Clover’ French press maker Coffee Equipment Co.

Starbucks has long said its $3 to $5 coffee is an “affordable luxury,” but that assumption is being challenged because consumers are spending less on everything, from dining out to buying clothing, as home prices fall and the cost of necessities such as gas and fuel continue to rise.

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“We’re an affordable luxury, but there are forces of nature here that we can’t control,” Schultz told journalists.

He told investors: “You have an economy that is really in a tailspin.”

Earlier this year, Schultz said Starbucks would close 100 underperforming stores and cut its 2008 new store plan in the United States to 1,175 from 1,600, while increasing the number of international store openings by 75 outlets to 975.

Big shareholders were hoping for an update on those efforts, but the company did not comply.

The Seattle-based company is facing unprecedented economic pressures -- from lower consumer spending to high coffee and milk costs -- and Schultz did not see profit margins improving for the balance of the year.

He said the new turnaround plan offered solutions to “reaffirm our coffee authority” and make the chain feel less corporate. For instance, Barista will be able to see customers over new low machines.

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A new coffee blend is scheduled for an April debut and a Web site, wonder-struck, will allow customers to submit ideas to the company and to vote on them.

Under the reward program due to begin in mid-April, consumers who use the company’s prepaid cards and register online can get free drip coffee refills and extras such as flavored syrup or soy milk, Starbucks said.

Meanwhile, competitors are nibbling away at different segments of the $25 billion-plus U.S. specialty coffee market that Starbucks carved out.

McDonald's Corp MCD.N has aggressively entered the drip coffee market and plans to roll out more expensive espresso drinks.

Starbucks now has about 10,000 U.S. stores and some 5,000 international locations. The brand has become such a part of mainstream life that some analysts say it is struggling to offer consumers something special.

Starbucks shares closed at $17.50, down 74 cents or 4 percent on the Nasdaq.

Writing by Alexandria Sage, Editing by Toni Reinhold/Andre Grenon