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Crucible of Commerce and culture

BY Kevin Coupe

The recent management shake-up at Starbucks, in which chairman Howard Schultz retook the CEO position and forced out the incumbent, Jim Donald, after a six-month period during which the company’s share price dropped 48%, vividly illustrated the ongoing battle for the soul of a company that has transcended commerce to become an American icon.

It is too early to tell whether Schultz, who engineered Starbucks’ branding and expansion efforts before hiring Donald—a veteran of Wal-Mart and Pathmark Stores—about five years ago, will be successful at recapturing the magic that he seems to think has been missing. He’s talking these days not just about shaking up the company’s executive suite, but also about slowing down the company’s expansion and even closing unprofitable stores, while at the same time putting Starbucks’ international plans on a faster track. And, Schultz is talking about finding ways to recapture certain cultural imperatives that he apparently feels have been shunted aside in the recent past.

These moves have gotten me thinking about whether culture and commerce can exist in the same crucible. It isn’t really a new debate, though the battle often is posited as being between efficiency and effectiveness. Either way, it is a debate that Schultz and Starbucks are going to have to resolve.

The fact is that over the past few years, one of the ways in which Starbucks became an icon—not to mention a darling of stock analysts—has been through tremendous growth. In some cities, such as New York, Chicago and San Francisco, there seems to be a Starbucks on virtually every corner. More often than not, when I travel outside the United States, I see the familiar logo; last year when I was in Shanghai, China, I walked into my hotel room for the first time, opened the curtains, peered through the thick smog and saw, several stories below … an enormous Starbucks.

Growth has been the engine that drove the company, and as it has grown in size, it also has spread its wings, getting into music publishing and even movie producing, to various levels of success. And as it was doing so, in order to satisfy the increased traffic and customer desire for speedy service, certain niceties were eliminated, such as keeping coffee beans in big barrels. The baristas making lattes were able to use automated machines, which some thought made the process more science than art, and somehow diluted the Starbucks culture.

For some companies, this might not have been a big deal. For some retailers, the notion of corporate culture is little more than a slogan, but I think Starbucks is different, because it always has portrayed itself as a company not just interested in profit and share price. Sure, those things are important, but Starbucks is supposed to be something more than that.

Which is where, and why, the collision between culture and commerce takes place. Because in the end, Starbucks is a public company. It has shareholders. Its leadership is charged with maximizing shareholder value. And when the board of directors decided that it could no longer be patient with the challenges that were inhibiting Starbucks’ share price, it came to the conclusion that a change needed to be made—even though, I suspect, Jim Donald had been growing the company precisely the way he was hired to grow it. The word “scapegoat” comes to mind, but maybe that’s not being fair to Starbucks—we don’t know all the internal debates that may have been taking place at the company’s headquarters, and how it all played out. And we do know that the competition in the segment has been growing, with both McDonald’s and Dunkin’ Donuts ratcheting up the pressure on Starbucks. Against this backdrop, perhaps some sort of shake-up was inevitable.

One thing seems clear, though. We live in an era where everybody seems to expect immediate gratification. The fact that Starbucks is a public company, dealing with impatient and dissatisfied investors, was the central factor that led to Jim Donald’s departure. It couldn’t have helped that the stock market has been tanking for the past month or so, affecting a lot of companies other than Starbucks. And the hardest thing that Schultz will have to do is to figure out what “appropriate growth” means and how to achieve it while continuing to nurture the company’s culture, and to work steadily toward his goals while keeping the braying of the public markets at bay.

That’s not to say that it isn’t possible. In Seattle alone, not far from Starbucks’ headquarters, there are at least two companies that seem to have been pretty successful.

Take, for example, Amazon.com, where CEO Jeff Bezos seemed to have made the company successful by investing in new products and services and by focusing on a culture of customer service—even when the public markets often criticized him for having misplaced priorities.

Also in the Pacific Northwest, Costco is a wonderful example of ignoring the short-term view of the markets. CEO Jim Sinegal has repeatedly ignored or dismissed calls by analysts to increase margins and decrease labor costs. The investor types say that such moves would improve immediate profitability and maximize investor value, but Sinegal says that his responsibility is to the long term, and that keeping the prices low and the employees well-compensated is the best way to maintain the company’s culture and long-term health.

Ultimately, I don’t have much doubt that Starbucks will recapture the magic. There’s too much brand equity there, and I’ll only begin to doubt when I don’t have to wait in line for my lattes.

When commerce and culture occupy the same crucible, though, there are bound to be tensions. When the mix goes bad, there can be an explosion. It will be up to the folks at Starbucks to make sure that doesn’t happen … to use the crucible to create some combination of chemistry and alchemy; to grow the company while simultaneously recapturing some of its long-time cultural imperatives; and to do so while the clock is ticking.

Not an easy job. And I have one suggestion for Howard Schultz:

Now is not the time to switch to decaf.

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Lampert, the Eli Manning of retail?

BY CSA STAFF

HOFFMAN ESTATES, Ill. The New York Giants triumph over the highly favored New England Patriots in the Super Bowl earlier this month, has become an example of coming from the bottom to win it all. Sears Holdings chairman Edward Lampert is one of the latest to use the Giants win, even going as far to compare himself, and the leaders of his company, to quarterback Eli Manning.

The Giants analogy, and Eli Manning comparison, is applied mainly to the company’s Kmart division. In a letter to investors, posted on the Sears Holdings investor relations Web site, Lampert said during Kmart’s bankruptcy in 2002, the unit was “like an undrafted free agent who nobody thought had a chance to play in the big leagues.” Lampert went on to say, “Like Eli Manning, we know what it’s like to be underestimated and questioned, but we intend to keep working on our game to achieve our full potential.”

Sears Holdings reported net income of $426 million, or $3.17 per diluted share, for the fourth quarter ended Feb. 2, compared with net income of $811 million, or $5.27 per diluted share, for the fourth quarter ended Feb. 3, 2007. For the fiscal year ended Feb. 2, 2008, net income was $826 million, or $5.70 per diluted share compared with net income of $1.5 billion, or $9.58 per diluted share, for the fiscal year ended Feb. 3, 2007.

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Circuit City investor seeks to replace board

BY CSA STAFF

RICHMOND, Va. Circuit City Stores today acknowledged that it has received two proposals from shareholder Wattles Capital Management regarding its board of directors. Wattles holds approximately 6.5% of the outstanding shares of the company’s common stock.

Circuit City reported that Wattles proposed the idea of replacing the company’s Circuit City 12-member board of directors with its own nominees. Circuit City said its board of directors will review carefully the shareholder’s proposals and the qualifications of the nominees in accordance with its fiduciary duties, mindful that the proposal would give the shareholder absolute control of the entire board, which would be disproportionate to its relative ownership of the company’s shares.

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