according to this text "In the 20 years since Schultz began to build Starbucks into a global company, the business had 
achieved extraordinary financial success. Some of this was measured in rapid revenue growth and 
corresponding increases in net income. Some was captured in the stock price. This rose quickly 
through the 1990s, stagnated some from 2000 to 2002 in line with the S&P 500 and other indices, and 
then began to climb again in 2003 and 2004. Though Starbucks stock price fell in 2005, it rebounded 
the following year (Exhibit 5).25 By June 2006, $1000 invested at the time of the IPO in 1992 would 
have returned nearly $70,000.
26 Market capitalization reflected this appreciation, rising from nearly 
$300 million in June 1992 to almost $29 billion in June 2006.27
Starbucks historic sales growth and strong stock performance had led the investment community 
to expect — and indeed, evaluate the company on — continued expansion. During the late 1990s and 
early 2000s, the company had delivered soundly on these expectations, increasing its total store count 
from just under 1,900 in 1998 to more than 7,200 five years later.28 Growth continued to accelerate, 
and in fiscal 2005, Starbucks opened more than 1,600 net new stores — an average of four a day.29
Starbucks expansion was not limited to the United States. In 1995, Starbucks operated 677 stores 
across both the US and Canada. In 1996, Starbucks opened its first store outside of North America in 
Tokyo, Japan.
30 From 2000 to 2007, the total number of international outlets rose from 502 stores to 
4,327.31 Growth spanned continents, with stores opening in Asia, Europe, the Middle East, Africa, 
and the Americas.
32
At the end of fiscal 2007, the United States remained Starbucks largest market with 10,684 stores, 
roughly two-thirds of the company’s total outlets.33 In many large U.S. cities there were multiple 
Starbucks locations within a few blocks of each other. In Manhattan, for example, the Marriott 
Marquis hotel and Macy’s flagship department store in Herald Square each housed two Starbucks 
stores.34 Seattle, Starbucks home, had a particularly high concentration of stores, with one for every 
14,000 people. (The nationwide average was less than half as dense: one store for every 30,000 
people).35 At one Seattle intersection there were Starbucks stores on three corners, and the company 
considered placing a store on the fourth as well.36 It seemed the coffee retailer had still not reached a 
saturation point relative to national demand.37
When Schultz composed his internal memo in early 2007, Starbucks was on track to open a record 
2,400 stores by the end of the year on the way to its stated goal of operating 40,000 stores 
worldwide.38 Even for a company well accustomed to remarkable growth, this was heady stuff. 
The impetus for all this expansion came not only from Wall Street, but also from within the 
company itself. Schultz and other executives believed that Starbucks offered customers a product and 
an experience they could not find elsewhere. From this perspective, senior leaders maintained that 
the coffee retailer had the opportunity, and perhaps even the obligation, to bring Starbucks to as 
many customers as possible. Executives also noted that the company provided its internal partners 
with generous benefits and wide-ranging career opportunities. By their reasoning, Starbucks 
expansion would provide solid job and career opportunities, in addition to increasing demand for 
coffee and other inputs purchased from supply chain partners.
39
This internal imperative to expand was complicated, however, by senior management’s 
commitment to the organization’s original mission. From the start, Schultz had dedicated himself and 
his colleagues to building a company that provided comprehensive health-care coverage and stock 
options to its partners, delivered outstanding and personalized customer service, and consistently 
acted as a responsible corporate citizen. Twenty years on, these objectives remained vital to the senior 
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314-068 Starbucks Coffee Company: Transformation and Renewal
6
team. But as the coffee retailer accelerated its growth, it was becoming harder to maintain the close
relationships with partners and customers that were central to Starbucks Mission. It was also 
becoming more difficult to keep a careful, diligent hand on what was actually happening in new and 
existing stores. As Schultz recalled:
We were so intent upon building more stores fast to meet each quarter’s projected 
sales growth that, too often, we picked bad locations or didn’t adequately train newly 
hired baristas. Sometimes we transferred a good store manager to oversee a new store, 
but filled the old post by promoting a barista before he or she was properly trained. This 
was the kind of operational rigor we let slip and then didn’t attend to the subtle but 
negative cumulative effects, such as declining beverage quality, because every metric we 
were looking at said everything was fine. For years we were able to open new locations 
while sales continued to increase at the stores we already had.40
Increasing Competition
In the late 1980s, when Schultz acquired Starbucks, the specialty coffee sector was small and 
undeveloped. But this began to change in the 1990s. Spurred on by Starbucks success (and the 
tailwind of consumer interest created by the retailer), the total number of specialty coffee outlets in 
the United States skyrocketed — from 585 in 1988 to more than 12,000 in 1999.41 Several forces lay 
behind the coffee boom. On the demand side, American consumers became increasingly interested in 
specialty foods, including organic produce, fine wines, artisanal chocolate and arabica coffee.42 At the 
same time, per capita income was rising, especially for the most affluent segments of the 
population.43 Though most households could not come close to affording the extravagances of the 
country’s wealthiest consumers — private jets, second homes, yachts, etc. — many could, and did,
purchase small luxuries such as cigars, fancy lipstick, and specialty coffee drinks.
44 Passing over 
canned coffee in a supermarket in favor of a daily latte or cappuccino specially prepared in a café was 
a relatively accessible way to participate in the country’s expanding wealth.45
Responding to both increased consumer demand and Starbucks achievements, coffee retailers 
proliferated. By late 2006, there were nearly 24,000 specialty coffee outlets in the United States.46 A 
majority of these cafés were independent neighborhood operations.47 Most of the remainder 
belonged to chains such as Starbucks, Caribou Coffee, and Peet’s Coffee & Tea. Caribou Coffee had
been founded in 1992, and with nearly 500 stores in 2007 was a powerful competitor of Starbucks in 
the Midwest.48 Peet’s Coffee & Tea, founded in 1966 by Dutch-born coffee merchant Alfred Peet in 
Berkeley, California, maintained a fiercely loyal following, and by early 2007 had 136 stores in six 
states.49 Like Starbucks, these chains emphasized premium coffee beverages and a relaxed in-store 
experience. 
In addition to the proliferation of specialty coffee retailers, established food and beverage 
companies also began entering the market. One of the most active was Dunkin’ Donuts. Following in 
Starbucks wake in a host of regional markets, the New England-based company upgraded its drip 
coffee, raised prices on coffee beverages, and installed espresso machines in many locations. In April 
2003, Dunkin’ Donuts announced a line of espresso beverages that would be made exclusively with 
Fair Trade Certified™ coffee.
50 Among these were the Coolata™, a flavored iced latte, and the 
Dunkaccino™, a hot mocha drink that resembled the Starbucks® Mocha.
51 The company also moved 
quickly to offer coffee in a range of flavors, including caramel and toasted almond.52 Taking direct 
aim at Starbucks, Dunkin’ Donuts marketed these products as constituting a revolt against “espresso 
oppression and the tyranny of long waits, high prices and confusing sizes.”
53
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Starbucks Coffee Company: Transformation and Renewal 314-068
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In 2006, Dunkin’ Donuts introduced a coffeehouse aesthetic into its new stores as it undertook a 
major expansion effort into the South and West of 15,000 U.S. outlets.
54 That same year, some of the 
company’s advertisements took aim at Starbucks brand identification with the Italian origins of 
specialty coffee drinks such as espresso, café latte and cappuccino.
55 The chain ran a television ad in 
which coffee-shop customers stared in confusion at a Starbucks-like menu. They sang: “My mouth 
can’t form these words. My mind can’t find these words. Is it French or is it Italian? Perhaps
Fritalian.”
56 In November 2006, Dunkin’ Donuts reported that servings of espressos, lattes and 
cappuccinos had increased 48% since 2004.57
 
McDonald’s was another chain with enough muscle, leverage and resources to rival Starbucks. As 
early as 1993, McDonald’s began introducing gourmet espresso bars — called McCafés — in its 
Australian markets. By 2001, the fast-food retailer expanded these coffee outlets to 300 global 
locations, including its first U.S. café in Chicago, Illinois.58 Five years later, targeting Starbucks, 
McDonald’s launched a stronger, upgraded drip coffee brew, and in 2007, the retailer introduced its 
version of espresso-based coffees, also called McCafés, in select stores.59
 Generally priced lower than 
Starbucks® espresso drinks, McCafés were promoted on McDonald’s newly launched site, 
unsnobbycoffee.com.
60 (The next year, Seattle-area McDonald’s franchisees would raise a billboard 
reading, “Four bucks is dumb,” a clear shot at Starbucks. The billboard was pulled when Don 
Thompson, the U.S. president of McDonald’s, informed the relevant franchisees in question “that’s 
not the way we do it”).
61
In a 2007 Consumer Reports test, McDonald’s coffee was very well-received by consumers, beating 
out both Starbucks and Dunkin’ Donuts. Schultz was shocked by the result.62 He had built Starbucks
partly on the wager that consumers would trade up to the company’s coffee after tasting other 
players’. He was sure consumers were “not going to be satisfied with the commoditized experience 
or the flavor.”
63 Yet, despite radical differences in sourcing and quality, customers in the Consumer 
Reports survey preferred McDonald’s coffee.
64
By this time, it was clear to Schultz that Starbucks was threatened on both ends of its consumer 
spectrum:
McDonald’s and Dunkin’ Donuts were on the very low end. Let’s characterize them 
as willing to do anything to capture or intercept customers — free coffee, coupons, say 
anything, do anything. We respect them as companies, but we didn’t respect their 
practices. At the higher end were the independents who went to school on Starbucks. 
And there was this feeling of ‘Let’s support the local companies.’ So Starbucks was 
being squeezed to the middle, and that is an undesirable place for us to be.65
The success (and aggression) of various rivals, including their ability to appeal to cost-conscious 
consumers and market their coffee as thriftier, less pretentious alternatives, surprised Schultz and his 
team. “We had never had much competition,” he recalled. “Everything we did more or less worked. 
And that produced a level of hubris that caused us to overlook what was coming.”
66
 
After the leak of the memo, Schultz hoped to galvanize his colleagues to address both mounting 
competitive threats and internal challenges. But dropping in on company meetings in mid-2007, he 
was “struck by the lack of decisiveness and creativity around the table” and executives’ obsession
with meeting Wall Street’s expectations.
67 As the entrepreneur took this all in, he kept returning to 
the company’s early ethos, when, each day, “we were fighting for survival, doing whatever we had to 
do. We rolled up our sleeves and left our egos at the door. Every small gesture mattered, and so 
much of what Starbucks achieved was because of partners and the culture they fostered.”
68
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314-068 Starbucks Coffee Company: Transformation and Renewal
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Somewhere along the way, Schultz reasoned, this commitment had given way. “Enthusiasm 
morphed into a sense of entitlement, at least from my perspective. Confidence became arrogance and, 
at some point, confusion as some of our people stepped back and began to scratch their heads, 
wondering what Starbucks stood for.” He continued. “While our people worked hard to meet our 
goals, it was not always with the joy or innovation or pride that had once defined us.”
69
As 2007 wore on, it became increasingly clear to Schultz that the challenges Starbucks faced from 
the outside were as formidable as those it faced from within. “Day by day my disappointment edged 
toward anger,” Schultz recalled of what he perceived to be an absence of urgency around the issues 
he laid out in the memo.
70 In September, Schultz met privately with the board to discuss the 
possibility of his returning as chief executive officer, replacing Jim Donald whom he had helped 
promote to that position just two years before. ", very briefly answer these questions "What were the most important factors behind Starbucks decline in 2007 and 2008. How much of this did Schultz see in 2007? in 2008? Which factors were less obvious?"