Howard Schultz Transformation Agenda Communication #3

To:  All Starbucks Partners
From:  Howard Schultz

Earlier this month, we communicated our plan to transform Starbucks for the future, and we said action would come fast. It has, and I am writing today to share with you what has happened so far, and what's next.

The new senior leadership team and I have met almost every day over the last few weeks, creating the action plan to transform our company that not only resonates with our customers, but with our people. We are dramatically changing the way we manage the company and make decisions. We are laser focused on the customer, which will enable us to transform Starbucks.

The three parts of our transformation agenda are: improve the current state of our U.S. business; reignite the emotional attachment with our customers; and make foundational changes for the long term.

We have now assigned accountabilities to our leadership team and their direct reports. They will own everything about their business and be responsible for specific projects to drive us forward in all three of these areas. We have also validated a number of programs that were already in the pipeline that will support and further our vision for the Starbucks Experience.

Some of the actions we've identified will occur in the near future and we have a short timeframe to make them happen. We expect that the initial result of our work will be seen in our U.S. business. Other changes will take place in the coming months.

Currently, we have identified the following action steps:

Slow the pace of U.S. store openings and accelerate internationally

We now plan to open a total of 1,175 net new stores in the U.S. this year, down more than 34 percent from our fiscal 2007 openings. That includes closing approximately 100 underperforming stores. In addition, for 2009 we plan to open less than 1,000 new U.S. stores. This fiscal year, we will also open an additional 75 net new stores in international markets, increasing the international store opening target to approximately 975 stores. In 2009 that will rise to over 1,000 stores internationally, and mark the first time that our International store openings will outpace those in the U.S.

This will allow us to optimize our resources and potentially reduce cannibalization from existing stores.

By the end of fiscal year 2008, discontinue warmed breakfast sandwiches at our North American stores

We made this decision because, in short, the scent of the warmed sandwiches interferes with the coffee aroma in our stores, which is key to the coffee experience that forges our connection with customers. Moreover, while our customers liked our sandwiches, they told us that they missed the aroma of coffee. We will continue offering warmed pastries and selling lunch, but there will be some modifications to the line up, as is our normal practice. The highest priority for our food team is to develop the right offerings to complement our superior coffee and espresso beverages.

Manage our business the right way

We are giving ourselves and the financial community a new way to measure our progress, which we believe is a more thoughtful approach to managing our business for the long term. Going forward, we will not report same store sales comps as they will not be an effective indicator of our performance and we will no longer give annual guidance beginning in 2009 and beyond. I believe that this will help us make better decisions and focus on the customer, while building long-term shareholder value.

Reinvent partner training

In the coming months, you will see a renewed level of commitment to providing superior training for our retail partners. We will invest in tools and provide them with the resources they need to exceed customer expectations.

Reinstate regularly scheduled open forums

As you know, we believe passionately that when we invest in our people, build an emotional connection with each other and fully engage every partner in our strategy and agenda, we see positive results. Therefore, effective immediately, we are reinstating regularly scheduled open forums in the field.

Bring back the Leadership Conference

We believe that this is the most important and strategic event that we can hold for our store managers and above, because this is another way to build understanding of our vision and strategy, as well as connect and help continue career development. We will hold our leadership conference in Fall 2008. Details will be forthcoming, so stay tuned. And I promise you that it will not be cancelled!

These and future actions will reaffirm for customers and the market that, unlike others, we are not a reseller of commodity-based coffee roasted by a third party. We never have been and we never will be. We will utilize our 35-plus years of ethically sourcing, buying and roasting the finest coffee in the world to reaffirm our coffee authority. 

We will continue to communicate with you about our progress. We plan to do so, once again, at our Annual Meeting of Shareholders on March 19, when we will lay out five specific, bold "consumer-facing" initiatives that will be a major catalyst for change and transformation. They will extend our coffee leadership; ensure that our stores are the third place for the next decade; encourage a deeper dialogue with our customers; and further strengthen our partners' and customers' relationships with one another. And this is just the beginning!

On another note, we have received a lot of attention in the last week about the $1 brewed coffee 8 ounce short test. Testing is a way of life for us as we continue to find ways to enhance the customer experience. Right now, as a test, it makes sense to us. I'd like to reiterate that Starbucks is built on premium coffee and a premium experience. We intend to maintain our leadership position at the high end, while broadening our appeal. And similar to other leading global consumer brands, we believe there are opportunities to create segmentation, provide an entry point for new customers, and generate trial in a way that will also maintain the value of our core brand proposition.

What you can expect in the near term

Over the next several days, you will hear from your manager about the specific role you and your team plays in executing our transformation agenda. We will continue to conduct a thorough and rapid review of every part of our business to ensure we are using our resources as effectively as we can to continually improve the Starbucks Experience.

Most importantly, I ask everyone to please keep your ideas coming and your enthusiasm high. It is the passion and dedication of our partners that are critical elements in bringing to life the creativity and innovation that will drive our ongoing success. Our customers see your commitment, your excitement – and they respond.

Executing our agenda takes each and every one of us. Thank you for your excitement, and your continued focus on helping to build the best Starbucks Experience for our customers and for each other. We know what we need to do to be the best, and we will do it.