Schultz back at helm of Starbucks to take on McDonald's

Starbucks last night dramatically turned to the entrepreneur who inspired its sensational international expansion in an attempt to revitalise a business that has lost its way and faces tough new competition.

In a move that surprised Wall Street, the coffee chain ousted its chief executive, Jim Donald, and reinstalled as the day-to-day head of the company Howard Schultz, who stepped up to become chairman seven years ago.

It was Mr Schultz, who joined Starbucks in 1982 when it had just four outlets in Seattle, who turned the company into one of the most recognisable brands in the world, reviled in some quarters as an exponent of American corporate imperialism but undeniably shaping the way consumers see their morning coffee.

But in recent years the company's results have been disappointing and Wall Street has increasingly been asking if, with new outlets opening sometimes just a few city blocks from each other, Starbucks has saturated the market.

The question is even more acute at the start of this year because Starbucks is about to face its most serious challenge to date for the hearts and minds of American coffee drinkers a plan by McDonald's to install upmarket coffee machines in all of its 14,000 US restaurants.

Mr Schultz last night signalled that he would begin to close underperforming US stores and significantly slow the pace of further expansion in the US. Just how many of the chain's 10,000 US stores might close would be discussed at the next financial results presentation at the end of this month, he said.

"We know we can improve our performance by getting back to the essence of what drove Starbucks' past success," he said. "That is, our passion for the business and a complete focus on the customer."

Money saved by scrapping US expansion plans would eventually be spent on extra international expansion, Mr Schultz added.

For now, though, the focus is on attracting back customers in its home market, which have been falling for the first time since Mr Schultz took the company public in 1992. And in particular that means preparing against a resurgent McDonald's. Following successful trials in Kansas City stores, the fast-food chain plans to install upmarket coffee machines capable of producing Starbucks-style espressos, lattes and cappuccinos in all of its US restaurants something the group describes as its largest undertaking since it introduced breakfasts 35 years ago. Customers will even be able to buy frappes, the iced coffee that Starbucks sells gallons of during hot weather.

It's a straightforward land-grab. McDonald's customers will be served their coffee by staff known as "baristas" from filter machines that grind beans in front of them just like in Starbucks. In Kansas, McDonald's' advertising has made it very clear whose market is being targeted television spots poke fun at Starbucks' tall, grande and venti cup sizes (McDonald's prefers small, medium and large).

And there is a worrying precedent for the impending scrap. Dunkin' Donuts hardly renowned for its high-brow produce launched aggressively into the coffee market in 2005, with huge success. "Dunkin' Donuts is now the biggest single coffee retailer in areas of the east coast of the US, which proves this can be done," one analyst said. "Americans are not snobbish about where they buy their coffee."

McDonald's has one particularly significant card to play. It plans to undercut Starbucks by some margin prices in the Kansas City test run were between 60 and 80 cents cheaper than at rivals.

Could McDonald's one day import its new business model to the UK? If it proves successful in the company's home market, there is every chance it will do so. UK customers are much less sniffy about where they buy their coffee than continental European ones. McDonald's already has "McCafes" in Ireland and Starbucks would again be the likely target.

And just as Dunkin' Donuts has moved in on the US coffee market, unlikely competitors have prospered here. David Pope, a drinks analyst at Brewin Dolphin, said: "When JD Wetherspoon put coffee machines into its pubs and began opening at 9am, it rapidly started outselling Costa and Nero and that was from a standing start."

How the giants match up

McDonald's

* First restaurant opened in Des Plaines, Illinois, in 1955 by Ray Kroc, and named after the McDonald brothers. The pair ran a hamburger stand with a milkshake mixing machine that Mr Kroc believed could be sold to a chain of restaraunts. The company went public in 1965.

* McDonald's has nearly 14,000 restaurants in its home market, and 17,000 more around the world, including 6,400 in Europe. Its rapid expansion has partly been due to its franchising model.

* Global sales for 2006, the last year for which figures are available, totalled $21.6bn (11bn), producing profits of $4.4bn. The company believes its plans for an expansion into the coffee market could add $1bn to sales.

Starbucks

* First store opened in Seattle in 1971 by three partners who wanted to sell high-quality beans and coffee-making equipment. Howard Schultz joined the company in 1982 and pushed for Starbucks to begin selling drinks, eventually taking it over and implementing the idea in 1987. The company floated in 1992.

* Starbucks operates in 50 US states with 6,700 stores run by the company itself and a further 3,900 outlets. It has expanded into 42 other countries where it now has 4,300 stores. Unlike McDonald's, Starbucks does not offer franchises to individuals, although it does license operators in locations such as airports.

* Starbucks made total sales of $9.4bn in 2007, a 21 per cent increase on 2006. Profits were $673m.