Starbucks vs Dunkin - Trouble is Brewing | 4

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It's December two thousand seven in Hawaii. Howard Schultz is pacing his room before dawn. He's been up all night. One thought keeps going through his mind. Starbucks is failing itself at breakfast. His wife Sherry gives him a worried. Look Howard please eat something. I can't no appetite. He's always savored his family's Christmas holiday in Hawaii. This is when he and Sherry in their kids take time to reconnect. But now Sheri's alarmed. Howard is so miserable and distracted. He PUSHES HIS BREAKFAST PLATE. Away gets up from the table and goes to his computer. The email he's been expecting has arrived Sherry watches as he reads. It then puts his face in his hands. She hurries over to him. What does it say? I can't believe what I'm seeing? The sales at each of our stores are way down from what they were a year ago there in Freefall Howard. Every business has its ups and downs but starbucks isn't just a business for me. It's who I am right and look at all you've done you've established starbucks as progressive kind employer. You've made it a gathering place that draws people together. Yeah but the numbers are telling a different story. We've got fewer people coming into the store Sherry. And when they do they spend less time in them. I just don't know how to turn this around Schultz's momentarily lost in thought then he glances up at Sherri. You know not long ago when our stock was doing well one of my executives told me I was making people to rich. The investors believed the upswing wouldn't end. I thought that was great at the time. But but it's our success that led us to failure. That doesn't make sense. What do you mean I mean we fixated on the bottom line and took our customers for granted? I think that's why we're bleeding will then you've got to do something about it but I don't think there's any point in casting blame or pointing fingers. Now you agree anyway. There's no time for that. Our stock in sales are plummeting to quickly. I've just got to find the solution and I have to find it now. Dunkin donuts isn't GonNa wait for us to figure this out. The answer formed slowly in his mind before it becomes crystal clear what Schultz does next is unprecedented. It will open 'em up to ridicule and catch everyone off guard including his own team but finally he knows exactly what he must do. Go back to square one. These as you've got a lot of options to choose from to keep yourself informed in a time when backs matter more than ever. The Economist is a weekly magazine that sift through the noise focusing on the essential information that tells the Real Story. I recently read. How low key. Dutch company has become the biggest monopoly and chip-making. This is the sort of story the. The economist does so well before anyone else's talking about it yet the inside scoop on a story that everyone will be talking about the weeks to come. If there's one magazine. I cannot do without it the economist. It's a smart guy to the forces. Impacting your world and you can get twelve weeks access now for just twelve dollars for your twelve dollars. You'll get twelve print issues delivered to your door. A fantastic digital offering including full access to economist Dot Com with exclusive web only content and a whole lot more for your twelve weeks access to the economist for just twelve dollars. Just text beat w twelve to ninety nine zero zero zero. That's the letters b. w. and then the number twelve to ninety nine zero zero zero from wondering. I'm David Brown and this is business wars in the last episode Howard Schultz realize his dream turning starbucks into a booming upscale espresso business and a regrettable spending spree at Dunkin donuts led to a corporate takeover now with starbucks stocks steadily slipping Schultz worries. There's a takeover target on his company's back. He needs to turn things around but with the economy flashing danger signs. Things are about to get worse before they get better. This is episode for trouble is brewing. It's the first Sunday night of two thousand eight. A cold rain is falling in Seattle just two days ago. Howard Schultz held a secret meeting with the company's CEO. Jim McDonald now. Schultz is at home preparing to make an announcement. His assistant calls the leadership team. Howard wants you to come to his house at nine PM tonight. Why what's happening? I can't tell you. Please don't tell anyone about this call. Why are you being so mysterious? You'll find out when you get there Schultz. Here's the wheels of a car crunching on the stones of his driveway. One by one the team arrives. There's the chief financial officer the chief operating officers and the senior leaders responsible for everything from store operations and marketing to legal affairs. As each man and woman descends the steps into the living room. They're surprised to see other team members. The mood is subdued the conversation minimal. They sit on big arm chairs and couches trading wary glances at nine pm. Sharp Schultz strides into the room and stands as he addresses his team. I'll get straight to the point as of yesterday the current CEO. Jim MacDonald has left the company. I'm coming back. Co affected tomorrow. Everyone is silent shorts starbucks founder and chairman of the Board. It's clear his. Reinstatement is not up for discussion. The next morning on January seven two thousand eight. The public learns that Scholtz is returning as CEO. Schultz drives along Seattle's hilly streets after so much turmoil. He feels a need to connect with his starbucks routes to remember the feelings that brought him to the coffee business in the first place. So he's making a sentimental journey to the company's flagship store half a block from its original location. He takes his personal key from his pocket and opens. The door shop is dark. The gleaming Espresso machine is still the rich set of coffee. Beans fills the air. He's struck by how quiet it is. As he runs his hand over the original wooden counter he feels three decades of history beneath his fingertips behind this counter. He learned to make Espresso. Young man brings back a rush of memories particularly of the confidence. He had back then back in the days before he knew how much could go wrong for starbucks. He's going to need some of that. Old Confidence now to turn things around. He takes a last look around and leaves the darkened store hours later back in his office. Schultz watches his top staff silently. File into the conference room defeatism downcast eyes and slumped shoulders. It seems to him. They're embarrassed they've let the company slide. Standing at the head of the conference table. He takes a deep breath if there was ever a time to rally the troops. It's now I just need one thing from you and that is to fix the house because the house is on fire. There's silence in the room. Everyone waits anxiously for shelter to go on. Here's the problem we've been playing by the wrong rules. We've been so focused on not disappointing investors that we've lost sight of. Who's really important our customers around the table. The teams eyes are glued on shows. He takes a deep breath. But here's the thing. I am absolutely confident that we'll turn this company around. It's going to be hard and I'm going to ask more of you than has ever been asked before you need to ask yourself whether you believe in starbucks whether you have faith in it because if you don't you can leave right now. No hard feelings. I'm not leaving Howard neither am I. I'm in shorts. Finally sees a flicker of fire and there is. It's a start that afternoon. Schultz is alone in his office on his bookshelf. He keeps his small crystal ball. It's not doing him much good at the moment and on a nearby table. There's a bottle of Mazatlan failed starbucks product from the nineteen nineties and ill-advised hybrid of coffee and Soda. He keeps it there to remind himself that. The company isn't invincible. Not that he needs much reminding of that now he paces the room. His eye catches a front page story in today's Wall Street Journal. The headline reads McDonald's takes on a weakened starbucks. The fast food chain is adding Baristas and coffee bars making a play to poach his customers but he knows it's Dunkin. Donuts that poses the toughest challenge? They planned to more than double their. Us stores to fifteen thousand in the next ten years by pushing into the South and southwest. Schultz can hardly believe that for all starbucks quality and sophistication its fiercest. Competitor is the humble Dunkin donuts. And that's for a very simple reason of all the coffee companies out there. Dunkin donuts is ranked number one in customer loyalty for the second year in a row. And Duncan isn't letting up a week after his return. Ceo is announced. Schultz called his leadership team into his office. They're hoping for a sign or something that will tell them how to douse the house fire. But they're not prepared for what's coming. Scholtz doesn't waste any time. The quality of our Espresso is slipping. Our baristas need to make perfect espresso. And they don't some poor it too fast so it's week others for it too slow. So it's better we have to retrain them having you retrain one hundred thirty five thousand Baristas. There's only one way. Give them a training course. It would require us to close all our stores for a few hours. But we do it towards the end of the day to minimize disruption. That's a big idea. No large retailer has done anything like it and for good reason closing stores even for three or four hours means losing several million dollars in sales woke Dunkin. Donuts jump at the chance to steal our customers looking for a fix. Even so starbucks is nothing without a perfect cup of coffee. Shot sits back in his chair. He turns to his team. Let's do it days later. Cnn MONEY DOT COM carries this story warning to starbucks junkies who usually get a fix on their way home from work. You're out of luck on Tuesday. Starbucks plans to temporarily close. Its seventy one hundred. Us stores on Tuesday for three hours of employee training at Dunkin donuts. The news is greeted with laughter. The leadership team season opportunity. They're admitting they've got a problem with their coffee. So let's take advantage of it. How about this will announce the wind starbucks closes will offer small as Cappuccino or espresso drinks for a special price of ninety nine cents and we'll put out a statement saying Dunkin donuts will ensure that no copy level has denied a delicious Espresso based beverage on February. Twenty six five thirty. Pm starbucks customers or politely asked to leave each of the companies. Seventy one hundred stores. Excuse me savary. We're closing up. I just bought my coffee here with the doors locked behind them. The BARISTAS wearing starbucks caps in dark green aprons over their street clothes take their seats. Their shown a hastily prepared video. That's been shipped to the stores along with seventy one hundred. Dvd players the narrator explains how to make perfect espresso. Finally Schultz appears on the screen. It's not about the company or the brand. It's about you. You decide whether or not the Espresso. You pours good enough. You have my complete support and my faith and belief in you. Let's measure our actions by that perfect shot of espresso that night starbucks is a huge media. Story One New York City newspaper runs. The headline starbucks. Shutdown is a pain. For New Yorkers a copy wars continued to brew Brew Brew starbucks closing stores doors for three hours later today to retrain its employees. Dunkin donuts responding by offering. Their specialty coffees for ninety nine cents during that time at Home Schultz flips on Stephen Colbert's mock news report about his three miserable hours without a caffeinated drink it ends with co bear. Dousing himself in the shower with coffee. Foam and cinnamon for the first time in months. Schultz goes to sleep laughing. But it's not so funny when he learns that closing the stores has caused starbucks. Six MILLION DOLLARS. Schultz has a message for his top brass. We paid a price for the closures. But at that means we're serving great coffee again. The losses are one hundred percent worth it yet. Starbucks are far from over in April. They cut expenses by one hundred fifty million dollars. But there's more pain to come. Arthur Rubin fell the senior vice president for stored of element delivers the bad news. To shows I to say this. But we're oversaturated. We've got more stores than we can support in this economy so I believe we need to close two hundred stores. Why why we've already cancelled the opening of three hundred forty eight stores? We're not meeting the two to one ratio. That ratio is key to starbucks business model during its first year. New Store needs to bring in two dollars for every one dollar invested to cover the design in lease expenses but in the midst of a recession. Expensive coffee is seen as a luxury. People just aren't buying it the way they once did. Shorts takes a deep breath. He slumps in his chair. This is even worse than cancelling those store openings. That was a necessary correction. This feels like a defeat but by July. It's clear that even more stores need to be closed. The final number is huge six hundred. That's eight percent of starbucks retail portfolio when the company also announces. They'll be opening two hundred new stores the following year the media has a field day. What this is is an admission of a mistake. Basically what they're saying. Is You know what we opened up. Too many stores in too many places that we shouldn't have so we've got our retrace our steps. Now shut all those suckers down before we can open up some new ones and once again. Stephen. Colbert takes his shot at the coffee giant dam. You mom-and-pop coffee stores for forcing star books out of business now that I'm not spending four dollars a cup. What am I supposed to do with that extra money by Joni Mitchell Sienese? I can't all the starbucks are closing as new spreads of their plans. The stock tanks trading at its lowest level since two thousand and three then come the lay offs globally starbucks fires twelve thousand workers. That's seven percent of its global workforce after everything. Schultz is done to fix the company. He's right back to where he was in Hawaii. A year ago those massive layoffs are keeping them up at night. What's next he wonders. How much worse can this get? The answer will come from a taste test. We get support from Valera you know nobody goes into business because they want to collect sales tax. It's just something businesses of all sizes have to do right well to add insult to injury. It's pretty complicated. There are more than twelve thousand tax jurisdictions in the US alone you combine that with the thousands of product taxability rules and what you wind up with a massive headache for businesses. Trying to make sense of it all that is where avalanche can help you. Avelar is tax compliance. 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That's right just four dollars and ninety nine cents a month you'll save up to forty percents off. Usps priority mail plus for being a business wars listener. You'll receive a free thirty day trial to get started and a free ten pound scale to ensure that you never overpay and hey that's not odd you get with some pro online for one thing. You can calculate exact postage online and print shipping labels and stamps. Right from your computer. You can also schedule package. Pickups and track shipments from departure to a rival. So you can avoid those time consuming trips to the post office. You'll even save up to five cents on every letter and up to forty percents off. Usps priority mail go to PB DOT COM slash vw to access this special offer for Free Thirty Day. Trial plus a free ten pound scale to get started that's PB dot com slash VW experience. A savings in your shipping costs with a free trial of central online from Pitney. Bowes may two thousand and eight Cleveland. Twenty people sit along counter in the test kitchen. They range in age from late. Teens to mid sixties they trade quizzical glances unsure what to expect. Dunkin donut says commissioned a two month nationwide taste test that pits Dunkin. Donuts original blend again starbucks house plan more than four hundred randomly selected. Coffee drinkers will weigh in as the testers weighed. Four technicians wearing lab coats brew the coffee using the equipment recommended by each brand. Each tester gets two cups of black coffee with numbers marked on them. One Cup contains starbucks Brew Cup to Dunkin. Donuts the TESTERS SIP SIP AGAIN. Tasting one brand than the other. They write the cup number of their preferred coffee on the card in front of them. The final result fifty four percent prefer. Dunkin donuts coffee compared with thirty nine percent who choose starbucks. Six percent expressed no preference another blow to starbucks which claims it's coffee is indisputably the best soon after. Schultz picks up his hometown. Paper the Seattle Post intelligencer his eyes widen as he reads Dunkin. Donuts has a message for starbucks game on their running an ad that urges. Try the coffee. That one NC why America really does run on Duncan adding insult to injury. Mcdonald's website touted itself as UN snobby coffee dot com days later. Schultz is driving along the freeway when he sees a billboard ad for McDonald's coffee it reads four bucks is dumb now serving espresso a minute later. He passes another that. Reads large is the new day. There's no doubt about it. The coffee wars are blazing and everyone's gun is aimed squarely at starbucks. Howard Schultz storms into his office. He summons his top people. We got to get all the offensive. I want an aggressive ad campaign. Is Team exchanged curious Glances Schultz? It always shunned advertising. Finally one pipes up. You've always said starbuck. Success is built on. Its interactions with its customers. That was then. Now we've got a fighter. Hands were being squeezed from the bottom by fast. Food brands like McDonald's and Dunkin donuts from the top by high end independent coffee shops. We can't be caught in the middle so we've got to respond right now. Given Schultz's sense of urgency the AD agency decided to hook the add to the next big public event the upcoming presidential election that pits Barack Obama against John McCain on October thirty first two thousand eight five days before the election management view starbucks is I ever ad. It's unusual this thing. There are no spoken words just Light Piano Music and green type rolling on screen. It reads if you care enough to vote starbucks cares enough to give you a free cup of coffee. Come into starbucks on November fourth. Tell us you voted. And we'll proudly give you a tall cup of brewed coffee on us. You and starbucks. It's bigger than coffee. This is perfect. Now we've got to find the right commercial slots and figure out if we can afford them and we've got to make sure we have enough coffee to handle the traffic overflow. We've got four days to get this together. The next day they placed their add on Saturday. Night live after it airs. It's posted on social media. The AD goes viral. It seemed by eighty nine million people election day. Two thousand eight Schultz boats in the morning then hurries to a nearby starbucks. The store is bustling. There are students wearing jeans. Parkas business people in stylish suits young and women in running clothes stopping offer a Free Cup of Java on their way to the gym. The air is electric. People are chatting high fiving checking their phones for news. They all have a small oval sticker on their clothes that reads. I voted Schultz calls his wife. I wish you could see this. It's about more than the free coffee. Starbucks is a gathering place again. We're exactly what we set out to be. But his high short lived days after the election. Starbucks is accused of violating election laws by offering something of value in exchange for voting to avoid legal tussles. The company extends the offer of free tall coffee to anyone who requests it whether something else going on by the end of two thousand eight. The economy is crumbling and it doesn't play favorites. Both starbucks and Dunkin donuts are taking it on the chin. Hard pressed Americans have taken matters into their own hands. They're making coffee at home. In our next episode Dunkin donuts gets a tough new sheriff who insists on pushback then Howard Schultz has an instant revelation from one story. This is business wars. We sure hope you enjoyed this episode. We invite you to subscribe on Apple. Podcasts spotify Google podcasts. Stitcher iheartradio or wherever. You're listening right now you'll find a link on the episode notes just Tapper Swipe over the cover art. You'll also see some offers from our sponsors and we hope you'll support our show by supporting them. Hey if you like what you've been listening to. We would love it if you give us a five star rating and tell your friends how to subscribe. There's another way you can support us. And that's by answering a short survey one three dot com slash survey and tell us what business war stories. You'd like to hear quick note about the conversations in this episode. We can't know exactly what was said at the time but this dialogue is based on our best research. And if you'd like to learn more about starbucks we'd recommend onward how starbucks fought for its life without losing its soul by Howard chills. I'm your host David Brown. Elizabeth K wrote this story. Karen low is our senior producer and editor edited and produced by Emily Frost. Sound designed by. 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