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Overstretch is not a problem for great powers alone. Any company that measures its growth by the number of new locations can fall into the same trap: expansion itself becomes the goal, and the means to sustain it fall behind. At Starbucks, those means were not just money but customers, staff and what made the company what it was in the first place.
Growth as a business model
Situation
Howard Schultz turned Starbucks from a handful of coffeehouses in Seattle into a global chain. The IPO in 1992 finances a doubling of the number of stores, and after that the chain keeps growing year after year. At the end of March 2008, Starbucks has 7,257 company-operated stores in the United States. At this time Schultz is no longer CEO but chairman of the board.
Link to the principle
A company whose revenue depends on new locations has to keep opening more just to look as good as before. But every store is a commitment: rent, staff, quality. When the pace is faster than the ability to sustain all of that, overstretch begins.
The warning signs
Situation
Between 2006 and 2008, Starbucks stock loses about three quarters of its value. Many new stores are located right next to existing Starbucks stores. CFO Pete Bocian estimates that a store loses 25 to 30% of its revenue when a new one opens nearby. In May 2008 Starbucks reports a 28% drop in profit because fewer customers are coming in.
Link to the principle
This shows a typical feature of overstretch: new commitments no longer bring in additional revenue but merely spread the existing revenue over higher costs. From the outside the growth still looks good, while inside it is already doing damage.
The founder returns
Situation
On January 7, 2008, after eight years, Howard Schultz returns as CEO. He replaces executives and has all U.S. stores close for a few hours to retrain employees in making espresso.
Link to the principle
The training is a signal: quality has not kept pace with growth. If you expand too fast, you overstretch not only your money but also your people’s skills.
600 fewer stores
Situation
In July 2008 Starbucks announces that it will close a total of 600 company-operated stores in the United States by the middle of fiscal year 2009. About 70% of them have opened only since the beginning of fiscal year 2006. Around 12,000 employees are affected; most are to move to nearby stores. Planned new openings for 2009 are cut in half. The cost of the closures is estimated at up to $348 million.
Link to the principle
This is the step Hadrian took almost 1,900 years earlier: giving up commitments to secure the core. What stands out is which stores are affected: not the old ones, but the new ones. The overstretch had built up over the previous two years.
What it was not
Situation
After 2008 Starbucks opened new stores again and continued to grow worldwide. The closures came at a time when the economic crisis was also keeping customers away.
Link to the principle
The principle does not demand giving up growth. It demands that commitments not grow faster than means. The crisis made the overstretch visible, but it did not cause it.
Key takeaways
Key lessons
- Don’t measure growth by the number of new locations but by whether each one carries itself.
- Pay attention to whether something new brings in additional revenue or just spreads the old revenue thinner.
- Don’t grow faster than your people can maintain quality.
- When you cut back, start where the overstretch arose.
- Closing is not failure if it saves the core.
Summary
By 2007 Starbucks had grown so fast that new stores were taking customers from the old ones and quality was suffering. Howard Schultz returned as CEO in January 2008, had employees retrained and announced in July 2008 that 600 stores in the United States would close, most of them opened only since 2006. The case shows overstretch in a company: expansion itself had become the problem, and the way out lay in deliberately giving up commitments.
Sources
- Howard Schultz, Joanne Gordon: Onward: How Starbucks Fought for Its Life without Losing Its Soul. New York: Rodale 2011.
