When the last recession hit the U.S. economy in 2007, Starbucks (NASDAQ:SBUX) faced a challenge. The company had become hugely popular and had grown to accommodate demand. However, it had also become overly confident and wasn't prepared for the approaching headwinds.

When the company began to see slowing sales and unprofitable stores, former CEO Howard Schultz took back the helm and proved the company could withstand a recession. With a robust economy, the company will keep growing, but in the event of another recession, Starbucks has a strategy in place as part of its culture.

Facing declines for the first time

Starbucks saw declines start in 2008, but they exploded into sharp drops in 2009. Here are the numbers for the three previous years as well:

Year

Store Count

Revenue

Growth
(YOY)

Comps Growth
(YOY)

2005

10,241

$6.4 billion

20%

8%

2006

12,440

$7.8 billion

22%

7%

2007

15,011

$9.4 billion

21%

5%

2008

16,680

$10.4 billion

10%

(3%)

2009

16,635

$9.8 billion

(6%)

(6%)

Data source: Company annual reports (2008 and 2009).

And then take a look at the numbers for 2010:

Year Store Count Revenue Growth
(YOY)
Comps Growth
(YOY)

2010

16,858

$10.7 billion

9%

7%

Data source: Company annual report (2010).

The huge two-year decrease was followed by a dramatic turnaround. Was it just that the economy improved the following year? Or did Starbucks create something that helped it gain ground?

The interior of a Starbucks store

Image source: Starbucks.

Meeting the challenge

Many experts say that a company like Starbucks, which serves expensive coffee, is one of the first to suffer in a recession: Customers can easily cut back on cups of coffee, which they can purchase elsewhere for a fraction of the price or brew at home.

When the recession hit in 2007, Starbucks was not at all prepared, and saw a decrease in growth for the first time. In fact, it had been too confident and expanded too quickly, giving in on its core values to spur faster growth. When the downturn came, the company was in a compromised position.

Fortunately, Howard Schultz returned at that point to realign the company's values, and make its stores places where customers would want to come in and spend their money, to give themselves that small luxury. And things have been looking up since.

Keys to sustainable growth

Starbucks is now in a similar situation, having grown its store count to more than 31,000 stores worldwide with $26.5 billion in sales. The difference is that it now has a strategy in place for charging through a downturn in the economy.

The company's winning formula has four parts:

  1. The "Starbucks Experience": Current CEO Kevin Johnson said that "The investments we are making for the long term -- in our partners, our stores, beverage innovation and digital -- are collectively delivering an elevated Starbucks Experience, as evidenced by all-time-high customer connection scores in the fourth quarter."
  2. A strong focus on digital: Starbucks was forging ahead with advanced digital capabilities. It has continued its relentless technological progress with its Mobile Order & Pay feature, and a heavy investment in data analytics. When Schultz made his second exit from the company, he was replaced by Johnson, who has a tech background, rather than an executive with a background in food or consumer goods.
  3. Client engagement: Whether it's through the "Starbucks Experience," the Starbucks Rewards program, or better employee training, Starbucks wants to show customers they are valued; it knows that people who feel valued will keep up their end of the relationship. Schultz said: "In the face of these challenges, we made what many believed to be a controversial decision to invest in our people."
  4. Operational efficiency: When sales began to slip, the company realized that its rapid growth meant that it had lost touch with rigorous standards, and needed to implement cost-effective measures. This meant closing some stores, and establishing more stringent decision-making about product offerings.

At the time -- before the company knew that these were the right decisions -- Schultz said:

Our blueprint for change was the transformation agenda: improving the state of our business through better training, tools and products; renewing our attention to store-level economics and operating efficiency; reigniting our emotional attachment with customers; and realigning Starbucks organization for the long term.

This is the fuel for the company's growth now, and will continue to power this restaurant stock through potentially troubling times.