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    Competitive Watch: Starbucks Seeking A Fix

    Coffee giant will ax breakfast sandwiches, slow store growth to improve performance; also testing $1 extra-small cups of drip coffee with free refills in Seattle stores.

    SEATTLE -- The scent of ham, eggs, cheese and bacon will soon stop competing with the aroma of coffee in Starbucks stores as hot breakfast sandwiches become the first casualty of the company's battle to win back customers, The Associated Press reported.

    The sandwiches, which will disappear by this fall, boost a typical store's annual revenue by $35,000, so pulling them off the menu will cost at first. Starbucks chairman and chief executive Howard Schultz said this move proves the company isn't letting the soft economy distract it from committing to big changes that will pay off over the long haul.

    "The decision and the courage it takes to remove something when there's pressure on the business -- like the sandwiches -- is emblematic that we're going to build for the long term and get back to the roots and the core of our heritage, which is the leading roaster of specialty coffee in the world," Schultz told The Associated Press on Wednesday after the company released its financial results for the first fiscal quarter.

    Starbucks Corp.'s profit rose by less than 2 percent, as U.S. customers grappling with a soft economy lined up in smaller numbers for a second quarter in a row. Sales at stores open at least 13 months -- a key measure of a retailer's health -- fell 1 percent in the U.S. as traffic declined 3 percent also for the second consecutive quarter, the AP stated.

    As part of its broad push to revitalize business, the company said it plans to open about 425 fewer domestic stores and 75 more overseas than previously planned, for a global total of 2,150 new stores. Starbucks has more than 15,700 locations worldwide.

    By 2009, Starbucks said it aims to open more stores overseas than domestically for the first time -- more than 1,000 stores in its international markets, where Schultz has said he sees enormous potential for growth, and fewer than 1,000 in the U.S.

    Schultz said the slowdown in U.S. growth will allow the company to make better use of its time, money and staff, and could reduce "cannibalization" -- easing pressure some stores experience when a new one opens nearby, according to the AP report.

    Starbucks also has been testing $1 extra-small cups of drip coffee with free refills in some Seattle stores, which Schultz said it's doing to respond to the economic pressures many of its customers are facing. Some analysts say it could draw in new customers and drive up sales if they upgrade to a $4 mocha or other high-margin espresso-based drinks.

    Analysts have been eager for specifics on Schultz's turnaround plan for Starbucks, which has struggled with rapid growth, high dairy costs, declining traffic in U.S. stores and competition from cheaper rivals. But, Schultz said he won't release details, including "five bold innovations," until its annual shareholders meeting on March 19.

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