Onward: How Starbucks Fought for Its Life Without Losing Its Soul Page 16

  “Starbucks’ reward program, beginning in mid-April,” I said to our shareholders, slipping the card back into my pocket. “And this is just the beginning.”

  Four more partners joined me onstage that day to announce initiatives.

  Chris Bruzzo walked shareholders through our new website, MyStarbucksIdea.com. Then he officially launched the site onstage and online. Behind the curtains, Alexandra Wheeler sat at a laptop uploading ideas that had been verbally collected from shareholders that morning as they entered the auditorium. Back at the office, some of our moderators sat ready to respond. Within minutes after going live, more ideas came streaming in—”give customers a free coffee on their birthdays,” “free Wi-Fi for all”—from people listening to the meeting's broadcast or reading the rolling blog posts. In the next 24 hours, 7,000 ideas were posted to MyStarbucksIdea.com. Seven thousand! The implications for Starbucks would be huge.

  Andrew Linnemann, donning a green apron and standing with his colleague Leslie Wolford behind a table set for a coffee tasting, introduced Pike Place Roast, and together we announced that Starbucks would once again grind whole beans in our stores. To my surprise, Andrew also introduced a short video that had captured the reactions of shareholders as they sampled Pike Place Roast before entering McCaw Hall that day. Their spontaneous feedback—”smooth,” “well balanced,” “lighter,” “it doesn't bite”—was music to my ears, exactly what we'd hoped to achieve with the new brew.

  Finally, Clover. “What if a company could create a commercial way to replicate the benefits of the French press?” I asked the audience before Zander Nosler humbly described to the largest group he had ever spoken to how the machine that his company had invented made such a fantastic cup of coffee, which he brewed on camera for everyone to see on the huge overhead screens.

  That was it. Six transformation initiatives.

  The Mastrena.

  Conservation International.

  The Rewards Card.

  MyStarbucksIdea.com.

  Pike Place Roast.

  Clover.

  “I hope that you can see that we are deeply, deeply committed to the work at hand,” I said, looking out into the auditorium.

  Yet even as I spoke, the company's situation was getting bleaker. Our stock price, which had begun the day at $18.34, closed at $17.50. Day by day, sales would continue to decline. And so would the United States’ economic indicators—consumer confidence, unemployment, housing starts. The only things going up seemed to be labor costs and prices for commodities like dairy products, further eroding our margins. A storm was brewing as the world's financial systems teetered on the brink, and while I believed the situation would get worse before it got better, no one, not the smartest economists or the federal government, could know just how bad it might become.

  But going forward with fear would not allow our company to thrive. Some corporations are built, or rebuilt, on data-driven business plans and hired guns with formulaic strategies. They may succeed, but they lack soul. Starbucks is, by its founding nature, different. There was no doubt that the company had to mature, conducting its global operations with more rigor and discipline, hiring new talent, and consulting with outside experts. But for this organization, transformation was not only about tightening nuts and bolts. If we did not also feel, if we did not have conviction in our values and believe that we really were in the business of human connection—on our farms, in our offices, in our stores, in our communities—then the company was doomed.

  We had to preserve our humanity.

  To get the company to forge ahead and win, I had been trying to rekindle in our partners the love and pride that had fueled Starbucks for so many years. That's why the last 11 weeks had been so important: Discussing The Beatles at our first brainstorming summit. The first-ever retreat for Starbucks’ top 200 leaders. Open forums. My memos. Crafting the Transformation Agenda and launching a new mission statement. The annual meeting. All of these were engaging tools that were helping us navigate our way through and share in this unpredictable journey, one milestone at a time.

  “I hope you can see that what we wanted to do today is celebrate our company. Celebrate the passion we have for our customers. Celebrate our coffee and our people and bring it to life. . . . The celebration of our company, I think, needs to be done.” McCaw Hall filled with applause.

  It had been a good morning. A shot of confidence that Starbucks’ partners and I had been hungering for.

  Yet it had been only one morning.

  The initiatives we introduced each heralded a return to our core—coffee, customers, innovation, values—but they would not be enough to bring Starbucks home again. The time had come for all of us to get in the mud and get our hands very, very dirty.

  Part 3:

  Pain

  Chapter 17

  Whirlwind

  Starbucks was entering a tremendously chaotic period.

  In the first half of 2008, as we pushed new products and programs into the marketplace, we were making many decisions with little or imperfect information, in large part trusting instinct. There was a lot the company could try to control, but so much—the economy, competition, our critics—that we could not.

  Everyone was so very anxious to see the needle move, but behind closed doors our people worried whether we'd gotten carried away about just how quickly we might be able to make a real difference for our customers and to the business. Was it too much? Had we overextended ourselves? Bombarded our baristas? Would it all work? Would any of it?

  Rarely did I sleep more than four hours a night as I tried to predict what onslaught of opportunities, successes, and dilemmas the next day might bring.

  I had just flown to Bologna and was driving with a small team to a northern Italian town. Just a few days earlier, a friend had called me from Italy singing the praises of a sweet, smooth, cold Italian-made beverage that was not ice cream or sorbet or a smoothie but—whether mixed with fruit, milk, or yogurt—tasted absolutely delicious and like nothing else available in the United States. I had been intrigued, but with so much unfolding in Seattle I was hesitant to fly abroad, so I had sent a colleague in my place. “Howard, you should get over here,” he insisted after tasting the drink for himself. “We may have found the next Frappuccino.”

  I flew to Italy to taste it for myself at the sprawling headquarters of the company that made the product. Its offices were chic, its factory and research facility technically advanced, and our hosts could not have been more welcoming.

  Cliff and Michelle were among those in the tasting room with me trying one cold, creamy blend of the drink after another. Absolutely fantastic, I thought. Everyone agreed. It really was unique. During the trip we ran some back-of-the-envelope numbers, and the product's potential profit margin was hard to ignore. Given the simple ingredients and easy preparation we'd witnessed, the margin could be as high as 70 percent if the product was priced right. Serious logistics had to be considered—we'd have to airfreight the base ingredient from Italy and find a US company to manufacture the machines that mix all the ingredients—but once we'd figured out the gritty details, the product had the potential to be very successful.

  The taste and potential profit coupled with the urgency I was feeling to spark sales and rejuvenate the brand with innovation culminated in our decision that Starbucks would bring the drink to the United States by that summer.

  I fast-tracked the Italian beverage's development and rollout. Rather than quietly testing it in a few stores to work out production kinks and polling our partners about the product's viability, we would launch it with promotional punch in more than 300 stores in Los Angeles and Orange County, California, ideal markets for jump-starting a trend for America's next refreshing drinkable treat. We named it Sorbetto, and I had high hopes that it was going to be a big success.

  In April 2008, after the glow of the annual meeting, the partners in our home office had gone back to work to deliver on our promises. We'd set big goals for ours
elves—I'd told USA Today that Starbucks would bring more innovation to the market in the next 18 months than the company had brought in the past five years—and set some incredibly tight deadlines.

  Public reaction to the six initiatives we'd announced at the annual meeting was mixed, and to my annoyance, but less and less to my surprise, a vein of cynicism ran through much of the coverage in the traditional media and online.

  Investment bloggers were particularly harsh, yet not completely off base. “It hardly seems that a new coffee blend and an automated beverage machine will be the cure-all for your economic woes,” wrote Sarah Gilbert of BloggingStocks.com, calling us “desperate.” “Rather than a return to what they do best,” wrote Todd Sullivan on SeekingAlpha.com, “Starbucks seems intent . . . on running around in more directions.” The Wall Street Journal quoted an investor who estimated that her own shares’ value had lost $80,000: “I should have sold.”

  “They have to stop taking themselves so seriously. Let's face it—it's still coffee, not brain surgery,” a corporate consultant told USA Today in an article sidebar doling out advice from a smattering of industry experts. Except for a few items, the list read like a page from our existing playbook: Smell good again. Embrace wired youth. Reward loyalty. Get healthier. Drop food that doesn't jibe with java. Cut the clutter. Revive “coffee theater.” Open fewer stores. Sell combo meals. And give coffee away. Applying such improvements to our business may not have been “brain surgery,” but outsiders failed to appreciate the nuances of invigorating a service-based business, especially a brand as emotionally charged as ours. Starbucks is not a coffee company that serves people. It is a people company that serves coffee, and human behavior is much more challenging to change than any muffin recipe or marketing strategy. Many of the decisions I was making confounded others because they did not grasp the intangible value of preserving the company's culture.

  Elsewhere, Clover took a PR hit when several independent coffee shops declared, after hearing about the acquisition, that they would sell their machines, complaining that they did not want to pay Starbucks for parts and maintenance.

  Opinions about our first online community, MyStarbucksIdea.com, also varied from enthusiasm to doubt. “My initial grumpy skepticism was brutally arrested when I visited the site,” wrote Toby Ward of IntranetBlog.com. “The site is clean, easy to navigate and digest.” Less web-savvy folks remarked that Starbucks was taking a big risk by sanctioning a suggestion box it could not control—an emotional hurdle we'd had to overcome ourselves.

  Time would tell if they were right, but from our perspective, MyStarbucksIdea.com had already exceeded our initial expectations. Salesforce.com's customized technology, as well as our moderators, held up to the wave of participation. After one week online, 100,000 people voted. And in the first two months, 41,000 ideas flooded in. “Turn down the music.” “Free drinks for frequent buyers.” Chris Bruzzo's team shared the community's input with our product teams and research and development, public affairs, and marketing departments, as well as with me and the leadership team. Among the themes that began to emerge were, one, an increasing desire for value—people wanted more for their money—and two, loyal customers wanted to be rewarded for their frequent purchases. These findings bolstered our optimism about the potential success of the rewards program, which would launch on the heels of our new brew, Pike Place Roast.

  On a bitterly cold morning under a bright blue Manhattan sky, a perfect day for a hot cup of coffee, Starbucks officially launched its new “everyday” brew: Pike Place Roast. The huge national campaign was billed as the Nation's Largest Coast-to-Coast Coffee Tasting.

  I'd flown to New York City for the April 8 event and arrived with Cliff as well as my wife, Sheri, at Bryant Park, the tree-lined oasis behind the main branch of New York's public library. In the middle of the park stood a life-size replica of the original Starbucks store. I loved it! Amy Kavanaugh and her team at Edelman, our long-standing public relations agency that worked with Starbucks to orchestrate the national launch, had brought Seattle to the East Coast. We even flew in the store's former manager, Janeen Simmons, to run the mock store that day.

  All around us, smiling baristas pushed coffee carts and offered passersby steaming samples of coffee. At the same time, in 7,100 US stores from California to Maine, free coffee tastings were being hosted by partners wearing black T-shirts imprinted with the word “bold,” “fresh,” or “smooth.” In another brilliant attention to detail, our coffee cups’ green siren logo had been replaced with Starbucks’ original all brown, and slightly sexier, one.

  The Pike Place Roast launch was by far the largest, loudest marketing event Starbucks had ever executed. Because the company never budgeted much money for national advertising, we paid for it by scraping together funds earmarked for sporadic marketing activities around the country—and still we had a shoestring budget compared to what other national retailers typically spend. Pulling off something so grand so fast required logistical and creative heroics, and a lot of anxiety had preceded this day. I'd pushed our people, as had Michelle, Terry, Cliff, and Wanda, but every department had delivered, meeting once-unthinkable deadlines and acting as if we were one store with one goal.

  Standing in Bryant Park, both Cliff and I sensed that something had gone very right. It had been awhile since Starbucks’ partners had galvanized around a mission other than growth, and the promotion did not feel like some hollow PR stunt, but rather an authentic celebration because it invoked Starbucks’ heritage, focused on our coffee, and involved our people.

  Escalating Pike Place Roast to a reinvention of brewed coffee gave all of us something meaningful to rally around, which was vitally important to the transformation journey.

  The windchill was unforgiving, and all I had on was a suit and tie as I stood in front of television cameras for interviews; at one point Cliff even insisted I put on his coat, which was a size or two too big for me. Wrapped in his oversized parka, I checked e-mail and received reports that our store partners around the country were having fun sharing coffee samples and interacting with their customers. Also good news, customers liked Pike Place's taste and were pleased when they learned it would be served consistently. Brewed coffee sales were brisk that day, and Starbucks dominated the media; the newspaper and TV coverage alone was worth millions of dollars in advertising.

  That afternoon we flew back to Seattle to attend another Pike Place event at the original store. On the five-hour flight we took time to consider why Pike Place Roast seemed to be working so well so we could apply what we learned to future projects. We eventually concluded that the product as well as the way we had brought it to market met three critical criteria for success at Starbucks:

  It was right for and engaged our partners.

  It was right for and met the needs of our customers.

  And it was right for the business.

  Unfortunately, I did not realize that not everything the company was trying to do that season met those three very important standards.

  At the end of April 2008, we faced Starbucks’ second-quarter earnings. The numbers told a dispiriting story.

  Compared to a year earlier, global operating income for the quarter had sunk an unbelievable 26 percent, to $178 million. Earnings were down 28 percent, to $109 million, as our operating margins shrank from 10.7 percent to 7.1 percent of net revenues. Most frightening of all, the company's total comps were negative for the first time in Starbucks’ history. In the United States alone, customer transactions were down 5 percent and ticket sales, how much each customer spent per visit, had gone up a mere 1 percent! It's hard to overstate just how much these numbers shocked many of us at Starbucks. After almost 16 years of 5 percent or higher comps, such poor performance was so unfamiliar, even unthinkable, that it quite literally took our breath away. Although Wall Street no longer knew our comps because we'd stopped reporting them, the numbers, which were printed in red on our financial spreadsheets, were branded on my brain.
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  Faced with these results, it was requiring more and more faith for Starbucks’ senior leaders to believe that we could actually transform the company. I had complete confidence that Michelle, who had worked closely with me to finalize the Transformation Agenda, and Cliff shared my vision, but not all of the people on the team believed in or had the discipline to execute the strategy I was putting in place. I recalled what another second-time CEO had told me when I regained control of the company: “Most of your top leaders will be gone or new within a year.”

  His prediction was coming true. In addition to bringing in Cliff to head our US business, appointing Michelle chief of global strategy, and naming Chris Bruzzo interim cto and Chet Kuchinad head of partner resources, I'd recently convinced one of Starbucks’ most talented former leaders and a wonderful architect, Arthur Rubinfeld, to rejoin Starbucks as president of global development to manage our real estate portfolio, new store designs, and creative concepts. His most pressing assignment was to review the quality of our current retail portfolio, a task whose outcome—closing stores—had the potential to cause enormous pain to a lot of people inside and outside the company.