Onward: How Starbucks Fought for Its Life Without Losing Its Soul Read online

  It felt as if the sand in the hourglass was running out. December 2, Tuesday, two days before the analyst conference, the dining room in my Manhattan apartment was crowded and the mood tense. Cliff, Michelle, Terry, Vivek, and Troy were among the people there, along with Michael Casey, our former cfo, who had graciously hopped on a plane at my request to help us prepare for this crucial event.

  This would be the first time we'd held this conference outside Seattle. We'd chosen New York City, the hub of the global financial world, in large part because the burden of proof for Starbucks’ performance had shifted from the analysts to us. The company was not delivering as we had in the past and now we had to show the Street how we would rebound. Not by overpromising or making bold predictions, but by confidently reaffirming that we understood and were correcting our problems.

  Sitting around the dining room table, we continued to write and rewrite the script and corresponding slides, a task we would have completed in Seattle had we not been consumed with other responsibilities. Pulling all the facts together in a cohesive, optimistic story, especially under such time pressure, was incredibly stressful. We'd accomplished a great deal during the past 11 months, but it seemed overshadowed by recent bad news. Our comps were down across the board: negative 9 percent in the United States, negative 3 percent internationally, negative 8 percent worldwide. Nine weeks into the first quarter, it was only getting worse, and we projected missing external earnings estimates of 22 cents a share.

  Because I felt we needed an outsider's perspective, I'd invited one non-Starbucks person to join us. Billy Etkin runs a successful boutique merger and acquisition firm and has one of the most intelligent business minds I know, especially when it comes to communicating critical and often complicated information to Wall Street. While some were cautious about an outsider chiming in, Billy's business acumen and unfiltered, respectful opinions helped us, I think, to see the forest through the trees and articulate the company's situation. I trusted Billy and his intentions implicitly, and he showed up for no other reason than to help Starbucks.

  On Wednesday, December 3, 2008, the group gathered in an empty auditorium at the TimesCenter on West 41st Street to rehearse our presentations. Sitting among rows of empty seats, my mood was spiraling to levels it had not sunk to in ages. Maybe ever. I sensed a level of insecurity, which was understandable given our lack of prep time and the challenges we were knee-deep in back home, which created a daily intensity, like hand-to-hand combat, as we fought to save the business. When members of the leadership team took the stage, I was quick to interrupt or redirect their presentations, not making it easy for anyone to muster confidence.

  Finally Vivek turned to me. “Howard, I think you need to leave,” he suggested respectfully. Vivek was right. Everyone knew what he or she needed to do, and in this instance my input was more obtrusive than constructive. I grabbed my coat and left the rehearsal.

  Later that evening, Billy and I sat down for dinner at a small table inside Vespa, a modern little Italian restaurant on Second Avenue between 84th and 85th Streets. In summer, sunlight poured into Vespa's open garden, but this December night was dark and cold, and I felt an uncharacteristic level of angst. I even got frustrated trying to explain to our waiter that I did not want a specific dish off the menu, just grilled swordfish and pasta. Not fried or doused in spices. Just. Plain. Grilled. Swordfish. As the confused waiter walked away from the table, my head swirled with images of the dour faces of my team, the bad press about Starbucks, and the single-digit share price.

  “The stock could drop to $5 tomorrow,” I said aloud to Billy, deeply concerned about what might happen if it did. “We could be taken over.”

  This was, again, such an uncharacteristic fear for me, not to mention an unlikely scenario for the company, but my anxiety had reached a fever pitch. It had been such a long year. An endless treadmill as Starbucks planned and executed new products and events, one after the other. And we were still waiting for most to bear fruit. I had experienced such highs with the annual meeting, Pike Place Roast, and New Orleans, yet also such lows with store closures and the layoffs and Sorbetto and our sinking market capitalization. Our cfo quitting at such a crucial time had put me over the edge. As 2008 drew to a close, I was simply exhausted. Physically and emotionally.

  “Howard, you have to stay the course,” Billy reassured me with his steady tone and even a smile. “You have to stay true to your values and true to the company's core. Those are your rudder now. And when the seas calm and the winds shift . . . and,” he went on, “the seas will calm and the winds will shift, unless you believe that the economy is never coming back. Or that all along Starbucks’ value proposition and connection to its customers has been a ruse. Or that the millions of people still walking into your stores every week all over the world are kidding themselves. Now is the time to stay focused on the moves you have to make to rightsize the business, to innovate, and to return to the core. The confluence of these factors will propel Starbucks forward and will make all of today's naysayers positive about Starbucks again. I am absolutely sure of this.”

  Billy was not telling me anything I did not already believe.

  But he was telling me things I needed to hear.

  Finally, Thursday morning, December 4. The auditorium filled with some 200 influential people. Buy-side and sell-side analysts, institutional investors, a few guests, a smattering of press, and 11 of our top 30 shareholders—almost double the crowd that typically attended the conference in Seattle. Close to 1,000 more, including Starbucks partners, would tune in via a live webcast. I did not think there had ever been a more important meeting at which Starbucks needed to communicate with clarity and confidence.

  Backstage in the greenroom, I waited with the rest of the Starbucks team. I would speak first, followed by Troy, Michelle, Terry, and Cliff. Then Troy again to emphasize the company's heightened rigor concerning cost management. More than 100 slides were ready to flash on the overhead screen, an impressive photo album documenting a very full year. On one hand, we were proud. On the other, we felt intense pressure. How we discussed our business that day had to instill confidence in our ability to build long-term shareholder value. Dinner the night before had been cathartic for me, but I was still soaking up the tension of the room. Something had to break.

  “Bill!” I stood up and walked over to Bill Bradley, who had quite unexpectedly entered the greenroom. I hadn't known he was going to be at the conference and was glad, if not relieved, to see one of our board members. The former US senator, Knicks player, and two-time NBA champion towered over us, smiling as if he knew something we did not. And then, like a coach with the starting lineup of a team about to take the court, Bill corralled our attention and delivered what must have been a 15-minute pep talk, reinforcing our strengths and, like Billy the previous evening, reminding us of what we already knew to be true. Every company was feeling pain. But Starbucks had a good story to tell. An authentic story. A story about a year in the life of one of the world's most respected brands. A year spent taking stock and taking risks. He reminded us all of how far we had come during the crisis. Bill was so confident in his belief in us, so sure that the company would prevail, that we would shine that day—it was contagious.

  Like other members of Starbucks’ board of directors, Bill Bradley had unique gifts to share with the company and seemed to know just when to bestow them. For all the wisdom and talent among our team, a locker-room speech was exactly what we needed, an unexpected burst of positive energy. Amazing, actually. And the wind shifted. When Bill left the greenroom, I think we all stood a little taller, ready to go onstage and get the job done, as a team, with conviction.

  As I walked onto the stage, I knew I had to set the tone, to build on the faith Bill had instilled in us backstage and provide the rest of the team with a little bit of tailwind. I was also keenly aware of my responsibility not just to shareholders, but to everyone back in Seattle and all of Starbucks’ partners. Representing the com
pany was my job. It is also my life.

  “Good morning. Thank you for coming. We are all obviously living in extraordinary times, and we appreciate the fact that you've come here today.” I was not performing. I was just speaking honestly, and with each word my conviction in Starbucks’ purpose and our potential came rushing back.

  There are some who say, “Perhaps you should change your business model because the environment is so different.” And I ask rhetorically, for all of you that are in your own business, who have built something, you have guiding principles. You have a culture and a set of values. This is not the time to change strategies so significantly that you lose your reason for being. . . . Things are going to get better. People will continue to drink coffee, and the equity of our brand and the relevancy of the sense of community in the third place and the growth opportunities for Starbucks, domestically and around the world, will be stronger than ever.

  We have assembled a very strong team. We have a common purpose. We certainly have creative debate, but we are up for this challenge. Let me share with you who they are.

  One by one, each took the stage to articulate aspects of our unfolding story.

  Troy, in his first time presenting as cfo, rose to the task and did a great job of setting a somber, practical tone by outlining our cost-saving efforts and projections: $400 million in permanent cost take-outs, $200 million of which would be realized in 2009 on top of the $205 million resulting from actions we had taken earlier in the year.

  “These are sustainable changes to our cost structure,” he reassured the Street before ceding the floor to Michelle.

  “So let's talk about what's been happening in our business,” Michelle said, alluding to an overhead graph that showed the 12-month correlation between Starbucks’ declining US traffic and weakening consumer confidence. “If we look at our transaction comps, they started decelerating about a year ago, which as we all know this week was reported to have been the start of the recession.” It was true. A report released the day before by the National Bureau of Economic Research had pegged December 2007 as the beginning of the US recession. A statement I had made a year ago was now official.

  Michelle, with her impressive command of numbers, provided an extensive overview of our past as well as our future: our more extensive customer research, our strategy to maintain our coffee authority, and the new beverage and food platforms we'd brought to market in 2008, including expanding the Tazo tea line and bringing back the infamous breakfast sandwiches.

  After I'd announced the end of the breakfast sandwich on the earnings call back in January 2008, we had immediately pulled the sandwiches out of stores’ display cases, although customers could still order them by request. And, as predicted, we saw an immediate decline in sales at stores that had carried the product, but we also saw impassioned customer comments posted at MyStarbucksIdea.com and got them at our customer call center. A website even sprang up: Savethebreakfastsandwich.com.

  With my full knowledge but admittedly tempered enthusiasm, the food team continued to study the sandwich to address my complaints as well as customers’ pleas, and they discovered that improving the quality of the ingredients—leaner bacon, higher-quality ham and cheese—helped reduce the aroma. They also learned that the tang of the English muffin was partly to blame for the sharp smell, so we adjusted the recipe with our baked goods supplier and also offered more bread options, such as ciabatta. Finally, by moving the cheese to the top of the sandwich and lowering the baking temperature to about 300°F, the cheese was less likely to burn. The result was, I had to admit, a breakfast offering that was worthy of our coffee.

  With my blessing, the breakfast sandwiches had returned to the stores in June 2008 and in the last six months had done extremely well. What's more, improving the sandwiches had actually helped us move our entire food program forward. We had updated nearly all of our recipes, paring down the number of ingredients and eliminating artificial flavors, artificial dyes, trans fats, and high fructose corn syrup.

  In retrospect, I realize that the ferocity of my reaction to the breakfast sandwich was likely heightened by my frustration with other shortcomings at the company. More emblematic than problematic, the sandwich turned out to be among the least of Starbucks’ ills. But like so many other things we had dealt with in the past year, we had turned the sandwiches around and learned from the experience how to improve the business.

  Michelle wrapped up her presentation and introduced Terry, who spoke about a critical yet nuanced marketing strategy: delivering value in a manner consistent with our brand.

  In fall 2008 the retail world was on sale.

  Every street I walked down had “Sale” signs displayed in windows, from Madison Avenue's high-end boutiques to Marks and Spencer's London department store. I recall seeing one sign declaring that customers could get as much as 80 percent off. There was so much pressure for every retailer and restaurant to discount prices. The unique challenge for Starbucks, however, was how to honor consumers’ needs for lower prices and reward our core customers’ loyalty without putting Starbucks on sale. Deep discounting is a slippery slope that can be impossible to climb back up. It would also play into McDonald's game, and that was not how I wanted to compete. Starbucks would compete as we always did. On quality and service.

  Still, we had to do something for our core customers. As Costco's Jim Sinegal had advised us earlier in the year, we could not let them slip away. Giving them value at almost any cost would be much less expensive than trying to win them back.

  The good news was that, by the time of the analyst conference, we were beginning to figure out how.

  Three months prior, I and several other people, including Terry Davenport, had flown back to Seattle together from a meeting in Los Angeles. During the two-hour flight, we began brainstorming about how to breathe life into what was sure to be one of our worst holiday seasons on record. For inspiration we considered our Rewards Card, our loyalty program that had been chugging along nicely since its June 2008 relaunch. What could we do with a card to provide even more value than the rewards program? We played with some numbers and eventually came up with the idea for a $25 Gold Card that would give cardholders 10 percent off on anything they bought at Starbucks for one year. Excited, we called the Rewards Card team from the plane to discuss benefits and pitfalls, and by the time we landed in Seattle I had given the Starbucks Gold Card the go-ahead, assuming no major problems cropped up.

  Our goal was to sell 25,000 cards in the first week. We surpassed that amount in the first weekend.

  Starbucks’ card programs—the Starbucks Card, single-product promotional cards, the Rewards and Gold Cards—were emerging as the company's winning way to deliver meaningful value. Cards are easier to use and have higher redemption rates than coupons. They enhance the brand, becoming part of the Starbucks Experience via the actual customer-barista transaction and, because the card lives in wallets, part of people's lives.

  The cards were also bringing us closer to customers. To receive rewards, a person registers it online by providing his or her e-mail address. As a result, Starbucks was building a rich database that we could use to better understand our customers’ behaviors and reward them accordingly. The database also allowed us to reach out to customers in meaningful, cost-effective ways, like we did with the election campaign. And when Vivanno launched that summer, for example, we invited cardholders to come in and try a free drink. The 16 percent response rate was exceptional for an e-mail campaign.

  “For a brand that does not spend a lot on traditional mass marketing,” Terry summed up for the analysts, “the database is going to be one of the hidden assets.” He was right. The card program was a truly sustainable, competitive advantage for us in the marketplace and, given the state of discretionary spending, perhaps the most relevant marketing tool that we discussed that morning.

  We were rallying, individually and as a team. From my seat in the audience I sensed, despite a palpable cynicism, that our main
message to Wall Street was for the most part getting through: Starbucks was focused on its foundation as well as innovation and would emerge from the crisis in a position of strength. With each presentation, my anxiety dissipated. We were staying the course. And as I quietly checked my iPhone throughout the morning, the market seemed to agree—our stock price never dipped below $8 that day.

  The conference was allowing our team to take a step back from the operational details that had consumed us for the past few months and ponder what we had achieved and what lay ahead. As Cliff briefly outlined during his presentation, Starbucks also had multiple revenue opportunities beyond our company-operated US stores:

  The consumer packaged goods business, mainly the whole and ground beans we sold in grocery stores

  Almost 4,000 licensed stores

  Twenty-five-million-plus cups of Starbucks coffee served per week in hotels, restaurants, and other venues that fall under our food-service business

  The at-home and single-serve coffee markets

  Seattle's Best Coffee, a brand Starbucks had acquired in 2003 and whose potential had yet to be tapped