Onward: How Starbucks Fought for Its Life Without Losing Its Soul Page 3

  Leaving, of course, was not an option. But with my engagement less than it needed to be for the health of the company, I decided the time was right to step away from overseeing day-to-day operations. To replace me as ceo, the board of directors and I appointed our president and chief operating officer at the time, Orin C. Smith.

  Wise, thoughtful, and affable, Orin had joined Starbucks in 1990 as chief financial officer. He shared my vision, was well respected by partners and investors, and had an admirably measured approach to solving complex problems. I trusted him, he trusted me, and we had a decade-long history of making decisions together. He knew the company inside and out, and would continue to strengthen the core business and invest in growth.

  Orin committed to spending five years as ceo. I turned my attention to expanding Starbucks around the world. Since opening our first store outside North America in Tokyo in 1996, we had been deluged with requests to open Starbucks locations in other countries. Then, as now, the opening of a Starbucks was often viewed as a sort of “coming of age,” a sign of arrival for a city as well as its inhabitants. At the time, Starbucks had 525 stores outside the United States, in such far-flung places as New Zealand and China. Soon we would bring Starbucks into Spain, France, and Russia.

  My new role as chairman and chief global strategist was, in large part, to help select local companies that would operate our stores in each region. We chose these international partners very carefully, selecting only organizations whose leaders shared our values. As the ambassador of the brand, it was also my job to imprint our mission on our local representatives, to ensure the brand's consistency across cultures.

  I was ecstatic about the possibilities that the future held for me as well as for the company, and during the next several years I officiated at hundreds of store openings throughout the world. Traveling exposed me to more innovative retailers and other merchants whose love for their products and professions was obvious the minute I walked into their shops.

  During my years as chairman, we opened US stores at a rapid rate and continued to expand around the world, pushing toward a target of 20,000 stores outside the United States. We opened in Dubai and in Hong Kong. In Saudi Arabia and Australia. And we continued to build and open stores in our most promising growth market: China. In 2003 our new Beijing store was Starbucks’ 1,000th store in Asia Pacific. The next year we opened the first Starbucks in Paris, followed over the years by stores in the Bahamas, Brazil, Egypt, Ireland, Jordan, Northern Ireland, and Romania.

  One of my most touching moments abroad occurred in 2001 in Japan, the country where we opened our very first store outside North America in 1996. Japan was also the first market outside the United States and Canada where we gave full- and part-time partners equity, and I will never forget the day we announced it at a regional company meeting. As I looked out over the audience, I saw that some of our partners were actually crying.

  Owning a piece of the company gave not just our partners in Japan, but so many of our partners a tremendous sense of pride, demonstrating that we respected our people enough to share our success. After the announcement, young people who worked in our stores in Japan approached me and explained, through translators, that they could not wait to go home and tell their parents because their mothers and fathers had never owned anything in their lives. It was an incredibly humbling and fulfilling day, the kind that reminded me that Starbucks is about so much more than coffee.

  Ironically, my days spent working back home in Seattle were often when I felt most out of sorts.

  Although, as chairman, I occupied the same office I had as ceo, with its expansive view of Seattle's ports and skyline, I felt somewhat lost inside our nine-story building on Utah Avenue. The role of chairman did not require me to be involved in day-to-day decisions. No longer was I part of the same meetings and planning sessions that had once packed my calendar. And while I felt comfortable, out of trust as well as respect, with leaving decisions to Orin and his team, there were times when, walking by closed-door conference rooms, I would peer through the windows, literally feeling like an outsider looking in.

  During Orin's five years as ceo, there was a great deal of momentum as our store count almost tripled to just more than 9,000. The company was rapidly breaking into new markets and geographies, bringing our stores to smaller metropolitan areas and suburbs. Back in major cities, where we had always thrived, competitors were following our lead and exploding their own presences. Yet even as more coffee shops sprang up, the lines at our stores got longer and longer.

  It was during this time that Starbucks began to better understand its customers, and what they wanted was convenience in all its forms. They didn't want to wait in line for their lattes, but they also did not want to walk a few more blocks or drive an extra mile to get it. Our way to reduce wait times was to open more stores, so we grew aggressively in urban markets, too. It was not easy and required hard work, but our growth felt manageable in large part because we had developed easily adaptable store designs. We also had adept real estate experts who took time to find just the right store locations, as well as skilled regional, district, and store managers who oversaw quality.

  It was also during Orin's leadership that Starbucks capitalized on opportunities to bring our coffee to people outside of our stores. We signed an agreement to supply our coffee to guests at hotels owned by Hyatt and Marriott. Expanding our store-within-a-store concept—Starbucks was already doing business in Barnes & Noble stores—we opened stand-alone kiosks inside hundreds of national supermarket chains such as Safeway, Kroger, and Publix. These new sales channels provided another revenue stream.

  But perhaps one of the most important, yet less publicized, strides that Starbucks made when Orin was ceo was to more fully and formally commit itself to social responsibility.

  Going about our business in ways that were good for people as well as good for the planet is something Starbucks has always strived to do. It is part of our DNA. But beginning in the late 1990s, social responsibility also became a marketplace imperative. Most people, I have always believed, want to buy a product or a service from a company they respect and trust. Yet that respect and trust was getting harder to earn. In the United States, there had been a surge in education and media attention about environmental issues and human rights. The 2004 movie Hotel Rwanda, about that country's 1994 genocide, and popular films such as Al Gore's global-warming documentary An Inconvenient Truth in 2006 increased awareness about global issues and helped to create informed consumers.

  More than ever before, people wanted the goods they brought into their lives to be created, packaged, transported—and discarded—with respect for the environment as well as for all of the people associated with the products.

  Our efforts came in many forms, from the reactive to the proactive. Between 2000 and 2005, the company and our individual partners committed more than $47 million to local communities around the world to support efforts such as youth and literacy programs in the United States and Canada like Jumpstart; improved education opportunities in rural China; and aid for the victims of disasters such as the September 11 terrorist attacks, the 2004 South Asian tsunami, and Hurricane Katrina in 2005. With donations and thousands of volunteer hours, our partners supported charities and improvement projects in the communities where they worked. As a company, we also joined with Global Green USA to raise environmental awareness. In 2005, when we acquired Ethos Water, we agreed to honor the brand's mission to increase access to clean drinking water for children around the world. We also began to take significant steps to reduce our stores’ environmental impact by purchasing renewable energy, reducing water consumption, and conserving energy. And through ongoing partnerships with global organizations, most notably Conservation International, which works with businesses and policy makers to protect the earth's most valuable resources, we participated in and created programs to further protect ecosystems and educate our own customers about issues such as climate change.

 
Perhaps most significant was that Starbucks took more concrete steps to fulfill its commitment to ethically source premium coffee.

  When it comes to buying coffee, I have always wanted Starbucks to be a company that gives back to farmers, not only with money but also by promoting healthy, sustainable farming communities. This has been our philosophy from the very beginning.

  But in the late 1990s, we began to experience vocal push-back from special-interest groups. The company listened to their concerns and, while we were already doing a lot, we agreed we could do more to formalize our intentions. In addition to Conservation International, Starbucks established a relationship with Fairtrade advocates, the organizations that license products as Fairtrade certified. This is a certification system that aims to improve the livelihoods of small producers by, for example, guaranteeing them a minimum price and connecting them to global markets. In 2001 Starbucks committed to purchasing one million pounds of Fairtrade certified coffee; not long after, our Fairtrade purchases reached 10 million pounds, making us North America's largest purchaser, roaster, and retailer of Fairtrade green coffee beans.

  But we went a step further. Also in 2001, in partnership with Conservation International, we created our own sourcing guidelines, setting out a comprehensive procurement process to ensure that the coffee we bought was ethically grown and responsibly traded. We called our verification program C.A.F.E. Practices, and it identified environmental and humanitarian standards that our coffee suppliers have to comply with to do business with Starbucks. Unique to our program is that quality and transparency are prerequisites to participating. What's more, independent verifiers are responsible for ensuring that our standards—from protecting workers’ rights to conserving water and energy—are indeed being measured. More often than not, they are. And because Starbucks buys only the highest-quality arabica coffee and pays the higher prices that premium coffee commands, many farmers have agreed to participate in the program.

  All the while, we continued to grow the business, and by the time Orin stepped down, Starbucks’ market capitalization—the value of the company's outstanding shares—had grown from $7.2 billion to $20 billion.

  The board of directors selected Jim Donald as the next ceo. His operational background—he had run Wal-Mart's grocery operations and later ushered in profitability turnarounds at Safeway and Pathmark—was impressive, but we were taken even more with his leadership style.

  You cannot meet a kinder human being. Jim possesses a natural talent for building relationships at every level of an organization, and when we hired him to head Starbucks’ North American operations back in 2002, everyone agreed that he embodied our company's values and brought to the job rare traits that could not be learned. Among them are heart, conscience, and emotional intelligence. In Jim's first two years at Starbucks, he seamlessly embraced the culture and our culture embraced him. Tremendously well liked, Jim's style fostered human connections. He routinely hand-wrote thank-you notes to partners for work well done. He enjoyed visiting stores and chatting with baristas. In the office, he had a habit of stopping one-hour meetings after 45 minutes and telling partners to use their extra 15 minutes to call someone they usually did not contact every day.

  When he inherited the company as ceo, Starbucks’ stock was at $25.83. We continued to set high bars for ourselves that Wall Street held us to, and every quarter, our people felt more intense pressure to maintain annual revenue and profit increases of at least 20 percent. It was an ambitious, some said unattainable goal that I was admittedly complicit in actively promoting.

  During that time, we also extended our brand beyond our coffee core and into areas like entertainment. Where once we sold a couple of CDs—artful compilations of music we played in the stores—soon we were displaying kiosks packed with the music of an array of musicians. In a handful of stores, we experimented with music bars that let customers download songs and compile their own CDs. One of the albums we produced with Concord Records, Ray Charles's Genius Loves Company, won eight Grammy Awards in 2005, including Album of the Year. Of the 3.25 million copies that were sold in the United States, approximately 25 percent were sold in Starbucks stores. Outside the United States, the album sold more than two million copies.

  We also sold books, creating several best sellers and helping to put unknown authors on the map.

  This success led us to consider ourselves somewhat of a tastemaker, and in our confidence we wondered if Starbucks could do for movies what we were doing for books and music—create hits. With that, we enthusiastically ventured into the film business, heavily promoting family-friendly fare and then selling the DVDs. I was among the company's loudest champions, intoxicated by the groundswell of opportunities that came our way. Studios wanted to pay us to promote their products. The business deals looked great on our profit and loss statements.

  It would be a while before I recognized that Starbucks’ amplified foray into entertainment, while it had its upside, was another sign of hubris born of a sense of invincibility.

  My relationship with Jim became complicated.

  I tried to give him space to do his job by forcing myself to stay out of meetings and keeping some opinions, but not all, to myself. But backing off proved more challenging for me than it had been with Orin, given our long history.

  In letting go of the ceo post, I had essentially agreed to trust in the decisions of others, even when my heart suggested those decisions were not wise. Like a parent standing back and watching his children make their own choices, the entrepreneur-as-chairman role had its unique emotional challenges.

  What's more, as chairman I was not always familiar with specific operational decisions, such as where most of our new stores were being built or who we were vetting for executive positions. One of the ongoing disagreements Jim and I had was which people were best qualified to fill some of the company's most influential roles.

  Eventually, toward the end of 2006, partners who had been with Starbucks for many years began coming to me in confidence. They expressed a variety of concerns about the direction of the company. People wanted something other than “Grow! Grow! Grow!”—a mentality that I, too, had helped to foster.

  I was faced with a dilemma. On the one hand, I wanted to support Jim's decisions and forge ahead with our growth goals. On the other hand, the cracks I sensed in our foundation, such as deterioration in the store experience, greatly disturbed me—as did hearing concerns from third parties. I felt trapped between two poles. My quandary was intensified by my love of the company and my sense of responsibility to partners and shareholders.

  As 2006 progressed, Starbucks’ performance began its subtle slide. The amount of money each customer was spending in our stores began to dip. By summer 2007, the growth in our store traffic slowed to levels we had never in our history seen. That year our stock dropped by 42 percent.

  It could not have been easy, and it probably was not fair, to expect a ceo who had spent only two years at Starbucks to operate unencumbered in the shadow of the person who had built the company and led it for years. Especially when that individual was as visible and influential as I had become inside Starbucks. In retrospect, I could have done a better job of preparing for Orin's inevitable departure.

  I often think that the best person to have led Starbucks would have been someone who had been inside the company for many years.

  As we had done from our early years, Starbucks was doing its best to invest ahead of the growth curve by, for example, building new roasting plants and distribution facilities before they were absolutely necessary to supply our stores. But as we opened more stores, it became almost impossible to effectively keep up the pace of investment. That reality, combined with the deteriorating customer experience I was witnessing in stores and the complaints I was hearing from colleagues, pushed me to act. That was why, in February 2007, as chairman, I sat down at my kitchen table to write a memo to Jim and Starbucks’ leadership team:

  Over the past 10 years, in order to ac
hieve the growth, development and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbucks Experience, and what some might call the commoditization of our brand.

  Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces.

  It was never my intent to attack or to assign blame. We were all responsible for the problems I saw surfacing and was about to air. Our problems were, in large part, self-induced, and I desperately wanted all of our leaders to feel the level of distress that I felt knowing that Starbucks was under attack, mostly from within.

  A well-built brand is the culmination of intangibles that do not directly flow to the revenue or profitability of a company, but contribute to its texture. Forsaking them can take a subtle, collective toll.