Onward: How Starbucks Fought for Its Life Without Losing Its Soul Page 5

  Companies pay a price when their leaders ignore things that may be fracturing their foundation. Starbucks was no different.

  The memo's content was never intended to be public, but once it was I did not view writing it as a mistake. Every thought I expressed came from a place of love. My critiques were honest expressions born of my passion for Starbucks and my deep desire to push for reinvention and self-renewal, especially at a time when we were still winning and our shortcomings had yet to become liabilities. I had written hundreds of memos during my 26 years at the company, and all had shared a common thread. They were about self-examination in the pursuit of excellence, and a willingness not to embrace the status quo. This is a cornerstone of my leadership philosophy.

  Starbucks is in the business of exceeding expectations. That means we have to admit it when we are not as good as we think we should be. My role, my duty, is to initiate that discussion, to challenge us, as well as myself, to be better, especially when we are knocking the cover off the ball.

  Our partners trust me to do so.

  Only by not speaking from my heart do I betray that trust.

  Chapter 5

  Magic

  I was just a young boy, no more than 10 years old, when my aunt took me to Radio City Music Hall in New York City. After the show, we walked to an Automat, a style of self-serve restaurant that I'd never seen anything like. I was immediately enthralled.

  Rows of little windows stretched from wall to wall, and behind each window was a different food. A turkey sandwich. A bowl of Jell-O. And my choice that day, a slice of apple pie. My aunt put some coins into a machine and then lifted the window, which was hinged at the top, and removed my pie. Almost immediately a new piece of pie appeared, replacing the one we had bought. My aunt convinced me that a magician was working behind the scenes; back then, I had no idea there was a kitchen full of cooks and servers behind the vast wall of food, making and constantly refilling each item for new customers.

  That experience crystallized for me what it meant to be a merchant. Since then, I have always looked for the magic.

  It's not unusual for me, no matter where I am in the world, to hop in a cab or go walking to visit other retailers. I do not know how many times I have done this in my life. Hundreds. I love to experience different stores—sole proprietors’ and large chains’—and to see firsthand how they present their products and communicate with customers. I am a sponge, always soaking up store design, layout, and salespeople's behaviors, and over the years I've been intrigued by many types of stores that have nothing to do with coffee.

  In New York City, I once entered a soap store and was struck when the clerk invited me to wash my hands in a beautiful porcelain sink by the entrance. All customers were encouraged to wash their hands, and there was something about that simple act that elevated the shopping experience before it even began. In just seconds, I was seduced! The store had successfully transferred respect for the product to customers. Who wouldn't want to leave with something so special?

  In Paris, one of my favorite places to visit is Colette, a spectacular three-floor specialty store that is owned and operated by a mother-daughter team. Colette delights customers with its whimsical collection of high-end, hard-to-find items from all over the world. Books. Sneakers. Toys. There is even a bar that serves 100 different bottled waters! The owners are curators, and shopping Colette is an adventure in discovery.

  The merchant's success depends on his or her ability to tell a story. What people see or hear or smell or do when they enter a space guides their feelings, enticing them to celebrate whatever the seller has to offer. Intuitively, I have always understood this. So when, in 2006 and 2007, I walked into more and more Starbucks stores and sensed that we were no longer celebrating coffee, my heart sank. Our customers deserve better.

  In the months after the memo was leaked, inside our company there were more open discussions about what was going wrong. To my relief, there was even general agreement that we were compromising too much in order to accommodate our ever-increasing size.

  That spring of 2007, at an all-day brainstorming meeting with a cross section of leaders and partners at Seattle's Edgewater Hotel, I was pleased to hear others voice their own concerns and pose tough questions. Is the stock price and valuation a limiting factor to where we want to go? How do we improve how our store partners interact with customers? How blinded do we get when we are doing well financially? Are we willing to give up certain thinking for an uncertain future? How do we make good business decisions while still being aspirational? How do we participate in the conversation about Starbucks? How do we grow without losing our core? How do we stay small while growing big? What is the soul of Starbucks?

  It was freeing to admit, collectively, that we had trapped ourselves in a vicious cycle, one that celebrated the velocity of sales instead of what we were selling. We were opening as many as six stores each day, and every quarter our people were under intense pressure from Wall Street—and from within the company—to exceed past performance by showing increased comparative store sales, or comps, which are the year-to-year differences in revenue generated by a retailer's existing stores.

  Our answer had been to build more stores as fast as we could.

  Our strategy was to do more of what had worked in the past.

  But we were not pushing ourselves to do things better or differently. We were not innovating in lasting ways. We were venturing into unrelated businesses like entertainment. And we were pushing products that deviated too far from the core coffee experience. As one Starbucks partner expressed, it was as if we were running a race but no longer knew what we were running for.

  During the Edgewater brainstorming session, as we sat in a circle and pondered our future, some of my colleagues said they recognized that Starbucks was at an inflection point or, as Jim put it, a “critical juncture.” I believed our predicament was much more serious. Starbucks was on the verge of a defining test that we would fail if we did not look in the mirror, acknowledge our blemishes, and undertake transformative, even disruptive, change.

  By summer 2007, it was no longer enough for me to talk about my frustrations with our executives in Seattle. I had to go out on my own and speak to our store, district, and regional managers directly, as well as talk with baristas. I considered the fact that it might have bothered Jim that I was talking to other partners about what I perceived was wrong with Starbucks, but still I took it upon myself to have these direct conversations about the deteriorating store experience.

  For me, the most acute example of this, the most symbolic representation of how Starbucks was deviating from its heritage and losing its magic, was the breakfast sandwich.

  Starbucks first began serving sandwiches in 2003. Over the years we had experimented with many types, from bagel sandwiches to, in 2006, warm combinations of sausage, turkey bacon, and ham and egg on English muffins. We called the latter warm or breakfast sandwiches, and most of them included cheese. I understood why sandwiches made financial sense. For years customers had come into our stores with competitors’ food products, or only bought our coffee and then went elsewhere, or were buying lower-quality coffee where they purchased their breakfasts. The sandwiches met a need. As a result, they drove sales, drove profit, and drove comps.

  But I had resisted the idea of serving hot food from day one. While I encouraged innovation, I never envisioned people coming into Starbucks for a sandwich. Many customers, however, embraced the warm breakfast sandwich, grateful for a tasty, more substantial food offering. In fact, they gained quite a loyal following. The more popular they became, the more our baristas had to heat them in our warming ovens. And when they did, the sandwiches’ cheese would inevitably drip and then sizzle in the ovens, releasing a pungent smell. Whatever rich, hearty coffee aroma remained in the store was overwhelmed by singed Monterey Jack, mozzarella, and, most offensively, cheddar. The smell further chipped away at our narrative. Where was the magic in burnt cheese?

  Pe
ople who have known me for years will tell you that few things had ever piqued my ire as much as that smell. As far as I was concerned, nothing could be further from the romance of the Italian espresso bar.

  I could not stand it.

  One day I walked into a Seattle Starbucks and immediately felt frustrated because burnt cheese had, once again, enveloped the store. I spoke to the manager about it. But she did not understand my concern because, she told me, the store had already far exceeded its sales goals for sandwiches for that week. I left the store depressed. What would be next? Hash browns?

  The breakfast sandwich became my quintessential example of how we were losing our way. “Get the sandwiches out!” I pointedly told Michelle Gass, then our head of global products, even as we continued to introduce them into hundreds of new stores. An hour later, Jim told Michelle that Starbucks needed the sandwiches and would not take them out. Research and anecdotal evidence had told him that customers liked them, bringing into our stores more people who now included our sandwiches in their morning coffee rituals.

  Not surprisingly, Michelle and others felt uncomfortably pulled between two leaders. Both Jim and I had good intentions and similar goals, but differing opinions about how to achieve them. Removing the sandwiches would have cost the company sales and customer loyalty. I was willing to trade some short-term pain for longer-term gain. Jim and others were not.

  My adamant stance was admittedly dispiriting for partners in our food department who had worked for years to create the new food offerings. Months of planning, research, and testing had gone into the sandwiches’ development, including hundreds of hours trying to minimize the smells of sausage, bacon, and, of course, burnt cheese. At one point, an “aroma task force” was pulled together as the team wrestled to eliminate the offending smells.

  They experimented with different ovens.

  They retrained baristas to clean the ovens more often.

  They replaced the parchment paper that held the sandwiches.

  Cook times were narrowed to prevent dripping cheese.

  Manufacturers were asked to rework their ovens’ vents to keep aromas from entering the air, and our own operations people tried to improve the stores’ heating, ventilation, and air-conditioning systems to pull odors from the air.

  Nothing seemed to work.

  Internal disagreement about the sandwiches’ benefit to Starbucks as a business—versus their detriment to Starbucks as a brand—continued to heighten tensions within the company's most senior ranks. The debate was as divisive as the memo. Maybe even more so. The question at hand was whether the company should follow customer data or my intuitive sense. At the time, I was not interested in finding a compromise.

  Adding to my frustration was the reality that the sandwiches were not alone in detracting from our stores’ essence. There was also the loss of coffee aroma, the resteaming of milk, the too-tall espresso machines. The list was getting longer. Such negative incrementalization, like one thread after another pulling at our seams, could be the company's undoing.

  I saw it. I felt it. I could not ignore it.

  A founder's perspective is unique.

  Entrepreneurs are builders, and the lens through which I view Starbucks and the marketplace is somewhat different from what it would be if I were a professionally schooled manager.

  Such a lens, however, has its strengths and weaknesses.

  On the plus side, founders know every brick in the foundation. We know what inspired the company and what was required to create it. That knowledge, that history, brings with it a high level of passion to do whatever it takes to succeed, as well as an intuition about what is right and what is wrong.

  But sometimes we are too close to a situation. Entrepreneurs can be blinded by emotion, by our love of what we have built, unable to see it fresh and with the eyes of a more objective outsider.

  Whether I was right or wrong about the sandwiches was less telling than my obsession with removing them, which was a manifestation of my mounting frustration. Twenty years after purchasing Starbucks, I felt like a former captain who could sense his ship slowly sinking. In a knee-jerk attempt to keep us afloat, I pushed to eradicate the sandwiches from our menu. But my efforts were only a gasping attempt to plug one hole when, in reality, there were so many other holes bringing us down.

  By the fall of 2007, six months after I wrote the memo, I did not think anything substantial had changed inside the company or in our stores. Day by day my disappointment edged toward anger, and at times fear, that Starbucks was losing its chance to get back the magic. That's when I began to seriously consider if the time had come for me to return as ceo.

  Chapter 6

  Loyalty

  I still remember what it was like when we started building the company. Every day we were fighting for survival, doing whatever we had to do. We rolled up our sleeves and left our egos at the door. Every small gesture mattered, and so much of what Starbucks achieved was because of partners and the culture they fostered.

  We believed that celebrating coffee and creating connections mattered. And we believed we were capable of doing it, and that it was worth doing, on a grand scale. Confidence propelled us, and we went after audacious goals with enthusiasm. We did not take our success for granted.

  Until some of us did.

  If not checked, success has a way of covering up small failures, and when many of us at Starbucks became swept up in the company's success, it had unintended effects. We ignored, or maybe we just failed to notice, shortcomings.

  We were so intent upon building more stores fast to meet each quarter's projected sales growth that, too often, we picked bad locations or didn't adequately train newly hired baristas. Sometimes we transferred a good store manager to oversee a new store, but filled the old post by promoting a barista before he or she was properly trained. This was the kind of operational rigor we let slip and then didn't attend to the subtle but negative cumulative effects, such as declining beverage quality, because every metric we were looking at said everything was fine. For years we were able to open new locations while sales continued to increase at the stores we already had.

  As the years passed, enthusiasm morphed into a sense of entitlement, at least from my perspective. Confidence became arrogance and, at some point, confusion as some of our people stepped back and began to scratch their heads, wondering what Starbucks stood for. Music? Movies? Comps? And while our people worked hard to meet our goals, it was not always with the joy or innovation or pride that had once defined us.

  I can recall popping in on meetings in mid-2007, sitting in the back of the room, a fly on the wall, and being struck by the lack of decisiveness and creativity around the table. It was incredibly tough for me not to jump in; I did not want to undermine Jim, but it also saddened me because I knew we were better than that. Back in the early days, just before our initial public stock offering in 1992, Orin, Howard Behar—a former leader at Starbucks who had been instrumental in helping to build the company—and I liked to say that a partner's job at Starbucks was to “deliver on the unexpected” for customers. Now, many partners’ energies seemed to be focused on trying to deliver the expected, mostly for Wall Street.

  This is why, I think, so many companies fail. Not because of challenges in the marketplace, but because of challenges on the inside.

  That September in Boston, seven months after the memo leaked, I shared with the board what I was hearing from partners as well as what I continued to observe. In a private executive session the board and I openly discussed the concerns we had about what was going on in the business. For the first time I indicated that, if things got worse, if things continued to deteriorate, I would be willing to come back as chief executive officer. I also confided in Orin. When I told Orin what I was considering, he reassured me that returning as ceo was the right decision. I knew that if he thought otherwise, he would have said so.

  It had never been my intention to return as ceo. But I have always said that people are
responsible for what they see and hear. I could not be a bystander as Starbucks slipped toward mediocrity, especially since I had played a role in and bore some of the responsibility for our troubles.

  Fiscal 2007 was not a terrible year for the company. But our internal problems, the toughening economic environment, and the rise of new competitors all hinted at a rougher time ahead—for our bottom line and our brand.

  On November 15, Starbucks reported annual earnings for the 12-month period that had ended September 30. Starbucks had $9.4 billion in revenue, up 21 percent, and almost $700 million in net earnings, also an increase from the previous year. We hit the earnings per share target that we had laid out for the Street, and for the 16th straight year we had 5 percent or better comps. Under any scenario that would have been fantastic, especially in the tenuous economic environment. But Starbucks had such a long history of high performance that the bits of increasingly disappointing news we delivered that quarter—slowing store traffic, the cannibalization of old stores’ customers by nearby new stores, and a contracting profit margin—worried Wall Street and drew more scrutiny.