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

  The day we announced earnings, a Wall Street Journal headline rang out: “At Starbucks, Too Many, Too Quick?” “The growth in Starbucks same-store sales revenue and number of transactions in the U.S. has slowed,” it read. The “‘underlying fear is that Starbucks is finally seeing the signs of saturation in the US,’ says John Glass, an analyst. . . . Some analysts say the chain has fallen behind on creating enticing new beverages and its breakfast sandwiches have created little excitement.”

  Meanwhile, every morning, just as I'd done almost every day for 20 years, I would wake up and, after making my coffee, go to my computer to look at the company's daily same-store sales data, the year-over-year changes in sales at stores open for at least 12 months. For most of my career, revenues, transactions, and comps had been nothing less than validations of Starbucks’ health and momentum. But as November 2007 rolled on, I continued to shake my head at the screen, disappointed, as the comps dropped to levels we had not seen in years.

  Eventually the board felt, and I agreed, that a change was really needed. Something had been lost at Starbucks, an ability to effectively execute at all levels: in our support center, at regional offices, and in the stores. The patient needed more than a face-lift. But the patient did not need a new heart. Starbucks was not that far gone. Our coffee beans’ quality had not been compromised. In fact—and this was a frustrating irony—we were sourcing, buying, and roasting the highest-quality coffee in our history. In addition, the heart of our culture—its purpose and mission, our values—was still beating, albeit faintly.

  But there were problems. The question was, how were we going to fix them?

  Being a ceo during a turnaround situation was not something I had experience doing. My entire career had been about building something that had not existed, and, more often than not, having the wind at the company's back as we executed against our original vision. Now Starbucks needed another vision, and I had to come back with one. I had to come back leading. From day one, my return as ceo would have to resonate with our partners and shareholders as more than just a point of inflection. Starbucks had lost its point of view, and I needed to declare one, as well as a clear perspective about how we were going to change.

  But whom could I talk to? Until we formally announced the change in leadership to the company and shareholders after the holiday season, it had to remain confidential. At the same time, I had to plan. I needed people I could confide in. I needed objectivity and tactical guidance to ensure we did more than just announce that I was back as ceo, but rather that I was back with confidence and vision.

  Myron “Mike” Ullman was—and still is—Starbucks’ lead director and the chairman and chief executive officer of JCPenney. Mike is not only one of the most respected retail executives in America, having also led R.H. Macy and Company and luxury goods manufacturer LVMH Moët Hennessy–Louis Vuitton, but also one of the kindest people I have ever met. This rare combination of qualities serves Starbucks well. During this period, Mike proved a supportive confidant and counsel for whom I was grateful. He knew I could not speak to people inside Starbucks about the upcoming transition, and he strongly recommended I work with an outside resource, a firm in New York City that he had worked with for many years.

  In Manhattan I walked alone into a Midtown office building on Madison Avenue and took the elevator to the 19th floor, where Kekst and Company's offices were located. I sat in a conference room across from a tall, thin man with glasses whom I had never met. His name was Jim Fingeroth. When it comes to surrounding myself with people who can add value to the company, I look for experience and skill as well as people with like-minded values. I've always had a sixth sense about those who will be a good character fit, and as I began to explain the culture and values of Starbucks to Jim, I could see that this was someone who was going to understand and embrace them, as opposed to fighting them as someone else might. If Jim could not help me make changes in a manner compatible with the company's culture, and do so with a degree of sensitivity and humanity, then we would fracture our partners’ trust.

  I immediately felt comfortable with Jim. He was personable and smart, yet understated. As a principal of Kekst and Company, he had been with the firm for most of its almost 40 years, guiding large public companies and financial firms through crises, mergers, and abrupt shifts in leadership. Jim and his colleagues were often brought in by outside advisors, and they worked quietly with a board of directors or senior management, usually behind the scenes. During our conversation, he did not reveal any clients’ confidences. I noted his discretion. There was a reason I had never heard of the firm. Being under-the-radar is part of its value.

  Jim also had worked with and studied entrepreneurs, and he understood that the odds were against me. It is very unusual for a founder to be able to manage his or her company through all phases of its evolution, especially in a turnaround situation. He told me he had winced when he read about my leaked memo back in February 2007, and had been following the company's trials in the months since. I appreciated his honesty. At one point in the conversation, Jim introduced me to two of his colleagues, Molly Morse and Jeremy Fielding. I felt that Jim and his team were the right people to help me. Plus, he had been so strongly recommended by Mike that any trepidation I had about confiding in an outsider disappeared. I opened up, and we discussed in some detail the past few years, my mounting frustration, as well as my fears. Jim listened intently and asked important questions.

  I had a lot of questions for them, too. What did I need to do in the weeks ahead to hit the ground running come January? How and when should we announce the change in leadership to our senior leaders? How should we announce it publicly and talk about it with shareholders? I knew there would be mixed reactions to my return. Some people would celebrate it, while others would question whether I was the right person for the job. I asked Jim how we could minimize the inevitable disruption and angst, but at the same time let people know that things at Starbucks were going to change. And what was the best way to communicate the many changes I was already thinking about?

  One of my biggest concerns was how and when to inform Jim Donald. I dreaded the prospect of telling Jim. He is a good person, and I did not question his love for Starbucks. Upending his life was one of the most unsettling things I would have to do. In the coming weeks, Jim Fingeroth, Molly, and Jeremy would help me tackle these and other issues.

  When I returned to Seattle, I shipped the Kekst and Company team a box full of background information about Starbucks. They immersed themselves in our history, watching DVDs of past speeches, reading transcripts of annual meetings, reviewing past memos, annual reports, and press releases. They also read my first book.

  When they flew to Seattle for the first of several visits, I took them to Pike Place Market and to the original Starbucks store that had opened in 1971, 16 years before I bought the company and combined it with Il Giornale. As I walked in the door, I explained once again how it had captured my imagination more than 20 years earlier. We also visited several competitors, including some of Seattle's finest independent coffeehouses. Then I quietly brought Jim and his team to our support center so they could get a first-hand feel for the culture. The nine-story brick building just south of downtown Seattle was a former warehouse for Sears, Roebuck and Co's catalog division, and we had designed it to feel inviting and to inspire collaboration and community, much like a coffeehouse. Our kitchens have espresso machines. The walls are lined with art inspired by countries where our coffee is grown. Costa Rica. Guatemala. Kenya. As we walked to my office, through the playful maze of slanted hallways and exposed staircases, we passed coffee trees that grow year-round under skylights, a cupping room that hosts daily coffee tastings, and partners holding impromptu meetings on couches and chairs clustered throughout the building's open spaces. Again, much like a café.

  I hold most small meetings in my office around a large rectangular coffee table, and when Jim Fingeroth sat down on the couch he voiced a specific request.
Could I identify an internal Starbucks partner with whom he could coordinate? Someone I trusted, who knew our leaders as well as Starbucks’ operations, but whose role would not be compromised by the knowledge of what was to come.

  I sat back in my chair. There were many people whom I trusted and deeply respected. Two stood out as the most appropriate ones to confide in at the time.

  One day I asked Chet Kuchinad to join me for a cup of coffee.

  Chet was our number-two leader in partner resources at the time, and we had traveled together a great deal internationally. We often jogged together in the early morning hours through the streets of whatever city we were visiting. Back in Seattle, we would run at lunchtime, from our offices to Pike Place Market and back.

  Chet had regular access to the board, and he was familiar with our senior leaders, our operations, and our day-to-day performance. I had always been impressed by his business acumen. He also did not shy away from speaking his mind with respect and conviction. He had a habit of telling me any number of things that I did not necessarily want to hear. At first I had been taken aback, but I came to value it.

  During one of our runs, at a time when Starbucks’ stock was doing well, Chet said half-jokingly, “Howard, you are making people too rich.” Many Starbucks partners had seen their net worth grow as our stock rose and split several times over the years. “People are starting to think it will never end.” There was truth in his statement. With time, I came to see the arrogance that the wealth of the company, and its track record for success, had created.

  Whenever I spoke with Chet, I knew I was getting an honest perspective. That trait, coupled with his sensibility for Starbucks’ culture, led me to seek his help.

  I put down my mug and leaned forward. “I am coming back as ceo,” I told Chet. “I could use your help, but I understand if it puts you in a delicate situation.” Chet worked with and respected Jim Donald, and he understood the tension that had come to exist between the two of us. I did not give Chet much more detail. “Take the weekend to think about it.”

  On Sunday he called me on my cell phone. “Howard, I'm in.”

  The next day, we met in my office where, over another cup of coffee, I brought him up to speed and put him in touch with Jim Fingeroth.

  The other person I wanted to bring on board was Wanda. A lot of the work Jim Fingeroth, Chet, and I had to do in the coming weeks involved crafting press statements and internal communications that would be released the day of the announcement. I thought Wanda would be the ideal candidate to assist. She was no longer a Starbucks partner, but she understood Starbucks’ culture and my voice. After more than a decade of working together, I trusted her implicitly.

  Wanda and I hadn't seen each other since February, when we had discussed the leaked memo, and in December I asked if she would meet me for breakfast at Lola, a restaurant in downtown Seattle. We hugged hello and settled into a booth inside the narrow, bustling restaurant. Over coffee and eggs, I asked Wanda how her family was doing and what projects she was working on. I updated her on the kids and Sheri. Then I casually changed the subject.

  “Would you be interested in doing some work for Starbucks?” I asked, careful not to reveal the magnitude or nature of the project. “We might need some help at the end of the year with an announcement.” I was not surprised, but I was pleased when Wanda smiled widely and, without hesitating, said she was available and would be more than happy to help.

  I left Lola with a heightened sense of optimism. The team was coming together.

  Chapter 7

  Believe

  At the end of December 2007, I joined my family for our traditional trip to Hawaii. Family has always been the most important thing in my life, and this was the only time of year when the four of us took time out from our busy lives to reconnect. But considering what I had planned for the New Year, it was hardly a vacation for me.

  Every day I was on the phone with Chet in Seattle and Jim Fingeroth in New York, not only mapping out the logistics of the transition, but also planning for what would come in the following days, weeks, and months. There were no obvious answers, and together we thought through what a new management structure might look like and how a variety of people's roles had to change. One of the decisions I made was to eventually eliminate the newly created position of chief operating officer and, instead, to have Starbucks’ most senior leaders report directly to the ceo. I wanted a clear line of sight into every aspect of our operations, from supply chain to store design to everything in-between. Reshuffling, as well as eliminating, some of Starbucks’ leaders would be inevitable.

  Given that I had spent the past two years observing and talking about what was wrong with Starbucks, it was invigorating to plan for how to make it right. Ideas and priorities had been percolating in my mind for so long. We needed to reignite our connection with customers. Replace the bureaucracy with a more efficient organizational structure. Slow our US growth to a more sustainable pace while ramping up internationally, focusing on countries like China. We would also have to close some stores, although I did not know how many.

  My struggle, however, was with how to appropriately frame my priorities for our people in a manner that would instill confidence and elicit support while communicating that we could no longer do business as usual.

  Fortuitously, I spent time in Hawaii with Michael Dell, founder of the PC company Dell, who was spending his holidays nearby. Michael and I had been friends for many years, and only 11 months earlier he'd returned to Dell as chief executive, replacing someone he'd selected to run the company two years prior. Our parallel circumstances were a bit uncanny, and although our respective businesses—coffee and computers—could not have been more different, Michael, as a returning founder, had a unique perspective and insight about what I could expect.

  It was during one of our daily three-hour bike rides along the Kona coast that I first confided in him. “I think I have to come back as ceo.”

  Michael did not seem surprised, and together we talked through a host of logistical and strategic issues now in front of me: managing the Street, maintaining morale, the teetering economy and the drop in consumer confidence, as well as the trepidation that came with reassuming responsibility for day-to-day operations. We rode to Michael's house, where he walked me through the chronology of what he had done at Dell one year earlier and graciously shared the very documents that had aided his own transition.

  One tool stood out as particularly applicable to Starbucks. Michael called it the Transformation Agenda. Neither of these words was part of my or Starbucks’ vernacular at the time. But they resonated with me. “Transformation” spoke to the scale of change that Starbucks had to undertake, but with a positive connotation. The word “Agenda” provided an actionable framework. This was key. I was intent on demonstrating, right out of the gate, a sense of immediacy and precision in decision making.

  Yet just as the future of Starbucks was beginning to crystallize in my mind, its present circumstances were causing me great angst.

  Every morning in Hawaii, I checked the company's daily sales reports.

  It was extremely difficult for me to fathom what I was seeing. Starbucks was reporting negative daily comps—meaning our sales were down compared to the same day a year earlier—in the double digits. Our comparable store sales had been negative before, but never had I seen performance this poor, and so consistently. Sales were in free fall! Every day, around the country, fewer and fewer people were coming into our stores. And those who did were spending less money than in the past. Starbucks was hardly alone. That holiday season in the United States, consumer spending reached its weakest level in four years. Still, I felt helpless. I was on the phone with our people in Seattle asking for comps from every region of the country. The numbers were so bad I felt paralyzed. I simply did not know what to do with myself. I couldn't eat breakfast. I couldn't enjoy my family. I could barely move. It was as if everything I feared was coming true.

  As Decem
ber 2007—and our first fiscal quarter of 2008—came to a close, I knew that Starbucks would not make its projected earnings. I was not only coming back as ceo, but also coming back to hold the mantle after the company's worst three-month performance in its history as a public company.

  Immediately after the New Year, I returned to Seattle and reconvened with Jim Fingeroth and the few other people who knew of my return as ceo.

  There was a disciplined, almost chesslike approach to the work we did in the days leading up to the public announcement on Monday, January 7, 2008. As the cold winter rains and gray skies engulfed Seattle, we hunkered down around my dining room table, comfortably dressed in jeans and sweatshirts, and engaged in very serious discussions about what and when to communicate to a variety of audiences. These included Jim Donald; Starbucks’ most senior leaders; thousands of corporate and store partners; shareholders; the financial community; the business and consumer media; and customers who would likely come across the news online, in newspapers, or on television.