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

I want to express to you that this is not an interim situation for me. And I will tell you as I told the board that I'm in this 100 percent. My passion. My commitment. This is the most important thing in my life other than my family. This is 25 years of my life, and I don't like what has happened.

  It is not going to be good enough to go “back to the future,” but there is a piece of that past we need; we have to find and bring the soul of our company back, find our voice.

  Soon I'm going to share with the leadership team a restructuring of the organization, and I promise you I will do everything in my power to restore the company to the greatness we have known in the past. But understand that this is not a one-person job. We have to lock arms with one another and recommit ourselves to the things that are important.

  The worst thing that could happen is that you spread out with fear and trepidation. That's not the purpose of this meeting—the purpose is to be honest and open that we have serious challenges, and we need serious people to help solve them. And I commit myself to being in the front of the line leading the way.

  As I spoke, a flurry of internal and external communications was being unleashed. Just as the stock markets stopped trading for the day on the East Coast, our press release hit the newswires (“Starbucks Announces Strategic Initiatives to Increase Shareholder Value; Chairman Howard Schultz Returns as CEO”) and a memo from me (“The Transformation of Starbucks”) was e-mailed companywide. Simultaneously, the voice message that I'd prerecorded landed in every partner's voice mail and a letter to customers was posted on our website.

  Meanwhile, Nancy and Tim Donlan—my other assistant, who first worked for Starbucks as a barista in 1991 and, like Nancy, is an invaluable asset to the company—sent dozens of international vice presidents and the regional organizations that operated our stores in other countries an invitation to join me for a conference call. Nancy sent another letter to a collection of individuals who were not formally connected to the company, but were considered friends and family. Also, on the eighth floor, Valerie O'Neil and her team were busy scheduling one-on-one interviews with journalists, responding to media requests, and answering the questions that were flooding in from news outlets.

  Overall, the news we issued that day strove to balance humility about our missteps with self-assurance about our ability to self-correct.

  The open forum ended as open forums always do, with an opportunity for partners to ask questions. Nothing was vetted beforehand, partners were free to broach any issue. I surveyed the crowd, and one person raised a hand. His question was not about Jim, me, or the impending restructuring or new strategies I'd touched on. His question was about another elephant in the room. Competitors.

  That very day, The Wall Street Journal had run a front-page article about McDonald's move into the specialty coffee market and the effect it might have on Starbucks. At the time, only 800 McDonald's franchises in the United States served espresso-based beverages, and they were made by machines that automatically mixed espresso and milk. The offering would soon spread to all of its 14,000 US stores, accompanied by a sprawling, $100 million advertising campaign. McDonald's also had $1 billion in capital to reconfigure many of its stores into what it was calling McCafés.

  Starbucks’ ills were not the result of competitors of the likes of McDonald's or Dunkin’ Donuts. Yet, as the economy continued to put pressure on consumer spending, McDonald's would no doubt capitalize on convenience and price. And despite what we perceived as the stark differences in the quality of our brewed coffee and espresso drinks—Starbucks sources and roasts its own beans in its own roasting plants, while McDonald's and Dunkin’ Donuts outsource those processes—we could not ignore the fast-food chains.

  I answered the question. “We have never had a major threat from a national company that has the resources, muscle, and commitment that McDonald's appears to have to coffee—and we have to get ready.”

  The one thing we could not and should not do was dismiss the ability of any competitor to capture our customers. It was going to be hand-to-hand combat as we tried our best to differentiate ourselves in the marketplace. “I strongly believe that if we protect, preserve, and enhance the experience to the point where we really demonstrate that the relationship we have with our customers is not based on a transaction, that we're not in the fast-food business, and then let the coffee speak for itself, we're going to win.”

  We also could not allow competition to define us. We had to play offense, proactively defining ourselves by sharing the full story of Starbucks’ value proposition: Behind every cup of Starbucks is the world's highest-quality, ethically sourced coffee beans; baristas with health-care coverage and stock in the company; farmers who are treated fairly and humanely; a mission to treat all people with respect and dignity; and passionate coffee experts whose knowledge about coffee cannot be matched by any other coffee company.

  “If we can't do all that,” I concluded, “then shame on us and they deserve to take our business.” I hoped that fear of a company like McDonald's could actually motivate the organization, giving us something to fight against, someone else to point to, instead of just ourselves.

  A bit to my surprise, there were no other questions and so I wrapped up the forum with a heartfelt thanks and a final emotional boost. “We earned our respect and recognition because of one reason: the quality of our people. Thank you for all you've done in contributing to the success we have enjoyed. I ask that you do everything you can to support the new initiatives and help get this company back, find our voice, find our soul, and make our customers and partners proud to be associated with Starbucks.”

  There was a palpable, positive buzz in the air as I headed to a 2:30 p.m. conference call with financial analysts, a group that was sure to have no shortage of questions.

  Unlike the enthusiasm I was experiencing at our support center in Seattle, I anticipated a high degree of cynicism from some of the analysts and institutional shareholders who covered the company; they would come to the call with a preordained view that Starbucks’ cup was half empty given that our stock was down almost 50 percent in the past year.

  As I saw it, Starbucks had three primary constituencies: partners, customers, and shareholders, in that order, which is not to say that investors are third in order of importance. But to achieve long-term value for shareholders, a company must, in my view, first create value for its employees as well as its customers. Unfortunately, Wall Street does not always see it the same way and too often treats long-term investments as short-term dilution, bringing down the company's value. Adopting this mentality was, in large part, how Starbucks had become complicit with the Street: For the past two years in particular, we—and I say “we” because no one person had led the charge—chased the pace of growth by building stores as fast as we could rather than investing in sustainable growth opportunities. The top line grew fast, but in a way that, for a variety of reasons, was impossible to sustain, especially when combined with the macrofactor of a tightening economy.

  In the conversation with the financial community, I had to be careful not to perform as a salesman. I would not overpromise, but rather would be realistic about the problems at hand and that they would take time to fix. I was not coming back with a solution up my sleeve, but a road map and commitment in my heart to create long-term value.

  For about an hour, I fielded queries from financial institutions whose influence had the power to raise or lower Starbucks’ value.

  “Your [business] started to slow around the same time as other retailers’,” said Sharon Zackfia of William Blair and Company. “How do you try to disaggregate what's economic versus self-inflicted . . . and what do you think you have in your arsenal to protect the company [from the economy] going forward?” Few brands would be immune from the impending economic downturn. Consumer confidence had been declining since July, except for a slight rise in December after hitting a two-year low that November. I told Sharon—as well as everyone else on the call, which also included
partners, customers, and the media—that I would not use the economy as an excuse and that we would fight the economic headwinds and rising commodity prices by reinvigorating customers’ attachment to our brand and creating highly relevant new products.

  David Palmer from UBS asked if our new-product pipeline had some “triples or home runs” in it. “It seems like it's been a while since your innovation has resonated,” he said. David was right. During the past five-plus years, our new product offerings either had nothing to do with coffee or were simply line extensions rather than exciting ideas that had significant impact, such as Frappuccino and the Starbucks Card. I responded with what I believed to be true. “What we have to do [now] is bring new opportunities to the marketplace that are consistent with the heritage of the company.” I stopped short of offering details about what was on my mind. But I was thinking of something very specific.

  The billion-dollar question came from Joe Buckley of Bear Stearns, who essentially asked how we planned to grow the company at the same pace it had grown at in the recent past—20 percent top-line growth as a public company for 15 years—especially since we were going to slow new store openings in the United States. I did not have a specific, tactical answer for Joe that day. I had not come back as ceo with some silver bullet that would restore the company's value. But I had come back with a navigational framework for how we were going to do it. And faith. But Wall Street doesn't buy faith.

  “It's very strange to hear about so much change and not have it financially dimensionalized at all,” countered Deutsche Bank's Marc Greenberg. “What can investors, after hearing this call, really sink their teeth into? What about margins, profits, costs, improved returns? We're numbers guys, and you're not giving us any numbers.” Because Starbucks was in the so-called quiet period of the quarter—we were restricted in what information we could say publicly—there were limitations on how much detail we could provide before we announced fiscal first-quarter earnings on January 30:

  Let me try in my own way to answer this. I've been here more than 25 years. I've seen every aspect of the growth and development of the company, and I am dissatisfied, perhaps more than anyone else on this call, with where we sit today. I have as much at stake personally, as well as my own reputation. . . .

  I am here to say that I'm making a commitment and a promise that we are going to do everything we can to make sure that the relationship we have with you, from a financial standpoint, is one in which you will be a proud shareholder of the company and recognize that we're making the right strategic decisions over the long term and going to take decisive action to put in place those things that have not been done before.

  Had I polled the analysts that day about how they felt about Starbucks and me after the call, I would venture to say that most of them did not come away believers. In the end, my words to them didn't really matter. The financial community only cared about how we executed and performed in the months and years to come. They are numbers people and they wanted numbers, and I was intent on delivering. But it would take time.

  In contrast, my words to Starbucks’ partners that day did matter because they gave them confidence, the fuel required to execute and perform.

  Every communication Starbucks issued that day—the press release, the companywide memo and voice mail, conversations with partners, journalists, and Wall Street—included three strategic initiatives that Starbucks would immediately undertake. I had come up with them during my time in Hawaii over the holidays, when I'd had time to plan.

  First, Starbucks had to improve the current state of its US retail business. This was our burning platform. The US stores provide the bulk of the revenues for the entire business, approximately 70 percent in 2007. Plus, their performance molds perception around the world. We are a global brand, and what happens in the States never stays in the States. We needed to be more cognizant of that fact and to act swiftly to deliver flawless execution and improve economics at the store level. To do that, we would immediately slow the rapid-fire pace of new store openings. We would also evaluate and then close underperforming locations. This was dramatic. Never before had Starbucks closed more than a handful of stores.

  My second strategic emphasis was less tangible than the first but equally vital: We would reignite the emotional attachment with customers. Unlike other retailers that sold coffee, the equity of Starbucks’ brand was steeped in the unique experience customers have from the moment they walk into a store. The aroma. The sense of community. The familial relationships customers establish with their local baristas. And the pride they feel knowing that their purchases support our high standards and socially responsible practices. Reinvigorating the Starbucks Experience could provide the meaningful differentiation that would separate us from competitors.

  Third, we would immediately begin to make long-term changes to the foundation of our business, closely reexamining our organizational structure, including our leaders, and digging into operations, revamping in ways that would significantly reduce costs and improve customer service. Everything from information technology—Starbucks’ antiquated checkout system in stores dated back to the early 1990s—to our bloated supply chain was ripe for overhaul. The only sacred cows, the two elements I'd refuse to strip from the company no matter how much others pushed me, were our employee health-care program and the quality of our coffee.

  These three strategic pillars were not definitive keys to success, but rather a near-term navigational blueprint from which a more comprehensive, easy-to-understand Transformation Agenda would soon take shape. The pillars also gave meat to the announcement of my return as ceo, positioning the move as far more than just a transfer of power—it was the serious first step in the company's holistic restoration.

  The day had flown by, and before I knew it the sky outside my office was dark with the Northwest winter's early nightfall.

  I spent the final hours at work talking to journalists and partners and reading e-mails that had begun to come in. I was pleased to see congratulatory notes from shareholders and comforted by sentiments of support from friends and other CEOs. One e-mail included that iconic photo of James Dean walking in a rainy Times Square. “It's going to be lonely in the rain for a while, but you can make it,” a friend who understood this particular reality of leadership wrote. That type of encouragement meant a lot to me.

  Most of all, I liked reading the e-mails from Starbucks partners. Many welcomed me back, but not blindly, and were quite pointed in acknowledging the company's problems and my responsibility to address them.

  Sandi Torrente, a regional coordinator in South Florida, wrote:

  I am an eight-year partner who started as a barista and this has been a tough year. I have always loved my job, but this year, not so much! I watched tenured partners leave the company and my optimism has been whittling away. I know how hard our partners in the stores work. We would not have a job if it were not for them. But it saddens me when I walk into our stores and don't receive legendary service or a greeting. It is not the fault of the baristas working behind the counter. It is the responsibility of the leadership team to keep our culture alive, growing and thriving.

  It will be a long hard road back; I am proud to count myself among those willing to do whatever it takes. Thank you for providing me with an uplifting day!

  That evening I drove home alone.

  Passing the city's massive, hollow stadiums and rows of sleeping railcars, I felt humbled but also energized. Eager to get started. I'd had so much time before January to get my head around what needed to happen upon my return that I wasn't nervous, but instead antsy to act. Like a player who'd finally come off the bench, I was hungry to win, confident that we would, and grateful to no longer be so alone in that conviction.

  Chapter 9

  A New Way to See

  Feeling somewhat skeptical, I entered the large event space of Seattle's Palace Ballroom for a three-day brainstorming retreat being conducted by a consulting firm from San Francisco. Histor
ically, I was not a fan of business consultants. Rarely had I looked to outsiders to tell Starbucks what Starbucks needed.

  It was only weeks after I'd returned as ceo, and as I walked into the hotel's ballroom someone handed me a black Sharpie, a white iPod, and a packet of index cards. Instead of the murmur of small talk I was expecting, the dozen or so people already in the room, most wearing jeans and sweaters, were hushed. Following instructions, I clipped the iPod to my belt and put the earphones on. The familiar rhythm of “Come Together” was a jolt of joy on the chilly January morning. Interesting, I thought, and made my way to a large table covered with what looked to be a collage of posters. Familiar faces hovered over the table, each listening to his or her own music and scribbling notes on the cards. I leaned over to see what was so engrossing them.

  A Hard Day's Night.

  Yellow Submarine.

  Abbey Road.

  Meet the Beatles!

  Laying across the table were enlargements of more than a dozen bright album covers and photos from The Beatles’ remarkable career, which spanned a decade as well as musical genres. For the second time that morning I was pleasantly surprised. I looked down and read what was written on one of the cards I'd been given: “What does it mean to reinvent an icon?”