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Rekindling the Heart & Soul of Starbucks

Howard Schultz strives to restore financial health while maintaining the brand's special culture.
John H. Ostdick

Starbucks’ frenetic SoHo location in New York City is a blur of movement and sounds on a cold winter afternoon. Grinding coffee beans rattle loudly. A stream of chilled customers sweeps through, ordering double-shot espressos and white-chocolate mochas. Every chair and table is occupied. A documentary filmmaker waiting on a client sits next to an NYU student riveted to her laptop.

The coffee retailer’s de facto founder and CEO, Howard Schultz, sits in an upholstered chair squeezed into the shop’s front corner. He’s focused and unflappable, laying out the details of the company’s remarkable recent recovery. Given his Mr. Toad’s Wild Ride of the past two years, overcoming the distractions of a chaotic Starbucks is child’s play.

“These are very emotional days,” he tells SUCCESS, leaning forward in his chair. “This has been my life’s work, as opposed to a job. I didn’t come back to save the company—I hate that description— I came back to rekindle the emotion that built it.”

Schultz needed every ounce of leadership and drive in his tank to direct the two-year transformation of Starbucks, which he calls “the company’s holistic restoration.” Although he credits the “strongest leadership team that we’ve ever had” with resurrecting Starbucks’ fortunes, Schultz provided the blueprint and hammered away at the processes that brought it to fruition.

“When I wholeheartedly believe in something, I can be relentless in my enthusiasm, passion and drive to bring it to life,” he writes in his newly released Onward: How Starbucks Fought for Its Life without Losing Its Soul (Howard Schultz with Joanne Gordon, Rodale Inc., 2011).

That passion is evident as he becomes animated when describing his best day so far at Starbucks: In October, he announced healthy fiscal-year earnings and “that we were able to give a cash bonus to 100,000 people in the field, enhance the 401(k), keep health care and create tuition reimbursement, and that we in fact preserved the values of the company during our transformation.”

After 40 years, the Starbucks founder’s perch in the front window of SoHo, coffee cup close at hand, is as near to his origins as it is far away. His rise to success is etched into American entrepreneurial lore.

Forging a Will to Win

The Starbucks story, as he likes to say, starts with the cup of coffee. Schultz shares a common bond with his coffee beans of choice; highly stressed origins shape them both.

Most mass coffee producers use robusta beans, which are raised in predictable and mild climates and produce a higher yield per tree. Starbucks has nurtured a far-flung network of coffee farmers, concentrating on the more-costly arabica beans, which produce complex flavors. The best grow under some degrees of stress, like high altitudes, intense heat or long dry periods. Schultz likes to note that “only 3 percent of the world’s highest-quality beans are good enough to ensure that their flavors meet our standards.”

Born in the summer of 1953, Schultz grew up about 10 miles from this Starbucks SoHo location, “literally on the wrong side of the tracks in Brooklyn … where team sports were a chance, often our only one, to escape our cramped apartments and the stress of struggling families,” he writes in Onward. The dawn-to-dusk games, from baseball and basketball to punchball and slapball, forged a fire in him to win. “I always took big, bold swings. I wanted nothing less than a home run.”

The oldest of three children, Schultz escaped a government-subsidized housing unit through a football scholarship to Northern Michigan University, graduating in 1975 with a bachelor’s degree in business and marketing. He worked a variety of jobs until becoming manager of U.S. operations for the plastics manufacturer Hammarplast, during which time he became enamored with a small coffee bean retailer and roaster in Seattle’s Pike Market that purchased his products. After a year’s lobbying, Starbucks (named after the first mate of the whale ship Pequod in Herman Melville’s Moby Dick) hired him as its marketing director in 1982.

During a buying trip to Italy a year later, Schultz was struck by the “romance of the coffee and a sense of community that existed in all the coffee and espresso bars” in Italy. He began devising plans to bring a “front-porch” atmosphere to the American coffeehouse market. To do this, Schultz started his own coffeehouse company and then bought out his former employers, becoming Starbucks’ chairman and chief executive in 1987.

Schultz developed and expanded a caffeinated version of TV’s Cheers model—a “third place” of connection beyond the home and office where at least some people know your name—with the twin tenets of serving “a great cup of coffee” while building “a company with soul."

The company chose to buy and roast all of its own coffee. It also made a couple of unprecedented workplace decisions for retail— providing all employees working at least 20 hours a week with comprehensive health coverage, including coverage for unmarried partners, and introducing an employee stock-option plan. These moves boosted loyalty and led to low worker turnover. As a result, the company became a regular on “Best Places to Work” and “Most Admired” lists.

Schultz’s attitudes about the workplace were shaped by his own early experiences; when he was a boy, his father broke a leg and a hip, and his blue-collar job provided no health insurance. “I saw real despair firsthand,” Schultz told attendees at Maria Shriver’s Women’s Conference last October. “I wanted to make my dad proud by building the type of company he never had the opportunity to work for.”

Rapid Growth Obscures Problems

When Schultz resigned as CEO in 2000, the company seemed healthy, as Starbucks shops popped up on busy corners across the nation. Although he remained chairman, the company’s fortunes changed without Schultz at the rudder. An unforgiving economy that altered consumer behavior and some strategic missteps took their toll.

On Valentine’s Day in 2007, Schultz sent the company’s management team a memo titled “The Commoditization of the Starbucks Experience.” It was a frank assessment of what he thought ailed Starbucks. Schultz was devastated when someone leaked the memo, and it spread like wildfire on the Internet and then into the mainstream media. A former employee put the hard lesson into plain terms for Schultz: “Nothing is confidential,” she told him. “This is the new reality.” The experience would later shape the company’s aggressive move into social media communication.

In late 2007, Schultz, distressed that the company’s fortunes were getting worse, decided he must act. “Like a doctor who measures a patient’s height and weight every year without checking blood pressure or heart rate, Starbucks was not diagnosing itself at a level of detail that would help ensure its long-term health,” he writes in Onward.

While vacationing in Hawaii, he spent time with friend Michael Dell, who 11 months earlier had returned to the CEO chair at the company he founded. When Schultz told Dell he had decided to return as Starbucks CEO, Dell shared a document that had aided his own transition. Schultz latched onto his own “Transformation Agenda,” which became an important tool in reinvigorating Starbucks.

“One of the benefits I had in coming back is that I knew where all the levers were,” he says. “An outsider would have come in and cut everything to the bone—like health-care benefits, for example— because that was what everyone was doing [in response to the financial crisis], which would have fractured the soul and conscience of the company.”

Facing Immediate Challenge

When, in early 2008, Schultz officially joined the ranks of high-profile CEOs who returned to the helm of the companies they founded—such as Steve Jobs at Apple, Charles Schwab and Dell— the retailer was in crisis.

One of the first, and maybe most important, lessons Schultz learned was to be well-versed on “all the pieces” of the business his second time around as chief executive.

“I put this under the heading of hubris or entitlement,” he says. “Growth and success cover up a lot of mistakes for a while and produce a mentality that at times can mask truth. What I didn’t fully grasp is that the momentum, the stock price, and the size and scale of how much the company grew were camouflaging the underlying level of executional excellence. Like many things, these problems don’t show up right away. I had an innate sense; I could smell it, but it had not yet surfaced. If the organization were really honest with itself back then, people would have acknowledged that the company was calibrating itself on the wrong metric. When I came back and closed the stores for retraining [Starbucks closed its 7,100 stores nationwide for three hours on the evening of Feb. 26, 2010, to retrain about 135,000 in-store employees], it was a shock to the system and public admission that we needed to go back to the core

Schultz surmised that he couldn’t truly transform the company unless it returned its focus to the cup of coffee. “I had several friends call me and ask me if I was out of my mind to close all the stores at the same time for retraining,” he says. “I asked them if they had a better way to train 100,000 people. It proved another significant galvanizing moment inside the company, where people realized, ‘Not only is he back, but he’s dead serious.’ It came from love.”

As chairman he shared responsibility for the crisis Starbucks faced at the onset of 2008, and he had lessons to learn from the company’s errors, Schultz acknowledges. But the CEO’s No. 1 priority in his first weeks and months back on the job was to instill confidence in the company’s future. Without confidence, he knew, people could not perform.

“I started early on communicating to our people very frequently and actively both in person and print,” Schultz explains. “I had these things called Transformational Memos, and I started numbering them [he would send 15 such memos between Jan. 7 and April 15, 2008]. I wasn’t really smart enough early on to understand it, but the organization really needed to hear from me and needed to be reassured that I understood what they were experiencing, and also that I had a remedy.”

The Transformation Memos were informative, infused with optimism and conveyed a degree of transparency that unnerved some people. “I had people telling me at the time, ‘Howard, I think you are being too vulnerable,’ ” he says. “But I had an intuitive sense I had to be real.”

Just as no one thing had led to the company’s spiral, Schultz came to realize there was no silver bullet, no single cure that would trigger Starbucks’ resurgence. Even high-expectation, new-product failures such as Sorbetto, a yogurt-based summer beverage introduced in July 2008 and dropped about a year later, taught Schultz and the leadership team valuable lessons, he says. “My leadership continued to evolve, and, perhaps more than ever in my career, I was effectively balancing entrepreneurial vision with patience of execution, paying the same degree of attention to the back end of the business that I was hard-wired to pay to the front end.”

Poster Child for Excess

In many ways, Starbucks, more than any other company, “became this poster child for excess in the down economy,” Schultz says. “McDonald’s had billboards all over Seattle that said, ‘Four dollars is dumb.’ That didn’t make us very happy. I think that realizing that the rules of engagement involving consumer behavior were changing so rapidly, I was seeking answers, and literally no one had any. It was like flying an airplane without instruments.”

Schultz’s team had to make “significant decisions without perfect information, not knowing where the bottom was and without abandoning company values.” Two years ago, Starbucks was being forced to the middle of the market by low-end product offerings at McDonald’s and high-end independent coffeehouses. The middle was the worst place for his company, Schultz says.

“People perhaps smelled blood and thought Starbucks was on its ass and really not going to make it,” he says. “The headlines were ‘The Bloom Is Off the Rose.’ I sensed that our people had lost confidence, and the organization had lost its swagger. It was important that we didn’t feel sorry for ourselves; we allowed this to happen. We had to manage our way out of it. Some of the things I wrote about in the [Transformation] memos were that we were not going to let other people define us, that we could control our own destiny—not by just saying that we were going to but by doing the work. Through social media and the campaigns we created—VIA [the Starbucks instant coffee product] and loyalty and rewards benefits—we were able to define our brand and history.”

At a critical time in the company’s history, its founder provided a clear picture of what was expected of each employee.

“Whether you were a high school student or a Ph.D., you could read the Transformation blueprint and understand what the company was going to do and your role and responsibility in the process,” Schultz says. “My responsibility was to ensure the focus and discipline against these initiatives. People were waiting in the weeds inside and outside the company for us to say: ‘That’s just a piece of paper, it means nothing.’ That piece of paper became the law. We kept referring to it and measured everything against it. When I walked the halls of Starbucks, I’d see it on people’s desks or on their computers. It became powerful.”

Schultz admits the experience was humbling. “I couldn’t maintain the same level of style and leadership in the middle of this perfect storm,” he says. “It required a different level of sensitivity and discipline. I think transforming a company requires immense discipline in terms of focus and priorities, and almost an intense calm of emotions. You go through one day, one week, and it seems like a year. As a public company, everything we wanted to do or did had public discourse.”

In July 2008, he agonized about having to close 600 stores, all the more maddening because 70 percent of these stores had opened in the previous three years when the company had opened 2,300 locations during its go-go growth strategy. “We were closing almost 20 percent of our newest stores,” he writes in Onward. “We thought all we had to do was show up to be successful…. A lesson resonated … the only number that mattered is ‘one.’ One cup. One customer. One partner. One experience at a time. We had to get back to what mattered most.”

Under Siege and Under the Gun

As blogs and the mainstream media hammered away at how Starbucks had lost its way and relevance, and how its best days were behind it, Schultz was bombarded with what he considered unacceptable suggestions on how to turn his ship around. Reduce the quality of the coffee. Sell the company. Cut out that expensive health-care plan.

Nevertheless, he knew he had to permanently remove “tens of millions of dollars” from the business. Operational improvements would help, but layoffs were inevitable. It was a searing process for a company used to unbridled growth.

Schultz describes his lowest point with Starbucks: The night before the company announced layoffs for the first time in late July 2008, he asked for a list of everyone they were laying off, “and I went through every name respectfully so I could stand in front of everybody the next day when we met with employees and say I combed through every name,” he says. “It was a brutal evening. I knew we were fracturing a lot of people’s lives.”

The pain and challenges worked to strengthen Starbucks’ core. “During the transformation, when all the pressures—media, Wall Street, competition, customers—all lined up against us, there was almost a feeling of us against the world,” he says. “It gave us an internal feeling of conviction. You have to have the right strategy, the right people around you and a little luck. Certain moments in the transformation had a type of galvanizing topspin associated with them we didn’t understand at the time.”

One such transformational experience occurred at a leadership conference for Starbucks’ North American district, regional and store managers. In light of the company’s struggle and a Wall Street meltdown in the fall of 2008, there was mounting pressure to cancel the conference, but Schultz pushed onward.

From the time a marching band greeted company “partners” at Louis Armstrong New Orleans International Airport until its final session, magic pervaded the conference, Schultz says. Starbucks personnel met in strategy sessions and bonded in community service activities. The company brought $1 million in shovels, hammers and other supplies in two rental trucks. Employees spread out throughout the city, contributing more than 54,000 volunteer hours, among other things, by planting 6,500 plugs of coastal grasses in City Park, painting a badly damaged local stadium, constructing playgrounds, cleaning 22 city blocks of street and storm drains, helping to paint 1,350 murals at 25 public schools in one day and planting 1,040 trees. U2’s Bono greeted the ranks to announce the company’s new (RED) partnership to fight HIV and AIDS in Africa.

“The power of this company is you,” Schultz told the gathering. “We need to recognize as leaders that, unlike any time in our history, this is a seminal moment. This is a test…. Please remember what you have experienced here. Remember how you felt. And when you get back, please do not be a bystander.”

Schultz calls the New Orleans event “a signifi cant part of what we have accomplished.”

“At the height of the cataclysmic financial crisis, we decided— against the advice of others and despite outside criticism—that it was imperative we meet with the company’s most important leadership group, our 10,000 store managers,” he says. “Every municipality in the country wanted us, because no companies were traveling at that time [because of the economy]. We picked New Orleans for obvious reasons. We wanted to give back to that community post-Katrina and remind and rekindle the organization with the values and guiding principles of our company before we did a stitch of business.”

Beyond that, Schultz says he just instinctively knew he had to communicate in the most heartfelt, transparent way—even demonstrating his own vulnerability—what was at stake and what he needed from them, and then ask them for their personal accountability and responsibility. “I think people were a little unnerved by the honesty,” he says. “One of the real lessons I share from this experience is that people need the unvarnished truth. I think perhaps that most CEOs don’t either feel confident enough or they’ve been conditioned not to be that open. I think the openness allowed people to be part of the solution rather than being outside of it. I honestly believe without that seminal event we would have not been able to transform the company and do it so quickly.”

Schultz says another reason the transformation happened so quickly was that “our people and our customers were hungry and wanted Starbucks to succeed. The brand was much more resilient than the outside world realized. The experience we created in this store almost became more relevant during the crisis than less because we brought people together.”

Commanding Specific Skills

The transformation of Starbucks wasn’t without miscalculations, Schultz admits. “I think one of the great personal lessons I learned early on, when I was convinced there was a silver bullet out there that would turn us around, was that there is never one thing that creates a level of sustainable success. That was an error I made.”

But throughout the process, Schultz sought to minimize missteps by leaning on the counsel of trusted voices, both within and outside the company.

“I’ve solicited outside views throughout my career,” he says. “The role and responsibility of a public CEO has changed dramatically over the course of our [Starbucks’] public life—the demands, public requirements, shareholder relationships and the general work. You become so close to it, so intimately involved with it every day that getting outside perspective and insight, not only about the work but also about thoughts and ideas you have, is extremely valuable and critical. I’ve also brought people—such as Jim Sinegal of Costco, who I think is one of America’s best CEOs— in to speak to the team. It helps the team understand that we don’t have all the answers.”

In Onward, Schultz writes that he believes effective leaders share “two intertwined attributes: an unbridled level of confidence about where their organizations are headed and the ability to bring people along.” In most cases, he believes these skills are both innate and learned.

“Where I grew up and how I grew up imprinted me with a set of life skills,” he says. “I’ve been able to refine those skills over the years through building a company and the life experiences I’ve had. Age also gives you a little bit more wisdom and less emotion and bravado. I don’t think everyone is born to be a leader or taught to be one. What’s most important, though, is that the style of a leader or CEO is based on who you are; it cannot be prescribed. You have to be comfortable in your own skin and know who you are.”

To succeed, Schultz also says he had to understand he needed help. “I had to attract world-class people who had a skill base beyond my own, who had like-minded values and who could help me transform the company. One of the reasons the company has been so successful is that this is the strongest leadership group the company has ever had. [Only two people on the senior team remain from Starbucks’ early days.] And you have to share the stage.

That leadership team implemented dramatic cost reductions and process improvements. It nurtured better beverages through espresso training, the Clover brewing system that Schultz believes delivers a more authentic coffeehouse experience, and new popular products and processes including Seattle’s Best Coffee, Pike Place Roast and VIA. It developed successful value offerings and loyalty programs. It introduced lean thinking and fresh, relevant store designs. It promoted better customer service, brought tastier and healthier food into Starbucks’ locations and developed a strategic social networking platform that has become a corporate champion. “It’s not an accident that Starbucks is the No. 1 brand on Facebook and Twitter,” Schultz says. “We’ve used that to engage with our customers in a much more real, authentic, emotional way. It’s lowered the cost of customer acquisition and built customer loyalty. Embracing the status quo is a death sentence for any business today.”

Schultz says his leadership team’s responsibility is to provide its people with tools and resources, as well as a clear focus on priorities.

“We need to keep focusing priorities and then recognize and reward behavior at all levels of the company that provide the kind of execution we’re after,” he says. “One of the great things I’ve learned over the years is that Starbucks created something that has universal appeal around the world. If you are French and working in our store in Paris, or Jordanian working in our store in Amman, as an employee or partner in Starbucks you want the same thing—to be respected and valued, see that there is a path for career development and truly believe in the company’s mission. That’s not about being big or small. That’s about creating the right dialogue within the company and rewarding people for their efforts.”

Looking Ahead

Now that Starbucks is recovering from its painful transformation, the team, which is operating more than 17,000 stores in 50 countries, is overseeing a different kind of location growth. In January, the company unveiled a new corporate symbol that drops the Starbucks nameplate that had encircled its iconic sea nymph logo, signaling its international push and product expansion.

“The store base is going to be significant outside of North America,” Schultz explains. “I just returned from China, where the opportunity is going to be significant. We’re also facing an ongoing strategic process as we grow another business—the CPG [consumer packaged goods] growth in the food and grocery channel—within Starbucks.”

Market analysts reacted to the company’s late 2010 presentations favorably. “Starbucks’ analyst day reinforced many of our thoughts about the firm’s impressive transformation over the past two years,” Morningstar stock analyst R.J. Hottovy wrote in early December, “as store closures, in-store efficiencies, supply-chain improvement and technology investments have helped operating margins rebound to record levels. More important, we left the event with more conviction in Starbucks’ ability to evolve from a predominantly retail business into a well-diversified consumer packaged goods—or CPG—and retail platform.”

Like return-CEOs before him, Schultz is often asked about what happens when he once again relinquishes his position. It’s certainly not imminent but an issue that he has given signifi cant thought.

“The success of the transformation will not be realized if the company and I don’t get succession right this time,” he says. “I personally added to the problem we had with succession. [Former CEO] Jim Donald was a great hire and a great guy, but he was just not in a position to succeed for a lot of reasons. This time around, we will get that right.”

Part of the reason he is successful is that Schultz takes his business very personally. He admits to confronting people he knows when he catches them with a competitor’s product in their hands because “it pisses me off.”

“I don’t believe you can succeed in business if you don’t take it personally,” Schultz says. “Everyone needs to take our business personally. I think the way I put it in New Orleans is that if you see something that is inconsistent with quality at Starbucks and you ignore it, not only are you part of the problem but you are doing a disservice to the person you are working next to.”

The key, he says, is absolutely loving and believing in what you are doing.

“I think I’ve done my best work in the last two years, but I’m not a glutton for punishment,” he says, laughing at the notion. “I don’t live for doing things against all odds in these situations, but I think people who work with me or for me would say that when Howard was against the wall is when he did his best work. I think it goes back to my childhood, the survivor in me.”

Sitting in this SoHo Starbucks, dressed in a well-tailored dark suit, so close to those childhood battles, Schultz allows, “There aren’t many days go by that I don’t think about how fortunate and blessed I’ve been.

“If I took you to where I grew up, the odds of getting from there to here are more than a million to one, but it does show the American Dream and the possibilities that still exist in this country,” he says. “I meet people all the time who know my story, and I try to share with them that this is not a Hollywood movie, that I am not smarter than anyone. I don’t have a Harvard degree. But I put myself in a position to win, and it can happen.

“With this economic environment, people seem to be beaten down. I try to tell them, ‘Please don’t stop dreaming about what is possible for yourself. In fact, dream bigger, because it can take place.’ I realize I’m in a position that I couldn’t possibly have predicted for myself, and I don’t want to take it for granted. I also want to make sure I share that with as many young people as I can.”

 

When a Cup of Coffee Still Cost $2

Check out more from Howard Schultz in our SUCCESS Archives: Miracles of Marketing.

Post date: 
Mar 6, 2011

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