World Changers

In December of 2007, Howard Schultz was vacationing with his family in Hawaii when he ran into Michael Dell. Less than a year earlier, the founder of what had become the world’s largest computer company had returned to Dell as chief executive, replacing his handpicked successor. Now Schultz, who had given up his job as CEO of Starbucks seven years earlier, was thinking of returning as well.

The once high-flying companies they founded were both struggling and in crisis, just as Apple Computer was when Steve Jobs made his return to the company he had cofounded with Steve Wozniak. Schultz found their parallel circumstances a bit uncanny, even though their respective businesses, coffee and computers, could not have been more different.

During a three-hour bike ride along the Kona coast, Schultz confided to Dell that he had become increasingly distressed over Starbucks’ deteriorating position. For the first time in its history, the company was consistently reporting negative daily comps—falling sales from existing stores—in the double digits. Every day, fewer people were coming into Starbucks’ stores and those who did were spending less money than they had in the past.

“The numbers were so bad I felt paralyzed,” Schultz would later say. “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.”

Two of the world’s most famous entrepreneurs were now meeting regularly while still on their family vacations. Dell was advising Schultz on how to manage Wall Street if he decided to go back into the job and how to maintain morale in a company that was clearly losing its mojo. One day the pair rode back to Dell’s house where he walked Schultz through a narrative of what he had done since his return, pulling out memos and documents of detailed plans to turn Dell around.

By the time Schultz left Hawaii for Seattle, he knew he was going to fire then Starbucks CEO Jim Donald, who had been recruited for the job from Walmart, and assume the leadership of the company he had once made great. But could Schultz do what Steve Jobs had already done? Could he really return in the top job to a much larger yet troubled company and bring back the magic he had originally created? After all, the Starbucks he knew had been almost a fairy-tale story of entrepreneurship and Schultz was as much a part of the fairy tale as anyone.

He had grown up poor in the projects of Brooklyn, New York, paid his way through college, and moved to Seattle to take a job as head of marketing for a small company called Starbucks. In September of 1982, Schultz began work in the first Starbucks store in Pike Place Market, scooping fresh beans for customers and sealing them in small bags.

On a business trip to Italy, he fell in love with the small espresso bars in Milan and Verona, marveling at their ability to connect people and create community over a simple cup of coffee. When he returned to the States, Schultz was determined to bring the romance of Italian espresso bars back with him. He left Starbucks to strike out on his own, opening a pair of espresso bars called Il Giornale.

In 1987, Schultz found himself in a position to buy his former employer Starbucks out. With the support of a few investors, he merged his stores with the six Starbucks outlets and kept their name. By the end of the first year, he had eleven stores, one hundred employees, and a dream to create a national brand.

By the time he left the job as CEO in charge of day-to-day operations in 2000 to assume the role of chairman, Schultz had built Starbucks into a company with annual revenue of nearly $2 billion. Since 1992, Starbucks had achieved a compounded annual growth rate of 49 percent. More important, though, it had dramatically changed the consumer’s relationship with coffee, re-creating with a lot of American marketing pizzazz the espresso bar experience that had inspired Schultz in Italy years earlier. It also had become a model for what a good business could be: Schultz had made Starbucks the first U.S. company to offer comprehensive health-care coverage as well as stock options to part-time employees who worked at least twenty hours a week. The company had become an American icon.

But when Schultz went on his bike rides with Dell in Hawaii, the recession was beginning to take its toll—and so was the company’s rapid growth rate, which led to an overexpansion and unprofitable stores. The company that Schultz would return to as CEO was a $10 billion company, five times larger than the one he left, with more than seven thousand stores in North America alone. But it also was a company in a deepening crisis as sales continued to plummet along with profits—and the company’s stock price.

Among the many things that Schultz would do to turn Starbucks around, the most agonizing and painful decision came six months after his return: he would shutter some 600 underperforming stores—8 percent of its U.S. company—owned and—operated outlets—and eliminate 12,000 positions. Starbucks would have to take a $340 million charge to shut down the stores. Shockingly, seven out of ten stores he was closing had been opened in the past three years, when Starbucks expanded to an additional 2,300 locations.

Within a week of the announcement in early July of 2008, the company’s stock fell to a fifty-two-week low. Wall Street and much of the media had written off Starbucks as dead, a victim of a deep recession that had changed consumer habits forever. But Schultz couldn’t and wouldn’t believe it.

The lowest point would actually come in December of that same year, on the evening before he had to face Wall Street analysts in New York to give them still more bad news. Schultz confessed to a friend that he thought the stock could drop to just $5 a share, making the company vulnerable to a takeover. The thought occurred to him that he could easily lose the company to someone else. That scenario never played out. Instead, the game plan he put in place not only would turn the iconic chain around, it would restore the company’s lost values and culture as well.

Howard, at the very height of the company’s troubles in 2008, less than four months after closing hundreds of stores and losing thousands of employees, you did something that many thought was pretty strange. You spent more than $30 million on, of all things, a company retreat. Why?

We certainly were in a crisis mode. Despite the external pressures to do things that were not consistent with the values and culture of the company, I felt we had to go back to the core purpose of what we stood for. We have always been a people-based business. Unlike almost any company, we have no secret sauce, no secret technology. Anyone can open up a coffee store. The essence of our company has always been the guiding values and principles.

From the very beginning we always believed that the only way we could exceed the expectations of our customers was to exceed the expectations of our people. So given the external pressures, the cataclysmic financial crisis, it was time to return to the intimacy of communicating directly with our people, galvanizing our organization against a core purpose, and asking our people to understand what was at stake.

We needed their personal commitment. If we got it, I believed very strongly that the equity of our brand and the loyalty of our customers would return. But without their understanding of the issues and a reinvestment in them, we could not do this. Candidly, I came under significant pressure from institutional shareholders who began to hear about this conference. This was an extremely expensive event to organize.

Every municipality in the country wanted this event because tourism was over. People were not traveling. We went to New Orleans because it was so fitting for us to go back there and demonstrate to ourselves and to that community the essence of Starbucks’ original business plan: to make a profit and to balance that, though it is hard at times, with a social conscience.

While we were there, we donated fifty thousand hours of community service. There wasn’t a press release. It was not marketing. It was really authentic. It began to build the foundation for the comeback of the company. We would not be here without having demonstrated our recommit-ment to our people.

Let’s go back to ten months before the event when you came back as CEO in January of 2008. You are, along with Steve Jobs and Michael Dell, three of the greatest entrepreneurs of our generation. All of you were drawn back to your companies because each of you profoundly believed that what you created could completely disappear. But the big question was, could you actually bring it back? How did you know you could really make a difference?

I’ll introduce a word that is not commonly used in business but it’s so truthful to me: it’s love. When you build something from the ground up and you have so much at stake—the legacy, the respect, and the responsibility of *200,000 people and their families—it’s very hard to watch it drift. I knew it needed a new level of nurturing.

I came back because I felt very strongly that the company required not a set of business principles, but it needed love and nurturing. We also had to remind people why Starbucks was great. In many ways, the growth of this company had been fantastic—fifteen consecutive years of positive comp store sales, almost 6,000 percent growth in terms of the stock price. It was the darling of Wall Street. We could do nothing wrong.

And all of a sudden, not only did we hit the wall, but there was a death march from the media and the financial analysts who said Starbucks’ best days are over. I just could not under any circumstance allow that to happen. Not that I am some healer, but I felt I had an unusual understanding of the issues and the circumstances that created the problems, and that I could bring back a group of people to solve those problems. And I felt that literally we would be a better, stronger company for having gone through it. Because we had to admit to ourselves that mistakes were made, and some of them were self-induced. And we did develop a new muscle, a new discipline in the company that would be permanent.

The fact that I came back is not an editorial about Jim Donald. At the end of the day, the weakness that occurred was not his fault. It was ours. We did not do a very good job of having a successor ready from inside the company. It presents a very steep challenge for someone outside when things start going awry. The commitment I’ve now made is that I want to see this through and I am here for the long term.

Jim Collins has said a lot of companies go through five stages of decline. The first is hubris born of success. The second stage is the undisciplined pursuit of more. The third stage is denial of risk and peril. The fourth stage is grasping for salvation, and the fifth stage is capitulation to irrelevance or death. Starbucks certainly went through several of these stages. What stage did you think the company was in?

I have a lot of respect for Jim Collins, but I would rather put this in my own words. We were simultaneously dealing with five different theaters—not stages. The first theater was we had to admit to ourselves and our people that there were self-induced mistakes, whether they were real estate mistakes or issues around growth. And we had to own them. We had made some very critical decisions that were not correct. We had to admit it. Fix them and cleanse ourselves of those issues.

Two, at the exact same time when we were going through these errors of judgment and decision making, there was a cataclysmic financial crisis. And Starbucks, unbeknownst to lots of people, was a leading indicator of the downturn and recession. We started feeling it very early and in many ways we had to make decisions without perfect information. We were navigating through a financial storm that we did not understand. No one did.

The third thing was we had competition. We had never had competitive pressures before. All of a sudden, McDonald’s was announcing that they were going to spend a billion dollars in capital to build McCafés and put $100 million in advertising behind them. And the world decided that McDonald’s was going to kill Starbucks.

The fourth theater might surprise you. For whatever reason, the Web and the bloggers started using Starbucks as the poster child for excess in the economy, and the Web became a method in which consumer confidence and confidence in our own people weakened and damaged the equity of the brand.

And the fifth issue was, how do you preserve the integrity of the most valuable asset in our company: the values and culture of our people at a time when we had unbelievable pressures and had to make tough decisions?

Any one of these issues could have done serious damage to the company. In the end, each one of them was dealt with and we really overcame them. The Web is a great example. Starbucks is now the number one consumer brand on Facebook. It’s the number one consumer brand on Twitter. We’ve turned the Web into an advantage in which the social media of the company has become an art form.

And McDonald’s made us better. The more they advertised, the better we got because people saw there was a big difference. And it also brought up a little bit of fear and courage in us. Competition is not a bad thing. The turnaround occurred because of our belief in the values of our company, the core experience that we’ve created, the quality of our coffee, and what we stand for.

The worst thing we could have done is thrown some Hail Mary pass that other people were suggesting: whether it was to license and franchise the system, break up the company, or end health-care coverage for our part-time employees. We are spending $300 million on health care a year to cover the health insurance of every single employee. We were the first company in America to provide comprehensive health insurance to part-time workers. We got enormous pressure for at least two years from people on the outside saying, “Howard, this is a fantastic time. You have all the cover in the world to cut that benefit.” I wouldn’t do it. The investment that we make in our people has to be consistent and actually has to be more in the future than it has been in the past.

That is just another counterintuitive decision you made. First, you spend millions to bring thousands of people to New Orleans for a company retreat when the company is in total crisis. You refuse to cut health insurance to your part-timers when many analysts believe you didn’t have the money to continue to pay for it. And then you close all your stores for an afternoon at great cost to retrain your baristas. Why did you do that?

Let me go back to the first theater: an admission of guilt. I couldn’t face myself or our people and ignore the fact that I believed we were not doing as good a job as we once did in making a perfect cup of coffee. I felt the growth of the company in many ways had covered up that issue. I wanted to go back to the earliest days. We literally closed every single store in an afternoon at great cost—lost sales and unbelievable labor costs. The media and the financial analysts again said, “This guy is out of his mind. The board has got to act. It’s got to get him out of there.”

But I felt we had to go back to the roots. I stood up in front of all of our people and said, “We’ve been operating at too lofty a place. The success of the company has been great, but have we earned it? Are we as good as we think we are?” I didn’t think we were. I wanted to get back in the mud. I wanted to get dirty. I wanted us to get back to the roots of our business, closer to the customer. And every time there is an issue I want to deal with it. I no longer wanted us to ignore any of the signs that caused our problems. I started traveling the world and having listening tours with customers. We started closing stores at night and had open forums with customers behind closed doors. I asked, “Tell us what we need to do that we’re not doing.”

What I learned, first off, is that our customers really wanted us to win. They had such respect for the company. There is a large reservoir of trust around the values of the company. Our customers know we provide health care to our people. They know what we’re doing with Product Red and how much we’re giving back to Africa. They also know, though, that there are lots of people selling good coffee across the street. And if we don’t measure up, they might go somewhere else.

I also learned that despite the growth and ubiquity of the company, it was critical for us to be locally relevant. We were once great at that. We now needed to create a new level of decision making and flexibility on a local and regional level where our stores can really be community based and we’re not seen as this large company—but rather a company that is large, doing great work in the local community.

One of the things you’ve had to do on this journey back is to do something you had never done: to close stores and lay people off. How hard was that for you personally and for the company?

The one thing I started doing early on when I came back was to communicate at multiple levels in all different ways with great transparency. Whether it was physical meetings, visiting stores, e-mails, voice mails, writing memos to our people, I was constantly trying to put them in a place where they really knew how much I cared and what were the issues and challenges we had as a company. I set the stage for the fact that we were beginning to have to face the issues that we had with underperforming stores. One of the tragedies of self-admission is that we had open stores that needed to be closed but the majority of the stores had been open less than two years.

When I first realized that, I was sick. How could we open stores and within twenty-four or thirty-six months have to close them? But the truth is, we had stretched the brand beyond its demography. Once the financial crisis occurred, those stores were no longer relevant. Closing those stores meant that we had to lay off people. Fortunately, lots of those people were able to find jobs in existing stores. But we also had to lay off a significant amount of our workforce in our support center, where we employ four thousand people.

The day of the layoffs we had a companywide meeting. I didn’t do this behind closed doors. I stood naked in front of every single partner in the company, and I truthfully said this is the hardest day for me in the history of our company. But in order to secure the future of our company, we have to make these decisions. I promised people we would do this with compassion, respect, and dignity, and they could hold me accountable to that, but these decisions had to be made. It was a very, very tough day. At the core of the equity of the Starbucks brand has always been a large reservoir of trust from our people, and in many ways that trust has transferred to our customers. The only way we could make these decisions, as tough as they were, was for everyone to understand the unequivocal, unvarnished truth. Though they were upset and concerned, the one thing they had to say was that Howard is telling us the unvarnished truth.

I don’t have a great answer for that other than to tell you that the people of Starbucks rose to the challenge. New Orleans served as a great foundation of bringing people together and working toward a common goal. Michael Dell helped me with this early on because it is something he had done. We created a blueprint called the Transformational Agenda. This wasn’t something that was held by ten people or fifty leaders in the company. We handed that blueprint out to everyone at Starbucks so they could understand the strategic objectives and how they related to each person’s role. It gave people a blueprint for success.

You have to provide people with hope and aspiration. Against all odds, the resurrection or the transformation of Starbucks was also linked to a tremendous amount of innovation. That innovation has gotten our people so excited again. It reminded them of what the early days of Starbucks were like. What I said to our people is, “We have to remember what it was like when we opened one store and were fighting for survival. What it was like when we couldn’t make payroll. What it was like when we had vendors who we couldn’t pay and asked them to hang with us.”

True. It wasn’t enough to embrace the status quo of the old days. We had to link the heritage and tradition of Starbucks with a new day, a new level of innovation, and a new way of thinking.

All of this has also meant that you had to reinvent yourself. You had to change from being a highly creative growth guy in the go-go years to someone more nuanced, who now had to manage a fairly large company in trouble.

I haven’t changed. I am the same guy, the same entrepreneur, pushing for self-renewal and reinvention. However, the reality of the situation demanded a new level of personal discipline. The rules of engagement had so significantly changed that we had to refine our strategy. We also had to understand that the old way of doing things had to be challenged. There had to be creative tension in the room. We needed a level of conversation about how we were going to market and how we were going to take costs out.

We took out $580 million of costs in 2008. Some 90 percent of it has been permanent. None of it is consumer facing. That was there for many years. Why did it take a crisis to allow us to have the courage to do that? So I wouldn’t say I changed. The environment created a new playing field. You had to adjust your style and decision making in order to survive and succeed.

I was going to be damned if I was going to allow any coffee maker on the planet to take away what we created. Every single day in my office what I thought of was the 200,000 people who worked for the company and their families. They were relying on their leaders to preserve and enhance the company.

You’ve also taken cost control and applied innovation to that. One of the most surprising stories involves how Starbucks was losing tens of millions of dollars by pouring steamed milk down the drain. Someone thought of an ingenious way to end that practice and save the company a lot of money. Explain how that happened.

You wouldn’t think a steaming pitcher could be sexy. But it became very sexy at Starbucks. We don’t want to re-steam milk because it doesn’t create a good-tasting beverage for our customers. So invariably, for the past forty years, we would pour out the remaining milk after we made someone’s latte or cappuccino. It was just common practice.

Someone starting to do the math on this said when we looked at every line item of cost control and cost containment, we have to go after dairy. It’s almost impossible to hedge against dairy, so we started looking under the hood and we discovered this problem. An ingenious idea was to create a serrated internal ring inside the pitcher that would guide how much milk to put in for one or two cups of coffee. We stopped pouring out milk as a result of that little idea, which turned into a major opportunity to save money.

There was no efficiency at Starbucks. We were flying high without instruments. I say that with a smile but we shouldn’t be proud of that. But growth and success cover up a lot of mistakes. It’s hard to look in the rear-view mirror when you are looking forward all the time. We were opening so many stores in so many markets, and everything we did for fifteen consecutive years worked. So no one ever said anything about these kinds of issues.

You know, it’s never one thing that creates success. It’s never one thing that causes a problem. But it does take a laser focus on what’s important. The strategy now is to push for new levels of innovation and maintain the discipline and financial muscle of not allowing creep into the company’s cost side.

Another good example of innovation is Via, the instant coffee you launched in 2009. There’s a great story about the person who walked into one of your stores one day with a powder that he asked your store manager to try out. It was his formula for instant coffee that tasted like Starbucks. How and why did you decide to launch an instant coffee in the middle of the company’s crisis?

His name was Don Valencia and he was an immunologist. He lived in Sacramento, California, and every time he went on vacation, he would go into his lab and try to crack the code on making an instant version of Starbucks. Twenty years ago, he walked into our store in Seattle, gave it to a store manager to taste, and she was blown away.

A few months later we hired Don Valencia to head up R&D at Starbucks. I should tell you that twenty years ago no one at Starbucks knew what the letters R&D meant. He created R&D at Starbucks, but was never able to commercialize the product for the scale of the company. It always broke down. He was able to do a number of other great things, including creating the core ingredient in bottled Frappuccino and blended Frappuccino. Don retired eleven years after being with the company, devoted his life to the church and Habitat for Humanity, and unfortunately was diagnosed with cancer and passed away.

When I returned as CEO I asked the now large R&D group to resurrect Don’s work. Six months later, they literally brought me a patent pending process that replicated the taste, body, and acidity of a Starbucks cup of coffee. Again, the media jumped all over us and all over me. It was billed as “Another desperate move by Howard Schultz to save Starbucks. The board has got to take this guy out!”

But this is a $21 billion global category within our core business. There was no innovation to speak of for over fifty years. It was a category dominated by one company. And we thought we could crack the code on not only the taste and profile of a cup of Starbucks coffee, but also successfully bringing it to market. It’s been a big success. It’s turned into a new growth platform for the company.

I make morning coffee for my wife before I leave, and I would always say, “How’s the coffee?” I served it at dinner parties as well. But I would never tell anyone. People loved the coffee and my wife could never tell.

The conventional wisdom of launching an instant coffee product would have been to take it to where it is sold: the grocery channel. If this product is going to have any chance of succeeding, it has to be embraced by our people first. The first opportunity we had was to convince everyone in our stores that this was good coffee. We didn’t try to sell them, but we did have rallies all over the country to introduce the coffee, tell them the story, and make sure they believed it performed in the cup.

We had many products over the years and they only failed when and if our partners didn’t accept them. When they reject something, it fails. When they accept it, we win. They not only became ambassadors for it. They became zealots about the opportunity. Then, we came up with the idea of not having a taste test against a competitor. Let’s taste it against our number one brewed coffee and create a national event over a four-day period where we invite everyone to come into our stores nationwide to taste it.

We didn’t want them to view this as Starbucks’ instant coffee. This is Starbucks coffee in an instant. As a result of the taste challenge, the largest majority of people couldn’t tell the difference and 67 percent of the people who tasted it bought it.

All of this is about reinvention. You are not going to save your way or cost your way to prosperity. We have to create new exciting opportunities for our people and our customers. We have to create new levels of innovation, and we have to invest in the future of the company. The question is what to invest in? Take big bets. Make sure you’ve done your homework, and make sure the marketplace is ready. Despite how big Starbucks had become, we had to bring back that entrepreneurial courage and creativity and balance that with the right process and discipline. What I’m really proud of right now is that the entrepreneurial spirit is back at Starbucks and it reminds me of our early days.

During the crisis, I tried to reach out to almost anyone who would take my call. When I sat down with Jim Sinegal from Costco, he had some real solid advice that we did use. His advice was that the most important customer base in this environment is your core customer. And the cost of losing those core customers and having to spend money to get them back would be significantly higher than retaining them. So the battle plan was to maintain and retain our core customers at all costs. That was very sound advice. The Starbucks Rewards program (which rewards customers for repeat visits with free drinks and other perks) turned out to be the right strategy.

During the lowest points, where did you get the inspiration? All around you—in the media and on Wall Street—was a constant barrage of doubts. So many people were writing an obituary for Starbucks. What do you draw upon to keep you optimistic?

In many ways, this is the hardest thing I’ve ever had to do, coupled with the most gratifying. My kids, who are in their twenties, say, “Dad, I have never seen you have so much fun in many years.” I think that’s true. When you do love something, when you care as much as I do, and when you feel the responsibility, you find another gear.

It is lonely, though. There’s not a lot of people to talk to. And when you have fear of failure as a motivator, it’s a strong motivator. I have had fear of failure my whole life. I came from a poor family in Brooklyn. I grew up on the other side of the tracks. I also felt a sense of, “Am I good enough to do this? Am I good enough to be in that room?” It has brought out the best in me. The hardest part of the last few years was not embracing a strategy that I knew in my heart might solve a problem for a quarter or two, but in the end we would be so sorry for.

I believed the company could endure. The short answer is, fighting for survival, fighting for respect and getting up every day believing in what you’re doing means a lot. I know it sounds so trite. But you are willing to do almost anything to defend what you love.