Paul Benger

Here’s a link to the 2007 leaked email. The commoditisation of Starbucks.

The woman in the grey sweatshirt stood up in front of roughly 100 others at Borders Books’ Chicago State St. location and tearfully told Howard Schultz, CEO of Starbucks, that she’d closed her store and driven all night from her store in Ohio to see him speak in person. “It’s an honor and a privilege to be in front of you today,” she said, her voice breaking with emotion.

She, like many others, were at Borders to see a Q&A discussion between Schultz and CBS2’s Bill Kurtis on Schultz’s new leadership memoir, Onward: How Starbucks Fought for Its Life Without Losing Its Soul (and perhaps get a book signed or a photo taken with the man who has changed the way many people think about coffee). After the woman thanked Schultz for all that he’d done for her and her employees, Kurtis asked her why it was that she drove so far to see him – why Schultz? “He’s an inspiration, and he’s honest,” she replied, as if it was the most obvious answer in the world.

It’s hard to argue with the fact that Schultz and the Starbucks brand have a die-hard following – think of this woman who traveled all night from the state of Ohio to see Schultz and express her gratitude and devotion to Schultz and Starbucks in such a personal way, Here was the power of the Starbucks brand in action. Here was a company that, more than most any others, had built up nearly impenetrable company and employment brands, gained a legion of loyal fans, customers and employees, and grown to a massive 16,000-store, “there’s a Starbucks on nearly every corner” giant. But, as Schultz would point out, things weren’t so rosy just a few years earlier.

FLASHBACK TO 2007

“I could sense, or small, that something wasn’t quite right,” Schultz said as he addressed the overflowing crowd of fans and curious onlookers before him. He was referring to February 2007, a time when, he said, he became concerned about what was happening at Starbucks – or rather, what wasn’t happening. Little by little, Starbucks had been losing some of the signature traits it had been founded on.

In 2000, Schultz had stepped down as CEO (or, as a Starbucks employee would write it, “ceo”– they have used lowercase job titles since their early days) and became chairman, moving away from day-to-day operations to focus on global strategy and expansion. In the years that followed, store growth accelerated and stock prices soared as sales and profits increased every single quarter – until they suddenly didn’t. By 2007, things were taking a turn for the worse. “Starbucks had begun to fail itself,” Schultz said.

BITTER TIMES

Over time, the company had been expanding the brand beyond its core into various media like music, books, and film. In addition, every quarter, there was more intense pressure to maintain annual revenue and profit increases of at least 20 percent – an ambitious goal that Schultz admits he was complicit in promoting. Amidst battle cries of “More growth!” the team had lost sight of what the Starbucks experience was really all about. Starbucks, he pointed out in his book, has always been about so much more than coffee. “But without great coffee,” he wrote, “we have no reason to exist.”

So, on Valentine’s Day 2007, Schultz sent an email to Jim Donald, the CEO of Starbucks at that time, warning of the commoditisation of Starbucks, hoping to unleash an honest conversation that would prompt everyone to reexamine the path they were traveling. He stressed a need to get back to Starbucks’ core and make the changes necessary to evoke “ the tradition, heritage and passion they all had for the true Starbucks experience.” Unfortunately, he said, the email leaked, and the next thing he knew it was all over the Internet – and the public was in a furor. Starbucks – and Schultz himself — received a lot of criticism for his opinions, even from Starbucks’ own employees, and as he says, it undermined what he was trying to accomplish.

Online conversations took on a life of their own, and while the company was struggling to figure out how to create balance between growth and a need to preserve what the company was really about, Schultz realised that they could no longer use their stores and website to communicate and control the conversations – the public was really in control of what was being said.  Coincidentally, soon before Schultz’s email went out, three big communication changes had occurred: a week earlier, Apple had introduced the iPhone; four months earlier, Google had bought YouTube; and five months earlier, Facebook had opened up to the public.

Times were changing, and Starbucks was forced to either change with them or get left behind.

BACK TO THE GRIND(S)?

Toward the end of 2007, as the situation reached a breaking point, the board decided Schultz needed to return as CEO. So, in January 2008, he did. It wasn’t his original intention, and it wasn’t an easy decision. In addition to having to tell Donald he was taking over, he was re-immersing himself in a company that was increasingly becoming viewed as one of the poster children of the recession (i.e. “save money, don’t drink at Starbucks”); people were being encouraged to look elsewhere for coffee easier on the pocket.

As he jumped back into his role as CEO, Schultz said, he realised that the issues he’d brought up in that now-infamous email back in 2007 were even larger and deeper than he had then thought. This was through no fault of people working there, he said — it was due to the fact that Starbucks was rewarding the wrong things. Factors like speed of service were praised, rather than keeping focus on the customer and the quality of the product.

SCHULTZ’S REACTION?

On February 23, 2008, “I closed every store to retrain 115,000 people – I said we were going back to the roots of the company.” Of course, the media frenzy that ensued from this decision brought many to believe that the end of Starbucks was near – that they were no longer relevant. Schultz admits it was a bold decision to retrain every single employee. His explanation? “It was honest, it was authentic, and it was necessary.” The company lost $6 million that day. And as he said, Starbucks still had a long, long way to go in solving their mounting problems – but this was a start.

Starting over, he said, involved metaphorically asking the question of employees, What does it mean not to be a bystander? “From this point, we had to create, attract and create new customers.” Gone, he says, was the time that Starbucks could do no wrong — that the company was on a “magic carpet ride” – and that profitability and likeability would happen automatically with every move the company made. Gone was the time that Starbucks was leading the conversation — now, they had to find a way to take part in the larger conversations that were happening.

Later in 2008, one month after Wall Street’s meltdown and a few weeks before Starbucks would announce significantly reduced profits for the fourth quarter, Schultz decided to get all of the store managers together — all 11,000 of them — for a leadership conference. They’d always done the conference in Seattle, and even though nearly every major city wanted to host them, Schultz said they chose a place very much in need of assistance: New Orleans. Despite the odds, Schultz knew it had to be done, to start rebuilding trust between Starbucks and its employees and invest in Starbucks’ continuing transformation — and New Orleans was the right place to do it.  Not only did they have a week-long meeting with interactive galleries, roundtables, and panels, but they also did service in the 9th Ward and helped to rebuild some of the city’s most devastated neighborhoods.

“I’ve always loved this company,” Schultz said in Onward. “Love is why I had some back as ceo and why I feel so personally responsible for its failure and success. Yet somewhere along our journey, the love our people had for Starbucks had blurred. New Orleans had brought it back into focus, and once again our values stood in stark relief… because of everything we experienced in New Orleans, it was apparent to all of us what it meant to love something — and the responsibility that goes with it.”

Moving forward

What’s happened since Schultz and the Starbucks team took major risks to turn the Starbucks experience around? Well, instant coffee (Via), for one. And Starbucks’ performance in the Q3 of fiscal 2009 marked its first earnings growth since Q1 2008 — the company earned $152 million, compared to its loss of nearly $7 million just a year earlier. As Schultz remarked in Onward, “for the first time in a long time, I felt as if we were winning.”

In July 2009, after riding out the December 2008 choice to make 401(k) retirement plans discretionary instead of automatic in light of a weak economy, Starbucks was again able to match the 401(k) contributions of eligible employees, which, to Schultz, “would not make headlines or mean much to shareholders, but for me… was as important as anything we were able to accomplish all year.”

In fiscal 2010, Starbucks revenues increased to a record $10.7 billion, and its operating income increased to $1.4 billion, up from $562 million in fiscal 2009. What’s next for Starbucks is anyone’s guess, but as Schultz says that every company must push for self-renewal and reinvention, constantly pushing the status quo, it appears he will continue to do just that.

Q&A WITH HOWARD SCHULTZ & BILL KURTIS

After Schultz gave his initial thoughts on Starbucks’ journey over the past few years, Schultz sat down with Kurtis to answer some questions about what the Starbucks brand really means, his ideal employee, and more.

Q:  How do you define success to your employees?

A: “’Howard Schultz is not going to serve any customers — it’s you,’ is what I tell employees.” Schultz tells store managers they are responsible for what takes place in their stores, and that “The essence of what they do every day is the difference between success and failure.”

The greatest reason for the enduring relationship Starbucks has with its people and its customers is due to the values of the company, Schultz said. “We’re not perfect; we’ve made mistakes, and we’ll make some more.” “The last 12 months has been the most successful in Starbucks’ history,” Schultz said. “However, we did not leave people behind.” Part of that decision not to leave employees behind while striving to be financially successful involved keeping 401(k), cash bonuses, and benefits. Starbucks was, after all, the first U.S. company to offer both comprehensive health care coverage as well as stock options to part-time workers.

Which leads us into another question…

Q: Why are you not willing to cut the price of coffee?

A: “We will never – and I mean never – turn our backs on our employees,” Schultz replied.  The company wasn’t willing, he added, to get cheaper coffee or cut health care benefits for each of Starbucks’ employees to cut coffee prices. The premium price is tied into having the best quality beans and treating their employees well.

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Q: What will be the future role of businesses on a macro level?

A: As social services continue to lessen in government, Schultz said businesses will have to do more to provide a safety net for people, as well as provide a safety net for people to serve their communities. Social requirements of the business world are changing, and people expect more from the businesses they patronize. People have become more cost conscious, environmentally aware, health-minded and ethically driven — and are holding businesses to higher standards. Seismic changes with social and digital media, he added, are changing the way businesses must communicate with their customers; people are making buying decisions based on companies they trust and those that align with their values.

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Q: What is the Starbucks brand?

A: Schultz admitted this was a tough question to answer, as the brand really means so many different things. Instead of spitting out a textbook definition, Schultz said he wanted to explain by telling the story of Courtney, an employee in the Queen Anne, WA store. The story goes like this: Schultz walked into a Seattle store one day, and an employee there told him he was in the wrong place, and that he really needed to get to the Queen Anne store as soon as possible. When Schultz asked him why, the employee said, “You’ll know why when you get there.”

So, Schultz got in his car and drove to the Queen Anne store – a store where a long-time employee with special needs and past behavioral issues, Courtney, worked. When he walked in, customers were laughing and chatting, and he noticed that they had thrown a birthday party for Courtney. Schultz says this was such a testament for him as to the emotional relationship between the staff and customers at Starbucks. “You can’t invent or describe it,” he said –“you just know it’s real.”

Starbucks, he added, is defined by those who wear the green apron and what they stand for.” In corporate America, there’s been such a fracturing of trust; for whatever reason, there’s a lot of cynicism and unwillingness to believe.” Consequently, people are hungry to work for a company that’s larger than themselves, he said, a company in which they can find their unique place. Many people go from job to job with bad experiences, becoming increasingly cynical, and when they start working at Starbucks, expect the experience to be the same and are in disbelief that it’s actually different – that the employees and the experience is actually for real.

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Q: Who is your ideal employee?

A: “We want people to join Starbucks who have like-minded values. We need happy people – we’re a people company that serves coffee, not the other way around,” Schultz said. He added that while Starbucks is creating organic, fair trade coffee, people come into the store for a different reason. “The human, emotional experience our people create is why customers come in – it’s more than just for a cup of coffee.”

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Q: What leadership qualities do you look for?

A: Again, Schultz stressed that like-minded values are key. He said that when he returned as CEO, he had 11 direct reports, and he asked them all the same question: “If you don’t believe we can do this, or you don’t believe in me, this isn’t going to work – we’re going to have to have a private conversation.” In the next six months, he said, nine of the 11 people left the company. He needed people who believed in the dream; who believed in the business – and that candor left him with those who did.

Schultz said that as far as employee qualities, it’s important to have:

• People who trust one another
• Those who leave their egos at the door.
• Those who understand that success needs to be shared.

And to not have: People who do a great job of managing up but not managing down.

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Q: What is Starbucks’ biggest win in the last couple of years since you came back on board?

“Instant coffee,” Schultz said without hesitation. Why? “Because we were able to bring quality to instant. Great companies and entrepreneurs have to continue to push for innovation. People thought when we added instant coffee, it was the beginning of the end. But really, we did it to prove to themselves that they could replicate the taste of brewed coffee – and we did.”

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Q: What advice would you give to someone who wants to take a leap of faith to pursue his or her dream?

A: In addition to getting a mentor, Schultz advised, “Dream big, then dream bigger. You have to put yourself in a position to win, and surround yourself with people who’ve done it before — with those with experience and the skill set to complement you.”