Into the Black

Howard Schultz has transformed Seattle's Starbucks from a local coffee manufacturer into a profitable $90-million national retailer, with a simple, if somewhat radical, growth strategy: every dollar you invest in your employees shows up -- and then some -- on the bottom line

On the far side of the glass behind Howard Schultz, multicolored boxes of coffee move like rush-hour traffic on a miniature freeway, winding their way on a conveyor belt that runs through the center of the building. The air is gently infused with the warm, fresh-brewed scent of today's blend. From where he sits, Schultz can see the tasting room, a kitchen cum laboratory complete with Bunsen burners that's located just outside his office. High-gloss snapshots of the coffee-brewing process decorate the walls, along with the current prices per pound of each of the 30 blends Starbucks Coffee Co. sells. "My dad was a blue-collar worker," Schultz says, recalling his upbringing in one of New York City's tougher neighborhoods. "He didn't have health insurance or benefits, and I saw firsthand the debilitating effect that had on him and on our family. I decided if I was ever in the position to make a contribution to others in that way, I would."

Schultz got the chance and seems to have made the most of it. As CEO and president of Seattle's Starbucks since 1987, he has overseen phenomenal growth -- a compounded annual rate of 80% over the past three years -- resulting, to hear him tell it, from one central strategy. "Our only sustainable competitive advantage," explains Schultz, "is the quality of our work force. We're building a national retail company by creating pride in -- and a stake in -- the outcome of our labor."

The centerpiece of Schultz's vision is a generous and comprehensive employee-benefits package encompassing health care, stock options, training programs, career counseling, and product discounts for all workers, full-time and part-time. "No one can afford to not provide these kinds of benefits," says Schultz. "The desire to scrimp on these essentials helps reinforce the sense of mediocrity that seeps into many companies. Without them, people don't feel financially or spiritually tied to their jobs." Emily Ericsen, head of Starbucks's human resources, puts it another way: "We are in the people-development business almost as much as the coffee business."

Though the connection between such an aggressive employee-benefits package and the bottom line is often difficult to show conclusively, the circumstantial evidence in Starbucks's case is compelling. The company is clearly on its way to becoming the dominant specialty coffee retailer and brand in North America. Since Starbucks went public, in June, the stock price has climbed 82%. Employee attrition, which typically hovers in the triple digits for food retailers, is less than 50%. The company is posting higher profit margins every year, beating even Schultz's own ambitious targets, and Starbucks's health-care costs, despite the extensive coverage, are well within the national average.

Looking at Schultz's success so far, Corey Rosen, director of the National Center for Employee Ownership, in Oakland, Calif., notes that Starbucks is swimming against the tide. "They've clearly taken a different approach. Many retailers want a lot of turnover so they don't have to pay a lot of benefits. Starbucks doesn't want turnover; it wants loyalty." As for the stock options, Rosen adds, "it's extremely unusual to offer those. I don't know of any retailers offering them. And I don't know anyone who offers them to part-timers."

For his part, Schultz says he needs no further proof that employee benefits are the key to competitiveness and growth. He's convinced his employees are working harder and smarter because they have a stake in the outcome. "We can't achieve our strategic objectives without a work force of people who are immersed in the same commitment as management," he says.

Dressed in soft green slacks and a tieless starched shirt, fresh from selling the company stock to investors across Europe and the United States, Schultz bounds along the carpeted floor from one end of his office to the window overlooking the roasting-plant floor. Shifting from loafered foot to foot as if he had downed several gallons of his own Kona Blend, he begins ticking off the company's milestones.

In 1971 Starbucks opened its first store in historic Pike Place, Seattle's landmark fish market overlooking Puget Sound. In 1982, when Schultz came aboard as head of marketing and retailing, Starbucks had 85 workers and sold whole beans. Schultz had been working in New York marketing coffee makers to a number of retailers, including Starbucks. That introduced him to the three founding partners, Jerry Baldwin, Zev Siegl, and Gordon Bowker, who eventually recruited him to bring marketing savvy to the loosely run company.

Named for the coffee-guzzling second mate in Herman Melville's Moby Dick, Starbucks at the time seemed content to roast and sell beans without a lot of fuss or impressive profit margins. Then, on a trip to Italy, Schultz was awed by the amount of espresso to be readily had at the more than a thousand coffee bars in Milan alone. "Coffee bars are the mainstay of every Italian neighborhood," he says. "That's what I wanted to bring back to Seattle."

But after halfheartedly trying to persuade the founders to open an espresso bar, Schultz left to do the same himself in 1984. Three years later he was back at Starbucks with a buyout offer of $250,000 and a plan to roll out retail shops far beyond Seattle.

That he did with a vengeance. When Schultz first returned to Starbucks, it had just 11 stores and fewer than 100 employees. Today the company boasts 100 stores in the Northwest and 56 more outside the region. Some 2,000 retail workers are ringing up $700,000 a week in sales, more than half of that in high-profit liquid refreshment. By adding brewed coffee to the product mix in addition to beans, Schultz fattened gross margins by nearly 5%.

From the beginning of his stewardship, Schultz saw a symbiotic link between Starbucks's growth curve and his ambitious benefits plan, gambling that revenues would outrun spending for Starbucks's expansion. At first, the company's losses almost doubled, to $1.2 million from fiscal 1989 to 1990, as overhead and operating expenses ballooned to $18.4 million on $19.2 million in sales. But in 1991 sales shot up 84%, dramatically outpacing expenses, and the company broke into the black.

Although the company already had an adequate benefits package in place and had been covering part-timers since 1971, Schultz began to beef up offerings substantially. He added a heavy emphasis on preventive health care, for example, by providing a special deductible-exempt $300 allowance for annual physicals. There's similar encouragement for regular dental visits, with a ceiling of $2,000 in expenses and no deductible. He also kicked in vision care, and the company picks up the total tab for disability and life insurance as well.