In his new book, Onward, the Starbucks founder describes how he overcame slumping sales and quality control issues that threatened to destroy the company he had built.
Howard Schultz took a small Seattle coffee store and turned it into a global business with more than $10 billion in annual sales. Yet one of his greatest accomplishments, says the Starbucks CEO, was making it through the past few years. In his new book, Onward: How Starbucks Fought for Its Life Without Losing Its Soul, Schultz chronicles his return to the helm of Starbucks during one of the most tumultuous times in the company's 40-year history.
After stepping down as CEO of Starbucks in 2000, Schultz, who remained chairman of the company, found it increasingly difficult to sit on the sidelines. "In letting go of the CEO post, I had essentially agreed to trust in the decisions of others, even when my heart suggested those decisions were not wise," he writes. "Like a parent standing back and watching his children make their own choices, the entrepreneur-as-chairman role had its unique emotional challenges."
In 2007, Schultz dashed off a now-famous memo to the management team criticizing the state of the company's stores. A year later, Schultz was back in charge and working to restore quality control, going so far as to close all 7,100 U.S. stores for one evening to retrain employees. But as the slumping economy drove consumers to cut back on $4 lattes, he was forced to lay off thousands of employees and shutter some 600 stores. Schultz, 57, spoke with Inc. senior editor Bobbie Gossage about what it is like running Starbucks the second time around and how he got the company back on track.
You write that taking on the challenges of a troubled company was completely new territory for you. How was that experience different from running the company the first time?
There's an energy and excitement when you're building a company. You have so much tail wind. You're planting new seeds. But it's also scary, because there's no safety net. I really enjoyed that experience. At an early age, my mother gave me this feeling that anything is possible, and I believe that. If you look at where I came from and where we are today, my story is like a Hollywood movie. I was able to achieve the American dream. It's not that it was easier or harder the first time I ran the company, but I would say that the feeling that goes with building something—especially when you get some success—it's a wonderful carpet ride.
It's different when you're trying to turn something around, especially something that you built, at a time when so many constituents—the media, Wall Street, competitors, ex-employees—are all saying that Starbucks's best days are behind it, and that Schultz is never going to be able to bring it back. It's not that they underestimated me, but they underestimated the power of our culture and values and the resiliency of the brand and our people.
In many ways, it's much more rewarding to be here today, having made it through the past few years, than it was building the company. It was difficult, because during the financial crisis, there were no navigational tools. No one had experienced anything like this. You couldn't really talk to anyone or read something. You had to make big decisions based on things you believed in your heart were the right things to do.
What did you learn about this new environment?
There's been a real sea change in consumer behavior. And those companies that are consumer based must appeal to the consumer in a different way today than they did two or three years ago. And it's not all based on value. Cutting prices or putting things on sale is not sustainable business strategy. The other side of it is that you can't cut enough costs to save your way to prosperity.
I think the question is, What is your relevancy to the new life of this consumer, who is more discriminating about what they're going to spend money on? The customer today is very well informed. In addition to price and convenience, there's something else they are influenced by, and that's what the company stands for: how it treats its employees and its customers. We've found that consumers are willing to walk another block and potentially spend a little bit more for companies whose values they truly trust.
How do you maintain quality as a company grows and grows?
There are 17,000 Starbucks stores in 54 countries, serving 60 million people a week. We employ 200,000 people. So I can make the case—and I have for years—that the most important discipline at Starbucks is human resources. I mean, Howard Schultz can't manage what I just described for you sitting in Seattle, Washington. I can't manage every store. I'm not going to pour one shot of espresso today.
Every enterprise has a memory. And that memory is imprinted with a history and a way of doing business. As leaders, we have to make sure that we're attracting the right people and that the values of the company are being upheld. When you see something that isn't right, you have to make sure that you're not a bystander. I've said for years that the most important aspect of our company is the culture. And people laugh at that, but that's the truth. Whether it's a small or a large company, transformation can't take place with only one person saying, "I'm going to transform this enterprise."
You grew up in a family without health insurance. During the recession, though, there was pressure on you to trim health insurance for part-time employees.
Yes. I got a call from an institutional public shareholder, whom I've known for many years. The conversation went something like, "I'm assuming you're going to cut back on health care." And I said, "Why would you assume that?" He said, "Well, because you've never had more license. No one is going to hold you accountable." And I said, almost instinctively, "There's no way that we're going to cut that benefit at Starbucks."
The fabric of the company—going back to the early days—is linked to that benefit. I would just not turn my back on that. I basically said to the shareholder, and not in an arrogant way, "You have to evaluate whether or not you want to be a shareholder, because I'm not cutting it." And I think great companies and great leaders have to be willing to stand up for the things they believe in. And these things are really important. We're not perfect. We make mistakes all the time. But that was sacred ground for me.
You write in the book about moments that looked bleak for your company. What would you say was your darkest hour?
It was the evening before we were going to announce store closures and layoffs. That night, I had asked for a list of all the people who were going to be laid off. I wanted to go through every name. I knew that there were lives at stake, and families. And when I had to get up in front of the whole company the next morning—that was the most emotional, most difficult moment in my 30 years at Starbucks. The way I tried to describe it at the time was that these were decisions we had to make to preserve the future. But we didn't have a choice.
When you consider Apple and Dell and other businesses, there seems to be a trend that when a company is struggling, the solution is to bring back the founder. Why do you think that is?
I think founders come back perhaps because they no longer recognize the company they built. In my case, if an outsider would have come in, I suspect the easiest and most predictable thing he or she would have done is cut things to the bone. That would have destroyed the company. I had the benefit of knowing what buttons and levers to push and pull. I also knew that just going back in time and embracing the status quo of the past would not produce success. That's what people thought I would do. I had to restore the company's heritage but, at the same time, push for reinvention.
What were some new strategies?
We recognized that social digital media was not only changing consumer behavior but, if done properly, could significantly lower our cost of customer acquisition and could be a creative way to engage emotionally with our customers. We've invested heavily in that.
We also started a website, mystarbucksidea.com. We said, "Tell us what will bring you back to Starbucks; tell us what will engage you with our company." Not surprisingly, the No. 1 suggestion was that we create a loyalty program. More than a million people are now carrying the Starbucks gold card and getting significant rewards.
You write in the book that you were also on a mission to find the next Frappuccino. You thought you had found it.
Yes, the Sorbetto. It didn't work. There were many lessons that the company and I learned. And I think one of the most humbling lessons was that the problems we were dealing with were not created by one decision or the financial crisis alone. There were multiple problems that led to the issues we were facing. I learned there wasn't going to be one silver bullet that was going to save us. There had to be a comprehensive transformation, from the bottom up. Even if Sorbetto had worked, it wouldn't have solved all of our problems.
One idea that did transform the company was Via, our instant coffee. Via not only reinvented the coffee category, but it reminded our people of the entrepreneurial DNA of the company. It was 20 years in the making, primarily because we could not replicate the taste of Starbucks coffee in an instant. Here's another example where the world thought we were crazy—and that I was desperate. And in the end, Via in its first year did over $180 million in sales.
You had people inside the company who fought this, too.
Yes, people came to my office and said, "In all due respect, I think you're crazy. It's a bad idea." But sometimes, you've got to believe what you believe. I'm not always right, but in this case, we were right. I think great companies have the curiosity to see around the corner about what's possible and the courage to execute. All small and large companies have to push for reinvention and self-renewal. Consumers are rethinking what they're buying and how they're buying it. Business plans decades in the making have to be rethought and reexamined, because they will not be relevant in the future.