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PIVOT: REINVENTION CENTRAL

Starbucks: The Art of Endless Transformation

How founder Howard Schultz keeps his iconic coffee shop chain on top after all these years.
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You can strategize, cogitate, and deliberate. But even in corporate empires, there's no substitute for serendipity. Last summer, at the Northern California wedding of two friends, Howard Schultz and Oprah Winfrey found themselves at the same table. He's Mr.  Starbucks. She's, well, Oprah. "She's enjoying her tea," Schultz recalls, "and then she's going off about how chai tea has become so important to her life and her meditation." Schultz asked why she wasn't drinking Teavana, the specialty brand that Starbucks  acquired in 2012 for $620 million. Winfrey said she'd never heard of it. Ever the marketing mastermind, Schultz arranged for a care package of Teavana Maharaja Chai Oolong to be delivered to her hotel room the next morning. She tried it--and, as she tells  it, she was in love! She called Schultz. "This is unbelievable!" she raved. "I'm tweeting it!" She likes exclamation points a lot! Given her 20 million Twitter followers, Teavana had its best sales weekend ever.

Thus started a partnership discussion between Schultz and Winfrey that included her stay at the Starbucks research kitchen at Seattle headquarters--and ultimately led to the Mother's Day 2014 launch of Oprah Chai Tea, "a bold infusion of cinnamon, ginger,  cardamom, and cloves, blended with loose-leaf black tea and rooibos." You can now find Oprah Chai at any Starbucks. Schultz intends it to be nothing less than a pivot in Starbucks' retail tea ambitions, which include Teavana tea bar outlets, too. "It's a $90  billion global category, ripe for innovation," he recently said over lunch, after a morning talking reinvention at Harvard Business School. "We're going to do for tea what we've done for coffee."

Bagging the tea market is only one of Schultz's initiatives to keep Starbucks flourishing. His leadership is consumed with reinvention: Today's success is dandy, but it's the promise of tomorrow that gets his juices (and coffee and tea) flowing. Tomorrow  includes aggressive expansion, especially in places like China. The company is already a player in digital transactions--and may license that technology to others. And Starbucks continues to be a pioneer in social conscience. Schultz has refashioned his own  role, too, the better to be reinventor-in-chief. Though still chairman, in February he handed off the day-to-day operations to Troy Alstead, the CFO who became COO. Schultz says he'll concentrate on the company's "next-wave" goals.

Starbucks has been a nonpareil brand in coffeehouses for a generation. Its financial performance has been near record highs. Late last year, the company's market capitalization surpassed $60 billion, and this spring, it has been within 10 percent to 15 percent  of that peak. Every week, Starbucks serves more than 70 million customers face to face, in 20,200 stores in 64 countries. With that kind of success, many fat-and-happy companies forget how to innovate--or lose interest in even trying. As Schultz, a former  quarterback at Brooklyn, New York's Canarsie High, likes to say, they "play defense, instead of trying to score." But the modern Starbucks has a key motivator going for it: institutional memory. The company survived a near-death experience.

Starbucks is a case study in the art of perpetual renewal while remaining true to your heritage. Its history epitomizes the arc of reinvention--the defiant journey from boom to bust to prosperity all over again. How Schultz keeps everybody on the bus of  reinvention is a tale of perseverance and passion, faith and fear.

New store designs have been part of Starbucks' revival worldwide. Pictured above: One of the company's outlets in Amsterdam

Not that long ago, the company got into hot water--because it had grown complacent. You know the story: Schultz joined Starbucks in 1982 as marketing director. It was only a small Seattle chain selling coffee equipment. Over the course of nearly two decades,  he gained control and transformed the company into a business selling fresh-brewed cappuccino by the cup, but more so about offering "an experience"--a "third place" between home and work that was not simply transactional. Starbucks coffeehouses proliferated,  the company went public, and all was well.

But Schultz stepped down as CEO in 2000. Though the largest specialty coffee retailer in the world thrived for a time--there were 15,000 stores by 2007--it had lost "a certain soul," as Schultz lamented. Bean counters obsessed over gross margins rather than  store atmosphere and company values. Instead of creating new products, management merely extended product lines--Blueberry Frappuccino, anyone? In a 2007 Valentine's Day memo to senior leadership that infamously was leaked to a Starbucks gossip website, Schultz--still  the chairman--mourned "the commoditization of our brand."

By the time Schultz returned as CEO in early 2008, the stock price had tumbled 50 percent in 15 months, to roughly $19; by Thanksgiving, it was down to $7.83. The financial vultures circled. Obituaries were drafted. But instead of presiding over a funeral,  Schultz took a series of risks to restore the company's luster. Apart from shutting 800 U.S. stores and laying off 4,000 employees, his M.O. was hardly conventional. He got rid of most top executives. At a cost of $30 million, he brought 10,000 store managers  to New Orleans to build morale. And to make a point, he closed all U.S. stores for half a day so baristas could relearn how to make espresso. For its part, Wall Street wasn't impressed that Schultz refused to compromise on core Starbucks principles, including  providing health insurance even for temps. Though institutional investors told him he would have ample cover to cut benefits, he thought it would gut what the company stood for.

In time, Schultz's approach paid off. A reinvigorated staff, modernized technology, shrewder operations, the introduction of Via premium instant coffee--all these helped turn the company around, a rebirth as impressive as Apple's. And Schultz became more  willing to make Starbucks a leader among corporations in staking out political positions, including a grassroots "Create Jobs for USA" campaign to help raise loans for small businesses. In the six years since Schultz's return, on top of the deserved praise  he has received for having an ethical pulse, Starbucks' market cap has multiplied nine times from its nadir.

The 60-year-old Schultz says he's not one to look back. Even so, he and his inner circle acknowledge they're inspired--or haunted--by the company's dance with mortality. Maybe they'll make new mistakes, but they won't rest on macchiato laurels. It is that  mindset that Schultz is trying to sustain, as he aims big. The dark days ever linger, a reminder of the perils of stasis. Schultz does not let anybody forget.

A few years back, when Starbucks stock set a record high at the time, Schultz implored employees to stay grounded. "In 2008, 2009, when the stock price had plummeted to single digits, we all joined together to ensure that we would not allow the stock price  to define the company, our brand, and our long-term performance," he wrote in a companywide email. "As hard as it might be to reach the same conclusion when the stock is at an all-time high, we must!" Such cheerleading might seem like pablum, but throughout  Starbucks' ranks, it's what fuels innovation. A decade ago, Schultz's message might have fallen flat. After the near-death epoch, it's an entirely credible cri de coeur. Alstead says: "We didn't think we could fail. But we know we can fail."

These days, at the center of the company's instinct to innovate are its integrated mobile platforms, which include a three-year-old payment program and a loyalty program. Both give Starbucks "a direct, real-time, personalized, two-way digital relationship  with its customers," says chief digital officer Adam Brotman. "Everything we've done around social and digital media has put us in the lead of almost every brick-and-mortar retailer," Schultz says. Mobile payments constitute 14 percent of all in-store Starbucks  transactions in the U.S. and Canada. A new iPhone app allows customers to "shake to pay" and to tip digitally, as well as earn free drinks and other perks. Later this year, Starbucks will test a mobile app that allows you to order before going to a store.

Starbucks Cards, which are part of the My Starbucks Rewards loyalty program, have become a marketing colossus, with more than eight million U.S. participants. During the past holiday season alone, one in eight U.S. adults received a card. Why pay for your  Salted Caramel Mocha tomorrow with a five-spot when instead you can express yourself with a Spring Butterflies Starbucks Card, boasting "our fluttering friends filling the air"?

Together, Starbucks Cards and mobile payments make up roughly 35 percent of payments at stores in the U.S. and Canada. Globally, the cards are available in 28 countries. "We've created a core competency in these multiple vertical platforms, which has added  value to the retail experience," Schultz says. Just as important may be the appeal of the digital platforms to other national retailers and tech companies, which, according to Schultz, are asking Starbucks "whether we would license or white-label our mobile  platform"--the same way Amazon sells its cloud technology. It's a major opportunity for Starbucks, though Schultz says he has yet to decide whether to pursue it.

Reinvention also means store expansion, particularly in China and India. There are about 1,200 Starbucks stores in China today; Schultz says that number will grow to be "north of 5,000 within the next 10 years, easy." Over time, he says, the total in India  could go from 40 to 1,000.

At home, the company will increase its evening alcohol and light-fare menu. Next year, the company will roll out a line of Starbucks Fizzio handcrafted sodas. Most new Starbucks will be akin to the traditional storefronts, but some will reflect the company's  experimentation with design, including walk-up kiosks and drive-throughs made from reclaimed steel industrial shipping containers. One showpiece will be the 15,000-square-foot Seattle Starbucks Roastery that's scheduled to open in October. "Think Willy Wonka!"  Schultz says. "I'd like to open one in every major city in the world." The initiatives may not all work. Reinvention can entail stumbling. The trick is to admit a blunder and get out fast. In the past decade, Schultz says, Starbucks' error was as much about  failing to reverse course as not recognizing the path was flawed.

On social issues, the company is ever more outspoken. In the past three years, Starbucks has chosen, in Schultz's words, to "use our scale for good." With a program in 2011 to help create private-sector jobs, a petition campaign last year to end the federal  government shutdown, and a recent effort to request gun owners in open-carry states not to bring weapons inside, Starbucks has been in the vanguard of trying to maintain a socio-corporate conscience. Its latest campaign aims to raise awareness about the million  veterans reentering civilian life. Starbucks has committed to hiring 10,000 veterans and military spouses by 2019. Schultz says such projects reflect his conviction that a public company can deliver top results "through the lens of humanity." Public-spirited  efforts, he says, "add value to the company's bottom line, but they were never intended to." The combination of doing right and doing well, he says, makes everybody at Starbucks buy into his aspirations.

The biggest test for Schultz may be his own role. Unlike back in 2000 when he stepped back, he remains the linchpin of "bolder, more disruptive" innovation for all the tomorrows to come. That's the fundamental lesson from last time, when by his own account  he lost focus. Given the close relationship between Schultz and Alstead, the transition has been smooth, but not without challenges. As Alstead says, "There's a heart tug for him every day." Schultz agrees. "Sometimes," he acknowledges, "I want to jump in  and make decisions." The best innovator needs to realize when it's time to get out of the weeds and ascend the mountaintop. For starters, it sounds like Schultz needs to relax a little. He just might want to go for some Oprah Chai Tea.

IMAGES: Joe Pugliese, Courtesy Starbucks
From the June 2014 issue of Inc. magazine

DAVID A. KAPLAN | contributing writer

David A. Kaplan, who spent 25 years at Newsweek and Fortune, is the author of three books: The Silicon Boys, The Accidental President, and Mine's Bigger.




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