Onward: How Starbucks Fought for Its Life Without Losing Its Soul

by Howard Schultz

  Wow. There could not have been a more apt question for Starbucks at this juncture in our existence. And I was not sure I knew the answer.

  On my second day back as ceo, Starbucks’ stock jumped 8 percent from the previous day, to $19.86. The media coverage, in a reprise of its reaction to the leaked memo, was a circus of opinions and speculation about what lay ahead for the world's largest coffee company now that its founder had retaken the reins. A BusinessWeek story headlined “Howard Schultz's Grande Challenge” noted that, while a returning founder has more freedom to play with the formula, nostalgia can also be dangerous. True, I thought. When the Financial Times asked other business leaders what our management change meant for our strategy, one banker I had never heard of chimed in that I might reposition the company for sale to a larger entity. That was way off. Selling the company was absolutely, positively the last thing I ever wanted. Ever.

  In Herb Greenberg's column on Dow Jones’ MarketWatch, the oft-quoted Yale School of Management professor Jeffrey Sonnenfeld opined on the three qualities of returning CEOs who are ultimately successful. First, he said, they come back reluctantly, with no intention of undermining the sitting leader. Second, even though their reputations may be at stake, they aren't trying to fulfill some unmet ego need. And third, according to Sonnenfeld, effective second-time CEOs recognize that what they built the first time was not a religion. They accept that change is inevitable. The column also recalled companies whose former CEOs had triumphed after returning to their posts, such as Steve Jobs of Apple and Charles Schwab, as well as chiefs whose comebacks did not go so well, like Gateway's Ted Waitt and Xerox's Paul Allaire.

  Which kind would I be?

  That was the overriding question—for all of us.

  Aside from perusing a daily summary of news to take the temperature of the marketplace and Wall Street, I didn't spend much time reading the omnipresent coverage that followed Starbucks like lint. Not only do I hate reading about myself, but also there simply was too much for me to do.

  In fact, almost immediately, my work habits shifted as my level of discipline heightened. I could no longer be as freewheeling with my daily schedule, especially as I learned just how deep Starbucks’ internal problems went. I began spending quiet time alone early in the morning, either at home or at the office, preparing for the day, something I had not done as chairman or in my previous years as chief executive. Now, after skimming the news before 6 a.m., I'd make calls to our overseas offices, read e-mails from partners—hundreds were streaming in with suggestions and observations about the business—and then sit back to consider what I needed to do that day to be as productive as possible and have the most impact on the business. I asked Nancy to be very discriminating with my schedule, and it helped that I'd shed outside distractions, such as my corporate board positions.

  By 7 a.m. for the first two weeks in January, I welcomed one or more senior leaders into my office or the boardroom where, using the three transformational pillars as a guide, we decided the company's most immediate next steps.

  One of the first organizational changes I'd made was appointing the equivalent of a chief of staff, someone who would work closely with me to craft our vision and a more comprehensive, long-term Transformation Agenda. The person I turned to was Michelle Gass, a 12-year Starbucks partner who at the time also happened to be the youngest member of the leadership team. An engineer by training, Michelle is an energetic, hard-charging, creative leader who embraces risk and bold thinking as well as details. In the 1990s, she led the strategy that took Frappuccino from a two-flavor product to a $2 billion brand platform.

  I had a lot of confidence in Michelle's analytical thinking and recognized in her a rare duality: an embodiment of the values of our culture and a fierce, quantitative understanding of the world. Plus, she did not shy away from respectfully disagreeing with me.

  Prior to announcing Michelle's new role, I'd asked for her input on my first draft of the Transformation Agenda—again, the three pillars—and 24 hours later, she had come to my office with solid suggestions. A few days later, we brought others into the planning process, and for the first time in a long while, Starbucks’ leaders debated, disagreed, and occasionally laughed as we envisioned a future that involved much more than opening new stores.

  We had a delicate balance to strike.

  A balance between heritage and innovation.

  Between meaningful tradition and modern-day relevance.

  What elements about Starbucks, we asked ourselves, are ritual and what elements are merely habits? Not everything required overhauling or needed to be discarded. But what, specifically, had to go, such as the movie promotions, and what was core to our soul, like health-care coverage, Bean Stock—our term for the equity in the company that we gave our partners—and ethically supporting our coffee farmers? Before we could challenge the status quo, my colleagues and I had to see it in new ways, reframe our existing ideas, and move beyond self-imposed constraints to imagine new possibilities.

  Before we began the tough work of defining Starbucks’ future, we had to spend time just seeing.

  To help us, I asked Michelle to organize an off-site retreat to flush us out of our familiar spaces and help us freely consider how we had lost our way, and then embark upon fresh thinking. To lead the retreat, Michelle suggested we look for someone outside Starbucks, and she asked me to interview SYPartners, a consultancy that Howard Behar had recommended and that Michelle had already vetted. “They're different,” Michelle promised as I raised an eyebrow. But, in the spirit of being open to new ideas, I agreed, and a few days later the firm's founders, Susan Schuman and Keith Yamashita, flew to Seattle with their colleague David Glickman.

  “Put down your pens. Don't take notes. Just listen,” I instructed after we shook hands. Then I summarized for them the past year at Starbucks, from the leaked memo to my gut instinct that the company had to get back to its core in a way that also embraced change and renewal. “I want to convene a summit not just for our top executives, but also 20 or so people with different histories that can enrich our perspective.” I told them the meeting was about much more than making money or putting bandages on old wounds. We needed to rediscover who we were and imagine who we could be.

  The discussion that followed was intriguing, not the PowerPoint presentation or jargon-laced dialogue I'd anticipated. Susan, Keith, and David asked probing, thought-provoking questions, and as they told me stories of various clients—Nike, Gap, Procter & Gamble—they spoke Starbucks’ language, from the word “partner” in their company's name to their philosophy: “See. Believe. Think. Act.”

  I was impressed, enough to override my long-held bias. If Starbucks was going to bring in strategic consultants, SYPartners seemed to be the firm for us. My ultimate decision to hire them was greatly influenced by my confidence in Michelle.

  “Let's give it a shot,” I conceded, having no idea what to expect given that they had only a few days to organize the retreat.

  The iPods were put away, and we sat in chairs around a sea of Beatles’ posters that had been spread out on the floor. The group included members of the leadership team as well as a select group of diverse voices from throughout the company. There were also a few people from outside the company whose ideas I respected.

  Another question was posed: “What did John, Paul, George, and Ringo teach us about the art of reinvention?”

  Everyone was deep in thought, but playfully so. The meeting had begun on such a sensory note with the music, the effervescent posters, even the writing with pens instead of keyboards, that it immediately transported our minds to a different place, in some cases back in time. Cliff Burrows, a Brit and seven-year partner and our regional president for Europe, the Middle East, and Asia, had flown in from Amsterdam to be here at my personal request. Tall and lean in a crisp white-collared shirt, Cliff enthusiastically held up a poster of a brick building splashed with a psychedelic painting, his eyes dancing behind rimless glasses. “This b
uilding is on Baker Street, only two blocks from my old home in London and near the Starbucks where I would stop on my way to work every morning.”

  While it would have been audacious for any of us to compare Starbucks’ cultural impact to that of The Beatles, one thing was clear from comments like Cliff's: Both are icons that play memorable roles in people's lives.

  Others piped up with observations about The Beatles’ career.

  “The band took risks,” someone said.

  “They took us on a journey at a time when the world needed cultural leaders.”

  “They didn't compromise.”

  “They led with their hearts.”

  “The Beatles believed. And if you believe, you can change anything.”

  “They kept reinventing themselves, but at the same time they stayed true to their music,” I offered, recalling their 1967 album Sgt. Pepper's Lonely Hearts Club Band.

  Using The Beatles as a metaphor for an iconic brand was, I thought, brilliant. It swept us into a creative process, providing fresh context for us to examine and speak about ourselves and the company. Most of us were enthused (although I noticed a few who were lost or rolling their eyes at the exercise), and, like Cliff, we got up out of our seats and walked across the posters to pick up our favorites.

  We considered other brands that had also evolved, some radically, but had still preserved their stature, some even after taking a hit. Brands such as Apple, Gucci, Mini Cooper. Even New York City. Then, with guidance from SYPartners, we looked for parallels that could inform Starbucks’ own challenges and touched on several themes.

  Icons make sense of the tension of the times, offering hope and even mending a culture in turmoil, much as The Beatles did for my generation in the 1960s. In what ways could Starbucks help bridge the political divides, environmental concerns, and economic uncertainties that were sweeping the country, particularly during a tumultuous election year in the United States and a recession that seemed inevitable?

  Icons assert a “cultural authority,” helping to frame the way people view the times they live in. How was the concept of “community” changing, online and offline, and how did we want to react to it—or drive it?

  Icons don't confuse history with heritage, and always protect and project their values. How could Starbucks continue to grow through the lens of ethical behavior, global responsibility, and human connection?

  Icons disrupt themselves before others disrupt them. With competitors and critics breathing down our necks as never before, how could we tell our story, reassert our coffee authority, and perhaps change the industry—again?

  Enduring icons are willing to sacrifice near-term popularity for longer-term relevance. For Starbucks, that would mean making tough choices and experimenting with new concepts at the risk of ridicule.

  These were profound questions that could not be answered that day, but at least they were being planted in our brains. I suggested something to the group as ideas began to percolate. “The only filters to our thinking should be: Will it make our people proud? Will this make the customer experience better? And will this enhance Starbucks in the minds and hearts of our customers?”

  Those questions, I figured, provided focus, but left lots of room for creativity.

  In those early days after I returned, as we talked long-term strategy, we also focused on tactics. Real actions that would yield visible results, and fast. The company had already announced that it would slow US store openings, close some stores, and accelerate growth in other countries. But we also needed to innovate and dramatically improve the in-store experience. A number of projects were already in the pipeline and, if pushed to completion and positioned right, held a great deal of potential.

  In my head I knew that no silver bullet would transform Starbucks overnight, but in my heart I was on the lookout for a big idea—What would be the next Frappuccino, the most successful new product in Starbucks’ history?—that would solve our problems. In truth, I was also impatient, a weakness I needed to curb.

  Yet there was another reason to insist on immediate, tangible improvements to the business. The annual Starbucks shareholders’ meeting loomed. On March 19, less than two months away, more than 6,000 investors and partners would pack Marion Oliver McCaw Hall, Seattle's grand arts auditorium nestled near the towering Space Needle, and the nearby pavilions we use for overflow. For the first time in our 15 years as a public company, many people in attendance would not be happy with Starbucks’ performance. Nor should they have been.

  Rather than apologize for the past, I viewed the 2008 annual meeting as a chance to move us forward. It would be a seminal event, an unparalleled moment with tremendous potential to reassure shareholders and partners that Starbucks was committed to—and, more importantly, already embarking on—real change. As ceo I would host the two-hour presentation, and secretly I was a bit worried about what the reaction would be when I stepped onstage to face thousands of people whose investments had lost almost half of their value in the past 14 months. Would they welcome me back? Would they boo? Anything was possible.

  My instinct was to take as much control of the situation as possible by infusing the meeting with honesty and optimism. To do so, I would need to deliver more than a compelling speech and a business plan. I would need proof of our progress.

  At the same time that I was working with others to imagine the company's future, I was also meeting with people in our operations, financial, partner resources, supply chain, and real estate departments to address our mistakes of the past. In those meetings, I more fully realized not only that I'd have to significantly change the makeup of our leadership team, but also that there were myriad questions that needed to be answered. What were the stores’ trending unit economics, our term for the financial performance of individual stores? Exactly how many stores were underperforming, why, and where? How many stores could we open, and in which markets, without risking further cannibalization? How far was our supply chain operation being stretched? Where were we spending more money than necessary to achieve the same or better results? Did we have the right people with the right skills in place for everything that needed attention?

  Perhaps the most important step in improving the faltering US business was to reengage our partners, especially those on the front lines: our baristas and store managers. They are the true ambassadors of our brand, the real merchants of romance and theater, and as such the primary catalysts for delighting customers. Starbucks desperately needed baristas and managers to be genuinely friendly, enthusiastic, and willing to go the extra mile millions of times a week.

  Unfortunately, I continued to learn via e-mails from people in the field and through my own observations that many of our retail partners were unmotivated and uninformed about our coffee and the company. Our turnover rates in stores were too high, and a new generation of baristas had not been effectively trained or inspired by Starbucks’ mission. It was not their fault. New hires were often handed a thick, three-ring binder of rules, techniques, and coffee information and simply told to “read it.” Employee reviews and pay raises could be inconsistent, and the scheduling of shifts was also inefficient, sometimes burdening one employee with the work of several. For some, being a barista was just a job.

  Part of the problem was that we did not have the proper incentives or the right in-store technology to help store managers operate like owners, taking more control over their stores’ destiny. Because we were opening new stores so fast, a barista could easily have a new manager every few months. Much too much inconsistency. In addition, our compensation and benefit plans, while generous compared to almost any other retailer, no longer rang revolutionary. Reinventing compensation and benefits for a 21st-century retail organization, and for a younger generation, was crucial. Unfortunately it would take time, likely more than a year, to put in place meaningful new programs.

  In the near term, however, we had to do something to inspire and improve performance.

  I made two quick deci
sions.

  First, we would retrain 135,000 baristas in espresso beverage preparation, from pouring a perfect shot to properly steaming milk. And we would do it before the annual meeting. I had long maintained that our training was inadequate, and giving baristas more tools and knowledge to do their jobs well would improve the experience for them as well as customers. I asked a team to figure out how the company could take on such a large task in a matter of weeks, and they came back to me with the radical idea of closing all of our US stores on one day. Espresso Excellence Training was set in motion, and on January 11 we issued a press release announcing that, on February 26, we would close stores for a “historic in-store education and training event.” Rather than trying to hide our deficiencies and teach people in private, we publicly celebrated espresso, loudly asserting our coffee authority.

  Second, I committed to hosting a 2008 leadership conference for our 8,000 US store managers and almost 2,000 more partners. Starbucks had a history of holding these mass meetings every few years in a different city as a way to inspire and reward our managers. But the company had not held one for several years. I did not know where we would hold the 2008 conference or how I would justify to Wall Street the millions of dollars it would undoubtedly cost, but I intuitively knew that such a massive gathering, if executed right, would infuse the people who managed our stores with the emotional capital they so desperately needed to reconnect with the company.