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

by Howard Schultz

Strategically, Pike Place Roast had the potential to be a powerful catalyst for and symbol of our transformation. For partners, the new brew was an accomplishment, the first in a while, to rally around, savor, and celebrate. For customers, Pike Place Roast ushered back in some of what had been missing in our coffee experience. Aroma. Freshness. A little theater. And for shareholders, Pike Place would be proof that the company was actively reclaiming its coffee authority.

  I was determined to demonstrate to our partners that Starbucks was going to push for self-renewal and reinvention. Pike Place Roast was just the beginning.

  Chapter 11

  Elevating the Core

  “You would have to agree that the consumer is in a recession,” I stated on the afternoon of January 30, 2008, during Starbucks’ first-quarter earnings conference call.

  I had seen this difficult day coming since the end of December and now, as I sat at the head of our boardroom conference table having returned only three weeks before as ceo, I mustered optimism in the face of so much discontent.

  Only 1 percent. That was how little our same-store sales—that alltoo-important measure of retail success—had gone up by in the first three months of our fiscal year. One percent after 16 years of 5 percent or better comps. It was Starbucks’ worst performance since the company went public in 1992. At the office, my personal frustration was fueling my desire to put Starbucks back on top, yet every day brought new challenges. I felt as if the team and I were racing to fix a sinking ship while at the same time charting its course and setting sail. And it didn't help that the economic waters were getting rougher.

  Outside our walls, seemingly fail-proof financial institutions were doing what had seemed impossible: failing. Amid staggering losses, America's largest mortgage lender, Countrywide Financial, was being taken over by Bank of America in a risky $4 billion deal. On January 15, banking giant Citigroup posted the largest quarterly loss in history, a staggering $9.8 billion. Less than a week later, stocks had their biggest one-day loss in six years. These and other daunting trends—the tightening credit crunch, foreclosures, rising food and gas prices, an uptick in unemployment—fostered more uncertainty. Consumer confidence continued to slide and people started limiting spending to essentials.

  Starbucks was hardly the only retailer suffering. Home Depot was closing locations. Sales had crumbled at high-end department stores like Nordstrom. Even consumer favorites Target and Wal-Mart posted lower than expected same-store sales.

  In addition to Starbucks’ disappointing comps, I was about to make two unexpected announcements on the earnings call—news that was sure to alienate customers as well as investors.

  The first was a choice I had made unilaterally.

  “By the end of fiscal 2008, we will discontinue warm breakfast sandwiches in our North American stores,” I said into the speakerphone somewhat triumphantly. This was, after all, a move I had wanted to make for more than a year but had been unable to bring about as chairman. Despite the sandwiches’ loyal following, and disagreement among Starbucks’ top managers, I was convinced that this was right for the business. “We are committed to a replacement category,” I reassured the analysts who asked about the sandwiches’ impact on sales, which was about 3 percent per store for the 3,700 stores that sold them.

  The second unanticipated announcement that day was even more contentious, at least among the financial community: Starbucks, I said, would no longer report its same-store sales. Our comps would no longer be made public. Had the analysts not had their phones on mute until they wanted to speak, I likely would have heard a collective groan, not to mention a few four-letter words, of irritation.

  “I would really love to know,” asked David Palmer of investment bank UBS, not mincing his words, “why you think it would help your stock, the company, investors, or anybody to remove disclosure at a time like this?”

  I agreed with David that comps were an appropriate measure for gauging a retailer's health. But for Starbucks, comps did not take into account the company's revenues from packaged whole-bean coffee in grocery stores or beverage sales at thousands of our licensed store-within-a-store counters in supermarkets and bookstores and in airports. This gap did not matter much during times when our stores were thriving, but if our US comp store sales continued to decline, we would not get any credit for sales in other venues.

  But there was an even more important reason that I chose to eliminate comps from our quarterly reporting. They were a dangerous enemy in the battle to transform the company. We'd had almost 200 straight months of positive comps, unheard-of momentum in retail. And as we grew at a faster and faster clip during 2006 and 2007, maintaining that positive comp growth history drove poor business decisions that veered us away from our core.

  The fruits of this “comp effect” could be seen in seemingly small details. Once, I walked into a store and was appalled by a proliferation of stuffed animals for sale. “What is this?” I asked the store manager in frustration, pointing to a pile of wide-eyed cuddly toys that had absolutely nothing to do with coffee. The manager didn't blink. “They're great for incremental sales and have a big gross margin.” This was the type of mentality that had become pervasive. And dangerous.

  Eliminating comps from the radar was my attempt to send a message to Starbucks’ partners: We will transform the company internally by being true to our coffee core and by doing what will be best for customers, not what will boost comps.

  The financial community was not pleased with this latest wrinkle because it made it more difficult to assess our present performance and predict Starbucks’ future. Many assumed we were hiding. But contrary to perception, I was not trying to be arrogant or obtuse or slick. I was, however, attempting to establish new priorities inside the company.

  Both decisions—eliminating the sandwiches and the comps—were worth risking public backlash. Especially the comps! It is difficult to overstate the seductive power that comps had come to have over the organization, quite literally becoming the reason to exist and overshadowing everything else. Releasing us from their shackles, especially at this very fragile stage of my return, demonstrated to our people that things really were changing, that “transformation” was not just a word I was throwing around. It was a grand gesture that freed everyone to enthusiastically focus on our coffee and our customers. And there was so much in that arena that demanded our immediate attention. In addition to the upcoming national launch of Pike Place Roast, I had elevated another internal coffee-related initiative that, at the time of the earnings announcement, was in a very private process of unfolding.

  Back in March 2004, a young engineer in Seattle set out to improve how brewed coffee is made. Zander Nosler was 32 when he quit his job at an industrial design firm and asked investors to fund a dream. Zander wanted to invent a coffee machine that brewed the best cup of coffee possible—one that equaled the quality of a French press. Even more ambitious, the machine and the brewing process had to be enchanting, even beautiful, something worth watching and waiting for. It was a niche wide open for innovation.

  Zander heard “no” many times before finding a few investors who believed in him. Together with his partner, Randy Hulett, a multitalented engineer who oversaw the small product development team, they built a lab in the back of a friend's woodworking shop in a garage in Ballard, one of Seattle's oldest, most eclectic neighborhoods, about six miles from Starbucks’ support center. Together his team began to build a high-end machine. After several false starts, they had their prototype. Made out of particleboard and hoses, it was the reverse of a French press, with a plunger that pushed ground coffee up instead of down.

  They named their machine the Clover brewer.

  By 2007 the company had sold 150 Clovers, all handmade. With its creative mix of automation and manual attention, the sleek Clover machine was beloved by its customers, which were mostly small, independent coffeehouses. It began to amass a loving following.

  I was with Sheri in New York City when I decid
ed to do a round of impromptu pop-ins at independent coffeehouses I'd been hearing about. We jumped in a cab and hopped out on a tree-lined block, where we walked to a small shop with a charming wood and brick façade.

  We ducked inside for a look.

  The space had a bohemian feel and in general I was underwhelmed. But one thing did intrigue me. There was a long line of people waiting for brewed coffee that cost, according to the sign, up to $6 a cup. A tall brewed at Starbucks was $1.50. I decided to try it.

  For me, the best way to brew coffee has always been in a French press. That was how I'd brewed it at home for 25 years. Unlike the drip method, where water passes over coffee grounds and drips through a filter, the coffee grounds in a press pot are continually steeped in water; the full immersion brings out a taste that just cannot be achieved with a drip brewer.

  As I stood in line and waited my turn, I watched the barista. I did not recognize the machine she was using, but it was fascinating to watch as she weighed and ground the beans for each order and then poured the grounds into the top of a stainless steel, black-sided machine. A silver spout on top added hot water and then, like magic, the resulting grounds unexpectedly materialized atop the machine in a thick, precise, pancakelike formation. It was beautiful.

  When it was my turn at the counter I ordered, watched, waited, and finally took a sip. I was stunned. This coffee was as rich and flavorful as coffee from my French press. Sparkling.

  “What's the name of the machine?” I asked the barista.

  She looked up at me as she prepared the next customer's cup. “Clover,” she said, and went back to her work.

  I walked outside and on my cell phone dialed our coffee department back in Seattle. “Who makes the Clover?” I wanted to know. Less than an hour later, I received an e-mail. Unbelievable. The machine was made by a company in Starbucks’ own backyard.

  I did not recall that I'd actually seen a Clover brewer in action, tasted its coffee, and met its inventor in mid-2007 as part of a demonstration at Starbucks. At the time, as Zander recalled, I told him that I had never tasted such a good cup of brewed coffee from a machine. About a month after that tasting, unbeknownst to me, Starbucks ordered one Clover and put it in one of our stores to test.

  The next time I saw Zander was in his makeshift laboratory not long after I rediscovered Clover and only three weeks after I had returned as ceo.

  This time when we met, I wanted Starbucks to acquire Clover.

  It interested me for several reasons.

  First and most important, Clover makes a terrific cup of brewed coffee. A cross between a French press and a vacuum pot, Clover sucks water through the bottom of finely ground coffee instead of pressing water through the top, using a very fine filter that lets the coffee retain its best-tasting oils. By no means did I see Clover as a replacement for our brewed coffee, but it would complement Pike Place Roast in our attempt to elevate coffee and the coffee experience. Nor was Clover a big revenue play to immediately spike sales. Rather, Clover would add depth to our menu, offering customers more options while supporting our mission to be the undisputed coffee authority.

  Second, because of Clover's inventive engineering and graceful design, it treats brewed drinkers to a level of customization and personal attention that had, historically, been reserved for our espresso drinkers. When someone ordered a brewed beverage at Starbucks, our barista poured the already brewed coffee into a cup with his or her back to the customer and then handed the drink over at the register. For espresso beverages like lattes or cappuccinos, the experience is intrinsically more elaborate and personal: The barista pours the shot, steams the milk, and customizes the drink facing the customer, then announces the order and presents the beverage on a high, uncluttered counter, much like a stage. All in all, there was not much theater for the drip drinker.

  Clover presented an opportunity to help solve that. Like an espresso machine but much more compact, a Clover could be positioned on a counter in front of customers, who could then watch the barista and the machine brew their coffee in a way they had never witnessed. What's more, Clover's technology would allow us to serve more specialty, small-batch coffees whose complex flavors are often lost using traditional brewers.

  Clover's quality and beauty not only were thrilling, but also posed a very real competitive threat, even at its premium price per cup—so much of a threat that I believed Starbucks needed to own it. Now.

  I was a bit taken aback when I walked, alone, into the large garage that was home to the Coffee Equipment Company.

  “Zander,” I said, a smile on my face and a hand outstretched. A slight, soft-spoken young man in glasses smiled back and welcomed me. Although we had met before, I did not recognize him. (Throughout my years at Starbucks, I have always met so many new people in the course of even one day that, as much as I wish I could recall every face, it's almost impossible.) Zander and I chatted for a bit next to a few half-built Clover machines before walking to Brouwer's Café to eat lunch outside.

  Listening to Zander, I was tremendously impressed. Here was an articulate, highly intelligent young man who is passionate about coffee and had educated himself about the industry. Respectfully, I told him why I had come. “Zander, we would like to acquire your company,” I said. “I think Starbucks can offer you something that you'll be quite happy with.” By “something” I was alluding to not just the purchase price, but also to the respect and opportunity Starbucks would give Zander, his team, and Clover.

  It was obvious from his expression that selling was not in Zander's immediate plans.

  “And what would we do with our current customers?” he asked me, clearly concerned.

  “You'll have to take great care of them,” I answered, knowing that, even if we bought Clover for Starbucks’ own proprietary use, Clover's current coffeehouse customers could continue enjoying the machine.

  “And what about our team? We have 11 employees.”

  I said they could come work for us and stay with Clover.

  After a handshake, I left Ballard rejuvenated.

  During the next month, I met with Zander several times to negotiate the broad strokes of the deal. Often it was just the two of us, across the table in my office or at my home, and with each meeting our mutual trust increased. It was important for me to stay closely involved with him. I never wanted Zander to regret trusting us, trusting me, with his dream.

  Meanwhile, back at Starbucks, our senior vice president of global finance and business operations, Troy Alstead, and his financial team worked diligently on the nuances of the Clover acquisition. Troy had been with Starbucks for 15 years. He is not only extremely intelligent, possessing a keen understanding of our global business, but also an excellent communicator. When Troy speaks, he never hides behind accounting jargon or numbers. His integrity, knowledge, and personal style garner a high degree of trust.

  Thanks in part to Troy's round-the-clock dedication and ability to work well with the young entrepreneurs we were acquiring, I had faith that the Clover deal would come together in a remarkably short period of time.

  As for launching Clover machines in Starbucks stores, that was not something we would do at a rapid pace. In light of the country's receding consumer spending as well as Clover's manual manufacturing process, it would take time for Clover to realize its full potential inside Starbucks and for Starbucks to see the financial fruits of the marriage. But I was okay with that. More important, in my view, was the message of confidence that Clover's acquisition would send to partners, customers, and shareholders, reassuring everyone that Starbucks was once again committed to decisiveness and coffee innovation.

  Chapter 12

  Get In the Mud

  I have long believed in the power of a word or a single phrase to effectively communicate a business imperative—and to inspire people. The best words are never big or complicated, but are packed with emotion and meaning, leaving no question of what I expect of myself and others.

  Rarely in my care
er have I actively searched for the right words. They tend to find me, often in a poignant moment, maybe minutes before addressing a roomful of people; during an impassioned, unscripted speech; in a private conversation; or when sitting alone in my kitchen, drinking a cup of coffee. The concepts that my words convey may be strategic in their intent, but the words themselves are spontaneous manifestations of my love for Starbucks. I feel them before I voice them.

  Mike Ullman, our lead director and an experienced CEO, has said that communication is always important, but it is even more essential when things are not working. Ensuring that communication is narrow, clear, and repetitive to set expectations wins people's trust. During this tumultuous period in Starbucks’ history, what I said and how I said it was, I believe, key to tapping into our partners’ passion, recapturing their faith, and redirecting their talents.

  In any well-run retail business there is, by definition, a maniacal focus on details. Especially in the beginning. Young companies must produce results every day or risk closing their doors. Anything with the slightest potential to add or detract from sales or earnings—the quality of each item, every customer interaction, the attitude of each employee, every dollar spent—is attended to with steadfast concern.