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

by Howard Schultz

  The layoffs were also devastating for the partners who remained behind and stood before me today. I was not nervous as I spoke, but mindful of trying to honor a very tough and sad situation while being realistic about the company's pressing challenges. Our people needed confidence to move on. We had to turn this page.

  This is a defining moment like no other for Starbucks Coffee Company, and moments like this are quite difficult and emotional so let me specifically address yesterday. I never anticipated, nor was I emotionally prepared for, the decisions that led to asking passionate, talented, deserving partners to leave our company. . . . I know people are angry and grieving and I know people are mad. But I had to make the difficult choice [and consider] the long-term sustainability of the company. Our revenue and profits have got to be linked to a lower cost structure or else we are going to find ourselves in a much worse situation. We have less customers in our stores this month than we did last month, and less last month than the month before. We are not seeing new customers come into the stores.

  The question is, How are we going to respond?

  In addition to the many initiatives under way to create customer demand and reverse the negative flow of traffic, we had to get the company's costs under control. Closing stores and fixing inefficiencies in the field was a start, but we needed to cut deeper.

  Unlike the phalanx of global financial institutions that considered themselves too big to fail, Starbucks has never been an irresponsible spender. But perhaps because we viewed our company as too good to fail, we did not work or operate the business as wisely as we should have. Rarely did we make the effort or take the time to step back and question whether we made the most of our resources.

  The situation in Seattle was akin to what Cliff was witnessing in stores. Our leaders and teams were always incredibly busy, putting in long hours under increasing stress, but their workloads—like empty cups waiting to be filled—kept stacking up. In our stores, rather than reconsider how our baristas poured coffee or made drinks, we often added people to absorb the load or in some cases tolerated less-than-perfect beverages. Similarly, in our offices—to keep pace with new store openings—we staffed up for short-term relief. More specifically, with each new store opening, our supply chain organization (SCO) was under intense pressure to deliver materials and equipment. Because SCO was moving so fast, it did not have time to figure out the most cost-effective, timely ways to work with suppliers or deliver goods. SCO was not at fault, and it was not alone. Most of our business units were striving to meet their objectives with the best of intentions. But not always with the best of practices.

  During Jim Donald's two years as ceo, he did recognize Starbucks’ lack of cost-management muscle and urged the company to, as he put it, “develop a new skill set” and tighten spending. But significant cuts never fully materialized, in part because there existed no acute need to run a tighter ship. Until now. The company's rapidly receding sales—comps in July were just shy of negative 7 percent—revealed a rocky foundation of operational inefficiencies, thinning our margins as never before. The leadership team and I agreed that Starbucks had no choice but to decisively pull tens of millions of dollars of permanent costs out of the business. And that meant reducing our workforce.

  In a tense daylong meeting earlier that month, the leadership team, despite some resistance, had made the difficult decision that each business unit would reduce a percentage of its costs. No one prescribed to anyone else who or how many people should be let go. To absorb the pain, I think I convinced myself that we were saving the company by sacrificing a very small percentage of people to preserve the large percentage who would stay. If I were going to enhance the long-term value of the company, I had to make this difficult choice. Ultimately, it rested with me.

  In the days that followed, our business unit leaders collaborated behind closed doors and—it was no secret to their staffs—went through the process of assessing who could stay and who would go. When I was handed lists of individuals who would be laid off, I looked at every name, never allowing a number on a page to replace a human being. I wanted to know the name and position of every person being asked to leave. I wanted to know who they were and how many years they'd been with the company. In many cases, a partner had been a solid performer with a strong track record, but we simply could no longer afford him or her. In certain instances I stepped in to make sure no politicizing or hidden agendas affected a decision, asking questions about why this person was being asked to leave or asked to stay.

  I recognized, and so did the leadership team, that slimming down the company would be brutal. Absolutely brutal. And even as we did so as compassionately as possible, our actions still seemed unfair.

  But the tragedy of doing nothing would have been far worse.

  “Why don't you just sell the company?” someone outside Starbucks asked me rhetorically, suggesting that a larger organization could leverage things that we could not, given our size, and stop the bloodletting.

  Unbeknownst to most of our partners, as ceo, pressure to dramatically slash costs came at me from all fronts as the chatter in the press and online insisted that Starbucks’ best days were behind us. Investors wanted Starbucks to undo our company-owned and -operated store model and franchise the system, letting other people own and operate our stores and pay Starbucks royalties. On its face, it made economic sense. Franchising would have given us a war chest of cash and significantly increased our return on capital. But if Starbucks ceded ownership of stores to hundreds of individuals, it would be harder for us to maintain the fundamental trust our store partners had in the company, which, in turn, fueled the trust and connection they established with customers. Franchising worked well for other companies, but would, I believed, create a very different organization by diluting our unique culture.

  “How much coffee do you roast?” someone else wanted to know.

  “Four hundred million pounds a year.”

  “Well, if you reduce the quality just 5 percent, no one would know, and that's a few million dollars right there!” This was seriously suggested as an option. But Starbucks would never sacrifice quality for the sake of saving costs.

  Others insisted I cancel our upcoming leadership conference, when we would bring almost 10,000 of our store, district, and regional managers together in one place at great expense, but for, I believed, great purpose. We desperately needed to reconnect with our own people, in person.

  At these recommendations and others, I did not blink. Every brand has inherent nuances that, if compromised, will eat away at its equity regardless of short-term returns. As Starbucks navigated, we had to stay true to our values, reinvesting in and recommitting to the things that had brought us success, not quick fixes. We had to believe in our hearts that, if we were authentic and if we were true and stayed the course, this transformation would work.

  “If I had a shadow of a doubt—a shadow of a doubt,” I told the person who suggested we put Starbucks on the block, “that we would not return the glory of our company, the equity of the brand, the experience in our stores, and the pride of partners, then I would be the first one to say, ‘Let's sell the company.’”

  I needed to communicate this same confidence to our people at the open forum following the layoffs, to ask them to stay strong and focused, which was no easy request given the circumstances.

  I can see the light, I know what we have to do. We have to show up. We have to do the work. And doing the work means we have to find answers to tough problems. We have to be highly focused on the things that matter and stop wasting time and money on things that are irrelevant.

  What matters is that we push for answers for the problems in front of us and are curious about the things we do not see, and look for ways to get better, smarter, more efficient, and push for reinvention and innovation.

  This is a true test of the company and a true test of the individuals who are assembled here. The reason we are going to succeed is the same reason we have succeeded in
the past. Not the stock price or the press. We succeeded because of what we believe in and what we stand for.

  I believe in the future of our company because I believe in all of you.

  Not everyone, of course, believed in me, and many people inside and outside the company were questioning my leadership, whether I could get us out of the deepening hole. In fact, during the past 24 hours I'd received a lot of e-mails from the people who were let go, thanking me for the opportunity to be part of Starbucks and thanking the company for dealing with them in a compassionate way. But I also got e-mails from partners who felt betrayed and questioned whether we were honoring our guiding principles. Read one curt note: “To provide an uplifting experience that enriches people's lives every day. Do you remember when that used to mean something? I do.”

  Given the frustration, it was imperative that I stand in front of our people and give them a chance to vent. Publicly. They were complaining among themselves anyway, but talking to me reinforced, I hoped, the very values people felt I had tarnished. Being transparent is my natural response, but it is also a symbol of the honesty I want everyone inside the company to embrace.

  When I opened the forum floor to comments and questions, several people stepped up to the microphones stationed around the room. A few read prepared written comments. Others spoke spontaneously. When Sean Shanahan, a manager in risk management, spoke, his voice was edgy after the day of letting members of his team go. From across the room, he looked me in the eye. “We took part of the hit for you yesterday in having those conversations,” he said. “And I don't want to do that again.” He gathered his thoughts. “I need to know that you hear that. We are not prepared to go through this again. So, we will be looking to you for things that we may have never asked you for before. . . . Are you and the people around you prepared to be held accountable by us?”

  “I think you have that right,” I replied. “Thank you for saying that.” Sean was right. Starbucks’ leaders had to be accountable in ways we had not been in the past.

  Decisiveness during this time of uncertainty was critical, especially when choosing who would lead Starbucks alongside me, and I continued to refine and realign Starbucks’ leadership team, shifting people's roles, saying a respectful good-bye to others, and welcoming new talent.

  The board, specifically Craig Weatherup, was impressing upon me the need to add seasoned executives from outside Starbucks to the management mix, people with rich brand-building and operational track records at larger organizations. I'd always believed that, to move forward, we needed to embrace new perspectives and approaches, and Starbucks had always attracted leaders with skill bases beyond the size and scale of the company.

  Our challenge was finding individuals whose accomplishments were matched by their values and an innate sense for Starbucks’ culture. This is a very fragile balance to strike, because the wrong match can pollute the integrity of the company. Political agendas. Managing upward, but not downward. An inability to earn respect or to be a trusted team player. These traits are poison. Yet when it comes to hiring, I have antennae about people's characters, a sixth sense that I often follow even if my choices raise others’ eyebrows. More than once I have promoted internal leaders to positions that would be a stretch from their previous roles because their core skills, determination, and passion for what Starbucks stands for would, I wholeheartedly believed, yield success.

  With the company in such dire straits, each leadership decision I made was more critical than ever. If I put or kept the wrong people in the wrong roles, the company would drift further off course.

  By the end of July, along with the layoffs, I had made several significant leadership changes, including a few surprises.

  I'd found our new chief information officer in Stephen Gillett, a 32-year-old from outside the retail industry. It appeared that Stephen would be the youngest CIO of a Fortune 500 company, which made some question whether he could handle the immense job of overhauling our ancient technological infrastructure. But Stephen brought a rich combination of technical acumen, valuable digital media knowledge, and insatiable curiosity to the table, all of which he'd honed at the digital media company Corbis, as well as at Yahoo! and CNET. I was also impressed by Stephen's dynamic thought process, and I sensed a good heart behind his wide grin.

  To oversee our supply chain organization, I appointed Peter Gibbons, our soft-spoken yet tough-minded head of manufacturing who had come to Starbucks in 2007 from a huge chemical company, bringing discipline and pride to his work. Peter recognized, perhaps more than anyone else at Starbucks, just how broken our distribution and logistics systems were, and when I tapped him to be executive vice president of our global supply chain, the area of the business I knew the least about, I had confidence that Peter would act with informed decisiveness and professionalism.

  And in September 2008, Vivek Varma joined Starbucks to lead public affairs after 12 years at Microsoft. I'd known Vivek and had asked his counsel on several complex issues that Starbucks had faced on several fronts. I found his perspective informed, confident, straightforward. And while we did not always agree, Vivek approached issues through a strategic and socially conscious lens that I believed would add sophisticated, sensitive guidance when it came to telling our story.

  Cliff continued the good but hard work as president of our teetering US business. And after having worked side by side with Michelle Gass to articulate the company's direction with the Transformation Agenda, I needed her back in an operational role. She assumed the position of head of marketing and category, overseeing the teams that lead marketing, creative, beverages, coffee innovation, and food. Paula Boggs, who had come to Starbucks from Dell, remained our knowledgeable and multifaceted executive vice president of law and corporate affairs, and Chet Kuchinad was in charge of partner resources. Arthur Rubinfeld was back at the leadership table as president of global development. Arthur had stepped into the job with conviction and creativity, and in addition to tackling our real estate challenges, his design team was already looking forward, envisioning the future look and feel of Starbucks stores. Beyond these positions on the leadership team, I knew a few more changes remained.

  I could not save Starbucks on my own. Being able to do so was never my intention or my belief when I returned as chief. I was no silver bullet and, like any leader, I needed to surround myself with strong talent who would bring new ideas and, with courage, challenge the old as well as challenge me. This meant watching some people leave the organization, which was never easy whether or not it was my decision.

  Inside Starbucks, July 29, 2008, was dubbed Black Tuesday. It definitely was a dark time. In addition to the layoffs, some of our people were questioning what we stood for. Our sales growth was hitting new lows, especially on the weekends. Our cost structure was not sustainable.

  And tomorrow I knew there would be headlines all over the world proclaiming that Starbucks had lost money for the first time in its history, because we had reported a net loss of $6.7 million for the third quarter. No matter that it was the one-time costs associated with the transformation that had taken us into negative territory—we'd actually made money before accounting for those charges, albeit not as much as the year before. A loss was still a loss. When I thought about our thicket of challenges both known and unknown, the word that came to mind was familiar and apt: “Onward.” More than just a rallying cry or an attitude, “onward” seemed to connote the dual nature of how Starbucks had to do battle and do business in these increasingly complex, uncertain times.

  “Onward” implied optimism with eyes wide open, a never-ending journey that honored the past while reinventing the future.

  “Onward” meant fighting with not just heart and hope, but also intelligence and operational rigor, constantly striving to balance benevolence with accountability.

  “Onward” was about forging ahead with steadfast belief in ourselves while putting customers’ needs first and respecting the power of competition.

&nb
sp; Yes, everyone at Starbucks could indulge his or her passion—be it for coffee, the environment, marketing, or design—but only if we did not lose sight of the need for profits.

  “Onward” was about getting dirty but coming out clean; balancing our responsibility to shareholders with social conscience; juggling research and finances with instinct and humanity.

  And “onward” described the fragile act of balancing by which Starbucks would survive our crucible and thrive beyond it. With heads held high but feet firmly planted in reality. This was how we would win.

  I knew this to be true.

  Thankfully, I was not alone in my conviction. The following e-mail from Cindy Gange-Harris, a district manager in Edmonton, Canada, whom I had never met, arrived just before midnight on July 31, 2008.

  Howard,

  From the tone of your voice mail, the assorted press reports and blogs it sounds like you have many people voicing their concerns and disappointment to you around the business decisions that have been made.

  I want you to know that you still have many partners who believe. I have been with Starbucks almost 11 years and know that to aspire and maintain greatness, difficult decisions must be made and sacrifices taken. I trust in the decisions that are being made to keep us on the right path. We will need to work harder than ever, with great diligence and attention to the operation of our business to keep us moving forward.