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

by Howard Schultz

  During my visits to stores I make it a point to connect with all of the partners in my stores, not just the manager, and talk to them about their training, their experience and ask for their feedback. I talk about what we are experiencing as a company and assure them that although we are facing challenges we have not faced in the past, I have seen countless examples of Starbucks facing adversity and how we work hard to “do the right thing” and make decisions based on our mission statement.

  Thank you for all you are doing and creating a company that has given me my dream job. Even when some of the days are tough, they are overshadowed by all of the people that I have made a difference for and who have made a difference for me.

  We ARE a different company, one of the best to work for in the industry, and I have absolute faith that fantastic things are ahead.

  Part 4:

  Hope

  Chapter 22

  Truth in Crisis

  On September 15, 2008, the economy spun into a free fall.

  Lehman Brothers Holdings, the investment bank founded in 1844 as a general goods store, declared the largest bankruptcy in US history despite last-ditch efforts by the US Federal Reserve and competitors to prop up the failing institution. Between prep sessions for a board meeting in Los Angeles later that week, I watched on the television in my office as stunned Lehman employees filtered out of office buildings carrying boxes of belongings.

  That same day, stalwart brokerage house Merrill Lynch and Company agreed to be taken over by Bank of America, essentially saving itself from Lehman's fate. Global insurer AIG was almost out of cash and teetered on the brink of collapse, a condition whose devastating consequences would ripple through dozens of countries.

  And in Seattle, Washington Mutual, the Northwest's homegrown bank that had proudly flourished to become the nation's largest savings and loan institution, was under siege from its own massive portfolio of troubled mortgage-backed assets.

  Few people understood, myself included, the degree to which the complex, risky investments made by the world's biggest banks were dangerously intertwined, but by the end of the day we would all have an idea. Wall Street fell more than 500 points on September 15, its biggest one-day point drop since the days following the September 11, 2001 terrorist attacks. While Starbucks’ stock, which had been hovering at around $15 a share, did not take a big hit that day, hundreds of billions of dollars of personal wealth vanished, affecting millions of people, including our partners and their families.

  Wrote Andrew Ross Sorkin that day in The New York Times:

  The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments. . . . “My goodness. I've been in the business 35 years, and these are the most extraordinary events I've ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group. . . . It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street and threatened the broader economy . . . which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation's growth rate has slowed.

  So many respected companies had fallen so far so fast, to the shock of so many.

  For the financial system and economy—as well as for Starbucks—it was taking a crisis to reveal fatal flaws. On one hand, Starbucks’ problems as well as our mistakes paled in comparison to the financial devastation caused by the banks’ mismanagement. On the other hand, our missteps could, like the banks’, be our undoing, and thus it was more important than ever that Starbucks Coffee Company fix all that ailed us. We had so much at stake. Our thousands of partners needed their jobs, and our shareholders did not deserve to have their investments and trust in us disappear, too. We were better than that and had to keep accepting where we had gone wrong and fight to get it right.

  This was especially true when it came to back-of-the-house operations. The escalating economic turmoil posed a further threat to our top-line sales and profit margins as already cautious consumers would no doubt cut back further on discretionary spending. And that meant, among other things, fewer trips to Starbucks. The financial crisis and the punditry, which painted Starbucks as a poster child for excess, were having a real psychological effect on our customers, making some people feel that by carrying around a cup of Starbucks coffee, they were not appearing frugal enough.

  To make up for lost sales, we would have to strip hundreds of millions of dollars of permanent costs out of the business. In September 2008, cutting the fat out of Starbucks’ operations took on a new urgency.

  “The wheels have come off the bus,” read the e-mail.

  It was a Saturday morning, two weeks before the September 15 financial collapse, and Jim McDermet, Starbucks’ senior vice president for the northeast Atlantic division, was e-mailing Peter Gibbons about a spate of recent problems with store deliveries. Peter was just weeks into his new job as head of Starbucks’ supply chain organization and already recognized that SCO—the 1,300-partner business unit responsible for procuring, roasting, packaging, warehousing, and transporting Starbucks coffee, beverage ingredients, baked goods, merchandise, and other supplies to stores—was a bureaucratic monster.

  Wrote Jim, “Across the division—and I would daresay the country—we are causing our district managers, store managers, and store partners real pain.”

  In Manhattan, upwards of 100 stores a day had been running out of food and other basics, like toppings for oatmeal, the popular breakfast item we'd added to the menu as part of the health and wellness platform. In store after store, delivery after delivery failed to show up on time or at all. Some stores even ran out of cups! Resourceful store managers and baristas were scrambling to make up for the shortfalls, which distracted them from customers. While the New York City problem was partly due to problems that our suppliers were experiencing, the performance was still unacceptable. It also was not an anomaly. In pockets throughout the Northeast, stores’ sales and morale were suffering from a logistics breakdown.

  Starbucks’ supply chain operations had always been uniquely challenging. Every week, around the world, we made 83,000 deliveries of perishable and nonperishable items from our four coffee warehouses, five regional coffee-roasting plants, 50 distribution centers, and multiple suppliers. Every year in the United States and Canada, 608 million pastries were delivered to our company-owned stores. So were 103 million gallons of milk and 242 million pounds of coffee. Most of our stores received at least one delivery every single day. And depending on changes in weather conditions, orders varied. A humid day in Chicago meant stores could run out of nonfat milk by midday. A rainy week equaled inventory overstock.

  If a store receives only some of the merchandise it orders, customer requests go unfulfilled and the store and company lose not only sales, but also customer goodwill. That's exactly what was happening. In 2008 the chance of a store getting everything it asked for on time and intact was about 35 percent, and it was highly likely that every day, thousands of stores were out of something. Tougher to measure were customer and partner disappointment. Every time a barista had to tell a customer, “Sorry, we're out of vanilla syrup” or “We didn't receive our banana shipment so I can't make your Vivanno,” the fragile trust between Starbucks and our partners and between Starbucks and our customers fractured.

  As part of the company's transformation, SCO was under intense pressure from the US business to improve service to stores and, simultaneously, under pressure from our cfo to drive down soaring costs.

  The company had not been completely oblivious to SCO's problems, and prior to Peter's leadership there had been a reorganization—but it was widely
thought to have only complicated matters and further confused our people and suppliers. As Jim McDermet had stated, our continued lack of discipline in this area was becoming painfully obvious.

  At 5 a.m. on Wednesday, September 3, 2008, four days after Jim's SOS e-mail to Peter, a longtime partner and district manager in St. Louis, Tina Serrano, sent an e-mail to the distribution manager of her region about the shortage of bottled water in her stores.

  I have heard of about a dozen or so stores that were zeroed out of Ethos. Some stores have been out for close to a week. Can you help? We have a major fair coming to town this weekend and no water.

  Six hours later, having done more due diligence, Tina shot off another e-mail.

  FYI—We are out EVERYWHERE!!

  Throughout the day Tina's e-mails were forwarded from one person to another and worked their way up the organization. Finally, the next day, at 6:36 a.m., an “Out of Ethos” e-mail was sent to Rich Nelsen, regional vice president, who e-mailed Craig Russell, senior vice president of store services, who immediately e-mailed Peter Gibbons.

  Peter,

  I wanted to ensure you had visibility to the Ethos supply issues impacting SE Plains. The teams are responding but the problem seems well beyond that team's scope of control.

  When news of the problem somehow reached me, I walked up to the ninth floor and into Peter's office and slumped back on a chair in front of his desk as he briefed me about the situation. Dozens of Starbucks stores were running out of Ethos water, or their supplies had already hit bottom, and many warehouses did not have any Ethos in stock to replenish it. I was incredulous.

  “How could this happen?” The fact that a portion of Ethos sales was donated added to my frustration.

  “Don't worry,” Peter calmly assured me. “This is all going to be fixed.”

  “But how could it happen?”

  Instead of dancing around my question, Peter answered me straight up. “SCO is so confused with all the changes that have taken place that no one knew who was supposed to order the water.” Unbelievable. “We'll get it straightened out. It won't happen again.”

  I'd known for years that the overall cost-effectiveness and efficiency of our manufacturing and supply operations was not on a par with the quality of our coffee. I'd heard the complaints, but for years SCO was so busy keeping up with the company's explosive growth—“Just get products to stores” was the mandate—that it did not have the time to properly invest in the discipline and competency that building a world-class supply chain requires. Nor was there a reason for the company's senior leaders to insist that we invest in SCO. The financial success of our stores more than made up for, or rather covered up, logistics and distribution inefficiencies. Nonetheless, we still incurred hundreds of thousands of dollars in unnecessary expenses each year, such as paying to ship US-sourced supplies overseas to our European stores rather than sourcing them locally. Or doing business with so many local bakeries that our food tasted inconsistent and prevented the cost savings that come from purchasing large quantities of, say, blueberry muffins from one or two suppliers.

  Like our information technology systems, Starbucks’ supply chain operations had not matured as the organization they supported grew in size and complexity.

  Another source of the problem, to the board's point, was our lack of deep supply chain expertise. Fault didn't lie with SCO's current leaders or managers, but rather with our culture. Starbucks had a pattern of promoting talented people into new roles to stretch and develop them, even if they did not always seem to have the obvious credentials. For years that worked fine, and our people loved the opportunities, but our supply chain operations in particular had become too sophisticated to simply allow well-meaning, hardworking people to learn on the job, even if they were committed to success. SCO desperately needed specialists, not generalists.

  I accepted part of the blame. Starbucks’ supply chain was not, historically, an area I focused on as chairman or as chief executive. Quite frankly, my attention went to the engine of the company: driving revenue by building the Starbucks brand, creating the Starbucks Experience, and inspiring our partners. These were my priorities and passions, as well as my skills, and like many people I gravitated to my strengths.

  But debacles such as the Ethos shortage, while not necessarily life threatening to the business, enlightened me to my own shortcomings as a leader: I hadn't delved far enough into the areas of the business that I was not comfortable with or had little innate interest in. I should have looked under the hood more often. Now I had an opportunity to self-correct and become as well versed in the company's back-end operations as I was in my own core competencies—which had been one of my intentions when I eliminated the coo role.

  Still, SCO had needed its own leader who could come in and, with decisive authority, identify what was broken and adapt proven solutions. I put tremendous trust in Peter, who had joined Starbucks as head of manufacturing even though it was a step down from his previous responsibilities. Peter had been steeped in back-end operations since age 18, when he worked in a vinyl-floor factory in Scotland, and more than once in his two-decade career he'd driven radical supply chain changes through larger organizations with more locations and product variations than Starbucks. Plus, Peter is a natural leader. His confidence and straight-talking yet personal communication style belie his technical training, and he quickly earned the respect of partners who, as he sensed after hosting his first SCO open forum, were hungry to be led by someone with a back-to-basics clarity.

  “At the end of the day,” Peter would repeat over and over, “someone places an order, someone fulfills that order in a warehouse, it gets loaded on a truck and is delivered to a store. That's what we do.”

  His strategy to transform SCO was all of three words: “Service. Cost. People.” Under Peter, SCO would have three goals: Deliver great service to all who placed an order, be they our stores or hotels that served our coffee. Second, lower our costs. And third, develop internal talent and recruit specialists in transportation, logistics, engineering, and quality control.

  “I won't take up your time with a lot of words or promises,” Peter had written in an e-mail to Cliff and about one dozen regional vice presidents about SCO's poor service record. “I just want you to know that the service levels that are being provided to you are not acceptable and will not be allowed to continue.”

  Not only did Peter have to overhaul the current system—rebuilding it to accommodate the company for years to come—but he also had to do so while preserving our coffee's quality and not further alienating our vendors.

  What's more, every new product the company was launching presented SCO with another piece to add to the puzzle. On September 10, 2008, it was my turn to receive an e-mail bemoaning our supply chain, albeit indirectly. The complaint came from a customer.

  Dear Sir,

  It sure is difficult to find stores with the ingredients in stock to make orange mango banana Vivannos. I have to drive all over. Some run out of bananas and others run out of the juice. Hope this will improve. Honestly, it's every day, and they taste soooo good, if you can get them and get them right.

  I forwarded the e-mail to Peter without explanation. The original e-mail's subject—”Vivannos Missing In Action”—would tell him all he needed to know.

  Five days later, the collapse of Lehman's sparked an economic crisis that would soon sweep the world.

  In September 2008, the debate about what the fall of Wall Street meant for Main Street was in full swing, and I left Seattle to do a scheduled tour of Starbucks stores in Los Angeles as part of a board meeting. Cliff and two of our directors were visiting stores with me. At a Starbucks in downtown LA, after visiting with the baristas, Clara Rolan, the store's manager—who began at Starbucks as a barista in 2003—took us in the back office for a private conversation to discuss her store's performance. I wanted to know what was selling, what was not. And what she was witnessing with consumers.

  “With the economy
so bad,” I asked Clara. “How do you keep customers coming back?” Clara paused for a moment before answering.

  “I think it would be better if one of our regular customers answers that question,” Clara said. I was unsure whether having a customer in the back office was a good idea, but I deferred to Clara, who walked out of the room and walked back in with a man in a suit. I could not help but notice he had a gun on his hip. “Don't worry,” he said, noticing me noticing his pistol. “I'm a police officer.” It turned out he was a detective for the Los Angeles Police Department who frequented Clara's store two or three times a day.