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

by Howard Schultz

  The election campaign was a turning point, with Starbucks discovering powerful ways to drive traffic and positively engage with customers at a low cost that was still in keeping with the brand. With BBDO, we even coined a term for our election ad–inspired marketing approach: brand sparks. These subtle, surprising, and rare marketing events—usually linked to cultural or humanitarian issues and devoid of a self-serving sales pitch—would characterize how we went to market.

  Whether or not someone walked into a Starbucks on November 4, the election campaign no doubt generated goodwill among several constituencies, placing a halo above our somewhat battered brand. And going into winter, Starbucks needed all the goodwill we could get.

  Chapter 25

  Plan B

  Starbucks’ mission from the beginning was to build a different kind of company, one that would achieve a healthy balance between profit and social conscience. Never had the earnings side of the equation been in more jeopardy than during the fall of 2008.

  For Starbucks’ fourth quarter ending in September, profits plunged 97 percent to $5.4 million. For the year, earnings were down 53 percent, to $316 million. While the drops included $105 million in one-time charges associated with the restructuring and transformation, without those charges the company still came in four cents a share below earnings estimates.

  Our outlook was also bleak. We publicly predicted that, in 2009, sales would be slow to rebound if costs of staples like gas and food continued to rise and home values and credit continued to contract. As the crisis spread to Europe and Asia, we were also pulling back on plans to open as many new stores overseas as previously announced. Our comps were trending at negative 8 percent, dangerously close to the double-digit declines plaguing other retailers.

  Because no one inside or outside the company knew just how bad the economic situation might get, Starbucks’ board of directors had steered us to prepare for the worst and, in an unprecedented request, had asked the leadership team to financially model what would happen if our comparative store sales dipped to negative 15 percent or even negative 20 percent. It was a chilling request. The exercise alone spoke to our dire straits, and once we ran the numbers it was immediately apparent that, should sales fall to those levels, Starbucks Coffee Company would be in very, very big trouble. Put simply, our earnings would decline even faster than the rate of our sales decline.

  Beyond modeling death-defying comps, the board also urged us to cut costs far beyond what we'd done to date. “Go deep” was the directive.

  We'd already retrenched once, back in April 2008, when the leadership team had agreed to reduce spending by more than $150 million, a decision that led in part to the July store closings and layoffs. Actions already taken would save us approximately $205 million in fiscal 2009. But that was not enough, and in the weeks prior to a scheduled November board meeting every department revisited its budget and, starting from zero spending, hunkered down and justified every line item.

  Working furiously, we looked for ways to reduce our cost structure. The challenge was as much emotional as it was financial, as we asked ourselves how to eliminate spending in ways that were not consumer facing and wouldn't subtly fracture the culture and values of the company. Finding a balance between Starbucks’ fiscal responsibilities and our responsibilities to live up to our partners’ expectations was more art than science, an ongoing struggle that prompted debate almost every time we sat down to talk about specific cuts.

  When it came to our back-end infrastructure, however, although Starbucks had never been a lavish operation, just relatively undisciplined, we quickly identified low-hanging fruit that we had never gone after in a lasting or meaningful way. In SCO, Peter's due diligence revealed that operating costs—the day-to-day expenses incurred in running supply chain operations—were exploding by $100 million each year, a runaway expense he subsequently referred to as a “super-tanker” that he insisted be stopped in its tracks by January 2009. Peter further committed to reducing manufacturing and logistics costs by $25 million and finding another $75 million in procurement savings.

  As Cliff and his US team examined the unit economics of our stores, they committed to reducing the cost of waste—the food, coffee, and milk that aren't sold—by $25 million. Another $75 million would be cut from labor costs, not by cutting jobs but by holistically reshaping how and when work got done within the four walls of our stores. More specifically, Cliff and his team were already applying Lean techniques to simplify and streamline the work of our baristas, finding efficiencies by optimizing their time and energy while improving the speed of service during busy morning hours and, in the afternoons, reducing labor hours to reflect traffic slowdowns. District managers who once focused on opening new stores would now attend to improving existing stores.

  Such deep cost analysis was a very healthy process for the company and its management. We could not control the economy, but we could exert greater control over how we operated in it—not just by reducing or freezing new spending, but also by designing a less costly operating model. Even once we revived the Starbucks Experience, brought back the theater and quality and partner engagement, even when our customer-facing initiatives panned out, we would need to operate differently over the long term if we were to survive financially.

  Eventually the leadership team felt confident that we could take out $400 million in permanent costs.

  This, we told the board in November, was Plan B.

  No, the board responded, it should be your new Plan A.

  Boards of directors do not exist to manage companies, but rather to make sure companies are managed well.

  Boards are at their best, I believe, when directors have complete transparency so they can provide informed guidance, offering an outsider's experienced perspective to push a company's management further than they might otherwise go. In the spring of 2008, for example, as we created the final Transformation Agenda, Starbucks’ board had been instrumental in helping Michelle and me more clearly articulate our overall goals and milestones.

  When it comes to working with their boards, chief executives are at their best when they frequently communicate the good news as well as the bad, and when they listen to the experience and advice of board members. A CEO does not need to do everything a board suggests, but unless we open our ears to directors’ perspectives, we miss opportunities to self-correct.

  In 2008, Starbucks’ board was a group diverse in experience as well as background.

  Barbara Bass, a Starbucks director since January 1996, was the president of the Gerson Bakar Foundation and former president and chief executive officer of the Emporium Weinstock Division of Carter Hawley Hale Stores.

  Bill Bradley, a managing director of Allen and Company, had served in the US Senate from 1979 until 1997 and for 10 years had played professional basketball for the New York Knicks. He joined our board in June 2003.

  Mellody Hobson had served as a director since February 2005. The president as well as a director of Ariel Investments, an investment management firm, she was also sitting on the boards of DreamWorks Animation SKG and the Estée Lauder Companies.

  Olden Lee, a Starbucks director since June 2003, had worked for 28 years at PepsiCo, some of it as senior vice president of human resources of its Taco Bell division and senior vice president and chief personnel officer of KFC; he was also on the board of TLC Vision Corporation.

  Jamie Shennan had been a general partner at Trinity Ventures, a venture capital organization, from 1989 to 2005, when he became a general partner emeritus. He was also a director of P.F. Chang's China Bistro. He had been one of Starbucks’ original investors and had served on the board since 1990.

  Javier Teruel had been the vice chairman of Colgate-Palmolive Company before retiring after a 36-year career with the company. Javier was also on the boards of the Pepsi Bottling Group and JCPenney Company.

  Myron “Mike” Ullman, our lead director, was the chairman of the board and chief executive officer of JCPenney Compa
ny. Prior to that, he had served as group managing director of LVMH Moët Hennessy–Louis Vuitton, chairman and CEO of DFS Group Limited, and CEO of R.H. Macy and Company. Mike became a Starbucks director in January 2003.

  Craig Weatherup, a nine-year board member, had served as the CEO of PepsiCo's worldwide Pepsi-Cola business, as president of PepsiCo, and as chairman and CEO of the Pepsi Bottling Group. He was also on the board of Macy's and had been on the board of Starbucks since February 1999.

  Jamie Shennan had a creative yet simple way of articulating important ideas, and he once observed that the more critical the times, the more important it is for a board and CEO to work together in a non-political, unemotional, fact-focused way. Throughout 2008, I made it a point to stay in frequent contact with Starbucks’ directors, and by fall there had been many times when I—and ultimately Starbucks—had benefitted from our one-on-one dealings.

  Mike Ullman had been especially instrumental in assisting me with my transition back as ceo, and he continued to be a mentor. More recently, over dinner in Seattle with Craig Weatherup, I had listened intently as he recounted his own tumultuous times at PepsiCo. Just hearing how someone I deeply respected forged ahead to overcome significant business challenges helped ease some of my own pressures.

  Perhaps most significantly, Olden Lee, a six-year Starbucks director, was having a profound effect on my own maturation as a business leader. A former PepsiCo executive, Olden had stepped in as our temporary head of partner resources when Chet left Starbucks to address family issues. Olden was consistently measured in his communication style, nailing the heart of an issue with a few well-chosen words. His balanced perspective was enormously respected. We did not know each other well at the time he somewhat grudgingly accepted the temporary HR post—it's uncommon for a director to assume a management role, and for a CEO to be comfortable with such a move—but Starbucks and I needed Olden's wisdom, and he selflessly provided it.

  The two of us began to meet regularly, and our discussions increasingly went beyond HR issues to my own leadership style. Olden sat in on leadership meetings, and afterward, behind closed doors, he often shared his observations of my approach, suggesting alternate ways I might have, for example, led a discussion or handled a particular situation. In Olden I had the benefit of a coach.

  But I also needed friends, and during this period, maintaining relationships with my peers outside the company was extremely helpful. I was grateful for the support of a cadre of individuals who routinely checked in or listened when I needed an ear: Todd Morgan, Steve and Patty Fleischmann, Richard Yarmuth, Dan Levitan, Nicole David, Dave Wirtschafter, Jonathan and Stacey Levine, Lauren Hostek, Matt McCutchen, Doron and Kai Linz, Jeff Brotman, Jim Sinegal, Norman Lear, Robert Fisher, Panos Marinopoulos, Mohammed Alshaya, Alberto Torrado, Robert Stilin, Pete McCormick, and Jeffrey Katzenberg. These were my behind-the-scenes supports.

  Although I never stopped believing that Starbucks would emerge from the darkness, I was nonetheless experiencing an emotional roller coaster daily. I tried, admittedly not always successfully, to keep my feelings in check when interacting with our partners. I was acutely aware of my mood's domino effect, and first and foremost our people needed reassurance of my own confidence. That's why the freedom I felt to be candid with Olden and trusted friends proved as psychologically beneficial as it was educational. Quite simply, I am human and needed an outlet. Some CEOs may have felt uncomfortable having a board member so close, but I trusted Olden. After all, he and I—and for that matter the entire board—all had the same goal: the success of Starbucks.

  The board's push to enact Plan B was dead-on.

  Redesigning the company's cost structure was vital to our maturity as an organization, but also a significant headline when our leadership team went to New York City to host Starbucks’ biennial analyst conference, a meeting that would put us face-to-face with institutions that sought to buy or sell Starbucks shares and the analysts who upgraded and downgraded our stock. The conference was an opportunity to regain credibility and trust on the Street by telling our story in more detail than we could on an earnings call.

  But what, exactly, was our story? What, for that matter, was any company's story as 2008 spun out of control? There was no blueprint, no historical textbook that told us all what to do. Weren't most of us just fighting for our lives in uncharted waters, in what former Federal Reserve chairman Alan Greenspan had recently characterized as a “once-in-a-lifetime credit tsunami”? In fact, the day Starbucks announced earnings, the largest US electronics retailer, Circuit City, filed for bankruptcy. At $2.92, General Motors’ stock hit its lowest level since World War II, and its competitor, the once venerable Ford Motor Company, was trading at $1.80. When I phoned other CEOs to learn what they were doing to combat uncertainty, they wanted to know what I was doing! No one had a real handle on this unprecedented moment. Anyone who insisted he or she did was lying.

  Much more than just the global economic landscape was changing. More than stock prices and housing values were in flux. The cultural zeitgeist was shifting beneath our feet. Habits. Priorities. Trust. Expectations. The crisis was forcing people all along the economic spectrum to come to terms with new realities and redefine how they lived in the world. Starbucks and I were hardly alone in our transformation. During this period, the most important steps business leaders could take were to put our feet in the shoes of our customers, listen to our advisors as well as our own intuition, and refuse to surrender our core values. And, when necessary, agree to enact Plan B.

  Chapter 26

  Stay the Course

  It was hardly an ideal time for us to present to Wall Street.

  Throughout November 2008, as the leadership team and I worked diligently to restructure budgets and operations, an analyst conference loomed. Months earlier, this biennial event for investors and Wall Street analysts had been scheduled for December 4 in New York City, and it would mark the first time since the March annual meeting that I stood in front of shareholders when the company was not performing well. Attendees would expect, and rightly so, a comprehensive picture of Starbucks Coffee Company. But because the team and I were in the thick of such significant structural changes, and because many of our initiatives during the past year had yet to have a material impact on our financial performance, preparing for the conference was like trying to put on a show while still writing the script.

  Rescheduling was not an option. The implications would be too dangerous. We had to go to New York.

  Then, just weeks prior, Starbucks’ cfo resigned. He'd been with Starbucks less than a year and was leaving to join a technology organization. I was stunned by the poor timing, but it took me about five minutes to identify the best person, perhaps a better person, to step into the role.

  I asked Troy Alstead to come to my office. Troy was senior vice president of global finance, had already been working closely with our cfo, and had been with Starbucks for 16 years. He is incredibly intelligent and an articulate communicator, especially when it comes to finance, and had long ago won the respect and fondness of partners. A runner-up for the cfo post when Michael Casey left after 12 years, Troy had held financial roles throughout the company—in the United States and internationally, in corporate as well as in operating units—all of which gave him a detailed command of the company's strategies and operations. Troy embodied Starbucks’ culture: smart, confident, genuine, and decisive when needed.

  “I would like you to be Starbucks’ new chief financial officer,” I bluntly informed Troy.

  Selecting the right people for Starbucks’ leadership team was among the most critical decisions I was making during this tenuous time. I'd already brought in Peter and Cliff and was utilizing Michelle's skills where and when they were most needed. When Wanda left after her scheduled 11-month return leading Starbucks’ communications, Vivek jumped in from Microsoft with ambitious plans. And like bringing Stephen on as cio amidst some skepticism about his youth, I knew a few eyebrows would rise b
ecause I did not hire an experienced cfo, but rather promoted from within. Even Troy assumed he'd have a few more years to go before stepping into a cfo position. But I always trust my antennae to recognize people whose skill, knowledge, passion, and loyalty will align to serve Starbucks well, even if the person's resume might imply otherwise.

  I promoted Troy with no doubts that he would win the trust of Wall Street; internally, his ascent was also gratifying for many partners who saw one of their own being rewarded for years of hard work and exceptional performance.

  The analyst conference would be Troy's debut.