“Onward” – by Howard Shultz
Review by Pete Laburn
Note from reviewer:
Those of you who know me will attest to the emphasis I place on organisations having and living by core values. Onward is an amazing story of a modern day company, operating in the fiercely competitive retail industry, with responsibilities to shareholders, which stuck to its core values through a very challenging time. I hope the story will inspire you, as well as encourage you, to conduct your business ventures according to your core values – no matter the cost. I have chosen not to try to precis the book as much as to take selected elements from the book that I think have real value for modern organizations. As such please view this as a review rather than a precis. I do however strongly recommend that the book be read in full to appreciate the full sense of the Starbucks story.
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Onward was written by Starbucks CEO Howard Schultz to share with others how the company overcame tough economic challenges and transformed itself without abandoning its guiding principles. What initially made Starbucks great was that its leadership was not just interested in winning or making money, but about building a great, enduring company, that struck a balance between profit and social conscience. No business can do well for its shareholders without first doing well by all the people the business touches.
After working as head of marketing for four stores of a then small coffee company named Starbucks in 1982, Howard Schultz developed a love and passion for coffee and it’s magic. In April of 1986 Schultz left Starbucks and raised money from local investors to start his own retail coffee company named Il Giornale. 16 months later he found himself in a position to buy his former employer Starbucks. Deciding to keep the name, almost overnight Starbucks went from the 5 original Il Giornale stores to 11 Starbucks stores. At 34 years old Schultz had 100 employees and a dream to create a national brand around coffee. Schultz determined to create a different kind of company based on core values. One that would be committed to building shareholder value, yet all the while recognizing that in order to do so, it had to act through a lens of social consciousness.
The Starbucks brand was built on humanity – respect and dignity, passion and laughter, compassion, community and responsibility and authenticity. Valuing personal connections at a time when so many people sit alone in front of screens. Aspiring to build human relationships in an age when so many issues polarise so many, and to act ethically, even if it costs more. These honorable pursuits are at the core of what Starbucks is about.
Connecting with partners and customers Starbucks has always seen its employees as more than just staff, but as partners in the success of the enterprise. Starbucks employees are always referred to as partners and valued as such. Schultz believes that work should be personal. Not just for the artist or entrepreneur, but for everyone. Work should have meaning for the accountant, the construction worker, the technologist, the manager and the clerk. Infusing work with purpose and meaning, however, is a 2‐way street. You should love what you do, but your company should love you back. Schultz’s desire has always been to inspire customers, exceed their expectations and establish and maintain their trust. As an employer, he has always tried to do the same for the people who work for him. As a business leader, he wanted to create an engaging, respectful, trusting workplace culture combining intent, process and heart.
The attitude of partners has such great potential to make customers feel something. While Starbucks makes exceptional coffee, its emotional connections with customers are its true value proposition. While the leadership of Starbucks will never make the actual coffee over the counter or create great experiences for the customer, the leadership can pull the right levers to create great employee experiences that make its partners feel good about the company. By 2000 Starbucks had evolved people’s relationships with coffee in a way that made its leadership and partners proud. Starbucks established unique employee benefits offering full health‐care benefits and equity in the form of stock options for every employee. The company was performing exceptionally well. With 2600 stores in 13 countries, revenue was almost $2‐billion. Since 1992 the company had achieved a compounded annual growth rate of 49%.
Change of Leadership
But after running Starbucks daily operations for 15 years, Schultz wanted a new challenge. He stepped down as CEO to turn his attention to expanding Starbucks around the world. His new role as chairman and chief global strategist was to help select local companies that would operate Starbucks stores in each region. Orin Smith took over as the new CEO. During Smith’s 5 years as CEO Starbucks store count almost tripled to just more than 9000. The company was rapidly breaking into new markets and geographies. During this time Starbucks began to believe that what its customers truly wanted was convenience. They did not want to wait in line or to walk a few extra blocks to get their coffee. So Starbucks decided to open more stores in urban markets.
Also during Smith’s term as CEO the company became more fully and formally committed to social responsibility. The company committed more than $47‐million to local communities to support youth and literacy programmes, provided aid for hurricane, tsunami, and terrorist victims, raised environmental awareness, and increased access to clean drinking water for children around the world. Starbucks reduced its stores environmental impact and committed to ethically source premium coffee.
By the end of Smith’s time as CEO, the value of Starbucks shares had grown from $7,2 billion to $20‐billion. The board of directors selected Jim Donald from Wal‐Mart as the next CEO. At the time Starbucks stock was worth $25,83 a share. The company continued to set high bars for itself and Wall Street held the company to those high standards. Every quarter Starbucks employee’s felt more intense pressure to maintain annual revenue and profit increases of at least 20%. During that time the company also extended its brand beyond coffee to include entertainment such as CD’s, books and DVD. It would be a while before Starbucks recognised that its expansion into entertainment was another sign of hubris born of a sense of invincibility.
Identifying that something was wrong
Towards the end of 2006, partners started expressing their concerns about the direction of the company and the ‘grow, grow, grow’ mentality. Cracks in the company’s foundation were starting to appear and the store experience was deteriorating. While visiting hundreds of Starbucks stores around the world during 2006, Schultz sensed that something intrinsic to the Starbucks brand was missing and deflating the brand experience. New espresso machines installed to increase efficiency were too tall, preventing customers from watching baristas create their beverages and engaging with the customer. Also, the full‐bodied rich aroma of freshly ground coffee had disappeared due to how coffee grounds were being shipped and stored. The stores design lacked the warm, cosy feeling of a neighbourhood gathering place and had become cookie‐cutter and sterile. Something about visiting a Starbucks store had vanished. Schultz felt that the company needed to return to its core of people and coffee.
Some people strongly disagreed with Schultz’s opinion. The company was soaring. Its market capitalization was $24‐billion. Every week Starbucks stores had 45‐million visitors and Starbucks was the most frequented retailer in the world. Balance had always been Starbucks challenge, and a challenge to all companies. Fiscal responsibility and benevolence; shareholder value and social conscience; profit and humanity and local flavour on a global scale. Schultz believed Starbucks had to restore the proper balance between its desire to grow and the need to preserve its heritage.
As 2006 progressed, Starbucks performance began to slide. The amount of money the customer was spending began to dip. By the summer of 2007 the growth in store traffic slowed to levels not seen in the company’s history and the stock price dropped 42%.Shultz began to realise that Starbucks was trapped in a vicious cycle that celebrated the velocity of sales, instead of what it was selling. The company was opening 6 stores a day and every quarter its team were under intense pressure from Wall Street, and from within the company, to exceed past performance by showing increased comparative store sales. The company did this by building more stores as fast as it could. Its strategy was to do more of what had worked in the past. But it was not looking to do things better or differently. It was not innovating in lasting ways. Instead the company was venturing into unrelated businesses like entertainment and pushing products that deviated too far from the core coffee experience.
If not checked, success has a way of covering up small failures. Many Starbucks leaders became swept up in the company’s success and ignored shortcomings. As the years passed, the company’s initial enthusiasm morphed into a sense of entitlement. Confidence became arrogance and then confusion about what Starbucks stood for. The energies of the team were focused on trying to deliver good results to Wall Street. Companies pay a price when their leaders ignore things that may be fracturing their foundations.
It is important for leaders to constantly be self‐examining in the pursuit of excellence and be willing not to embrace the status quo. This is a cornerstone of Schultz’s leadership philosophy. Starbucks is in the business of exceeding expectations, which means that the company has to admit when it is not as good as it thought it should be. As a leader, Schultz needed to initiate the self evaluating discussion and challenge the company to do better.
Looking back, Schultz believes that it was not easy or fair to expect Jim Donald, who had spent only 2 years at Starbucks, to operate unencumbered in the shadow of the man who had built the company and led it for years – especially a man as influential and visible as Howard Schultz. In retrospect, more could have been done to prepare for Smith’s departure and that the best person to have led Starbucks would have been someone who had been inside the company for many years.
The need for transformational leadership
Towards the end of 2007, feeling that nothing was changing even as cracks in the organization started to surface, Schultz felt that he could not stand by and watch Starbucks slip toward mediocrity and decided to return as CEO. Schultz did not have experience as a CEO during a turnaround situation. His entire career had been building something that had not existed and executing against an original vision. Now Starbucks needed another vision and he had to come up with one. He had to come back leading. His return as CEO had to resonate with partners and shareholders. Starbucks had lost its point of view and Schultz needed to declare one, as well as a clear perspective about how to change things. The company needed to reignite its connection with customers, replace the bureaucracy with a more efficient organisational structure, slow US growth to a more sustainable pace while ramping up internationally. Schultz was intent on demonstrating right out of the gate, a sense of immediacy and precision in decision making.
At the same time, Starbucks was reporting negative daily customer figures like never before. Sales were in free fall. Every day fewer and fewer people were coming into stores. Schultz was taking over after the company’s worst three month performance in its history as a public company. At the same time the US economy was sliding into recession with seemingly fail‐proof financial institutions failing. Banking giants posted quarterly losses and stocks endured their biggest losses in years. The tightening credit crunch, foreclosures, rising food and fuel prices and rising unemployment all fostered uncertainty.
Schultz made 2 commitments before returning as CEO. Firstly he would not return dwelling on the company’s storied history. While he knew the company needed to return to its roots, it needed to reinvent and innovate in order to survive. Secondly, he would not cast blame for the mistakes of the past. Instead he would focus on instilling confidence in the company’s future, for without confidence people could not perform. He would muster a collective faith in the original Starbucks experience, which was its purpose and reason for being, and refocus the company on customers instead of breakneck growth.
Finding a way forward
Starbucks has 3 primary constituencies: its partners, its customers and its shareholders, in that order. In order to achieve long‐term value for shareholders, a company must first create value for its employees and its customers. In order to do this Schultz initiated 3 main strategic initiatives that Starbucks would immediately undertake:
1 To improve its current state of US retail business
2 Reignite the emotional attachment with customers
3 Make long term changes to the foundation of the business.
Starbucks started looking at other iconic brands to look for parallels that could inform their own challenges. From this they identified that:
• Iconic brands make sense of the tension of the times, offering hope and even mending a culture in turmoil.
• Iconic brands assert a cultural authority, helping to frame the way people view the times they live in.
• Iconic brands don’t confuse history with heritage and always protect and project their values.
• Iconic brands disrupt themselves before others disrupt them.
• Enduring iconic brands are willing to sacrifice near‐term popularity for longer‐term relevance.
All five of these tenents edified Schultz as he tried to find answers to Starbucks challenges. One of the most important steps in improving the faltering US business was to reengage the company’s partners, especially those on the front lines: baristas and store managers. They were the true ambassadors of the brand and the real merchants of romance and theatre and the primary catalysts for delighting customers. Starbucks needed baristas and managers to be genuinely friendly, enthusiastic and willing to go the extra mile millions of times a week. As Schultz reconnected with them he told partners that the only filter to their 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?’ These questions provided focus and left lots of room for creativity. At the end of January 2008, during Starbucks first quarter earnings conference call, Schultz announced that it was discontinuing the warm breakfast sandwiches in its North American stores and would no longer report its same store sales, keeping annual store sales figures in‐house and not making them part of quarterly reports. These two announcements were to help Starbucks return to focus on its core business of making great coffee. While store sales figures are a good way to measure a retailer’s health, they were a dangerous enemy in the battle to transform the company.
Starbucks had had almost 200 straight months of positive store sales growth. Maintaining that positive growth rate had driven some poor business decisions that steered the company away from its core. Eliminating in store sales figures from the radar was sending a message to partners that Starbucks would transform internally by being true to its coffee core, and doing what was best for customers, not what was best for in store sales growth.
Back to basics
During 2008 Schultz felt that Starbucks had lost its attention to the details of the business. The company had focused on global in‐store sales figures and assumed that individual parts of the business, including distribution, partner resources, and entire geographic regions were also healthy. Starbucks was not diagnosing itself at a level of detail that would help ensure its lasting health. The company thought in terms of millions of customers and thousands of stores instead of one customer, one employee and one cup of coffee at a time. This mind‐set let many little things slip by unnoticed, but eventually they started to add up.
Starbucks did not have the tools to participate in the online debate on a scale that would make a difference. Its website was a one‐way dialogue, inadequate in the digital age. Starbucks had no interactive presence online. No way to speak up quickly on its own behalf, to talk directly to customers, investors and partners and let them talk directly to the company. In short, the company was losing control of its story, in its stores and in the world.
New behaviour among young people on laptops and cell phones, talking, texting, exchanging photos, downloading music and watching videos, TV and movies had resulting in an enormous change in how information was flowing and what was being communicated. Technology defined the nature of relationships and how people spent their time, and this fundamental societal shift was affecting people and customers. The company needed to discover new ways to reach out and be relevant to customers.
While it seemed bizarre that a coffee company might get a lot of traction from online social networks, Starbucks would have been foolish not to explore these hidden opportunities. The risk with social media was showing up inappropriately, and if not done thoughtfully, it could damage the company’s brand. As a result Starbucks initiated Project Greenstorm to develop a website where Starbucks could engage with its customers online – where customers could post suggestions and connect with the company. These suggestions would serve as opportunities for Starbucks to learn from and inform its customers.
A Perfect Storm ‐ Rising costs and sinking sales
At the end of the second quarter of 2008 Starbucks quarterly earnings were dismal. Global operating income for the quarter had sunk 26%, earnings were down 28% as operating margins shrank from 10,7% to 7%. Most frightening was that the company’s in store sales figures were negative for the first time in Starbucks history. Faced with these results, it was requiring more and more faith for Starbucks senior leaders to believe that they could transform the organisation. Leading Starbucks was a delicate balancing act as investments were needed to improve the customer experience and boost sales, while insisting that the company cut costs and manage expenses, especially in areas not directly related to core business.
As the months went on the contributing elements to Starbucks rapid decline were compounding each other. When growth became the company’s primary operating principle, it diverted attention from revenue and cost saving opportunities and the company did not effectively manage expenses. Then as consumers cut their spending, Starbucks faced a lethal combination of rising costs and sinking sales – leaving Starbucks existing economic model no longer viable. All these factors created the perfect storm of external pressures and self‐induced imperfections that left the company fighting for its life in 2008.
Building a great, enduring company requires thoughtfulness and at times, the courage to make very difficult decisions. For Starbucks July 2008 was a moment to make choices that Schultz never imagined he would be faced with as Starbucks made the decision to close 600, or 8%, of its US stores that were underperforming and not making profit, eliminating 12 000 jobs or 7% of its global workforce. 70% of the stores to be closed had been opened in the past 3 years, during the aggressive growth period when 2300 locations were opened. The firm would transfer as many displaced partners as possible into new roles, and as many as 70% of field and store partners would remain with the company. The company would also give 30 days’ notice to all laid off workers. 550 non store workers throughout the organisation were also asked to leave.
The next day Schultz stood up and spoke to more than 1000 Starbucks partners at their head office in Seattle. He apologised for the decisions that had had to be made and for fracturing the culture and values of the company by having to let so many people go. He acknowledged that people were angry and grieving about what had happened. He explained that the decision to lay off so many had to be made for the long‐term sustainability of the company.
Well‐meaning investors and other commentators, whose sole focus was on shareholder return, were quick to comment suggesting selling the company or undoing the company’s owned and operated store model and franchising the system, letting others own and operate the stores and pay Starbucks royalties. While this would make economic sense and significantly increase the company’s return on capital, if Starbucks ceded ownership of stores to hundreds of individuals, it would be harder for it to maintain the fundamental trust its partners had in the company, which in turn fuelled the trust and connection they established with customers. Franchising would dilute the company’s unique culture – a decision Schultz was not willing to take.
Other commentators suggested reducing the quality of Starbucks coffee by just 5% to save on costs, but Starbucks would never sacrifice quality for the sake of saving costs. Others insisted Schultz cancel the company’s upcoming leadership conference for almost 10 000 store, district and regional managers at great expense. But Schultz believed that the conference had great purpose and could help the company reconnect with its partners in person.
At these recommendations Schultz did not budge. Every brand has inherent nuances that, if compromised, will eat away at its equity regardless of short‐term returns. As Starbucks navigated, it needed to stay true to its own values, reinvesting in and recommitting to the things that had brought it success, not quick fixes.
No silver bullet
In mid‐2008 Starbucks launched Sorbetto – a new cold beverage that the leadership thought would increase sales and improve store performance. While initial sales were good, problems quickly emerged and the product had to be abandoned. Sorbetto had been embraced as a silver bullet to solve Starbucks financial problems. But in the end, while opportunities to transform Starbucks for profitable, sustainable growth existed, no single move, product or promotion and no individual would save the company. Its success would only be won by many. Transforming Starbucks was a complex puzzle where everything contributed to the whole. The leadership needed to focus on the right, relevant things for its partners, customers, shareholders and brand.
Throughout Starbucks transformation Schultz continually refined and realigned the Starbucks leadership team, shifting roles, saying goodbye to some and welcoming new talent. The challenge was to find individuals whose accomplishments were matched by their values and innate sense for Starbucks culture. The wrong match could pollute the integrity of the organisation. Political agendas; managing upward and not downward, an inability to earn respect or be trusted as a team player, these traits are poison. With the company in dire straits, each leadership decision was more critical than ever. If the wrong person was kept in the wrong position, the company would drift too far off course.
In July 2008 Starbucks lost money for the first time in its history and reported a net loss of $6,7‐ million for the third quarter. Despite a great deal of pressure to cancel the Starbucks leadership conference, a once biennial meeting for all North American district, regional and store managers, Schultz decided to go ahead in New Orleans in October 2008, one month after Wall Street’s September meltdown, and weeks before the company announced shocking reduced profits for the fourth quarter. The company chose New Orleans as it seemed like a natural extension of the company’s values as well as its challenges.
New Orleans was undergoing an uphill battle to recover from Hurricane Katrina that had destroyed thousands of homes, schools, possessions and livelihoods, killed almost 2000 people and rendered thousands homeless. The company decided that when it brought 8000 store managers, 900 district managers and 120 regional directors to New Orleans, it would do more than just help Starbucks – it would help the community of New Orleans. Each day of the 4 day conference about 2000 partners joined one of 6 organisations for 5 hours to do whatever needed doing in New Orleans. Overall Starbucks partners volunteered about 50 000 hours of time in New Orleans and their service and work helped them discover the power of giving and serving others.
During one of the conference sessions Bono, lead singer for U2 said, “Some people say markets are not about morals, they are about profits, but I say that is old thinking. That’s a false choice. The great companies will be the ones that find a way to have and hold on to their values while chasing their profits, and brand value will converge to create a new business model that unites commerce and compassion. The heart and the wallet. The great companies of this century will be sharp to success and at the same time sensitive to the idea that you cannot measure the true success of a company on a spreadsheet.”
Concluding the conference, Schultz stressed that the power of Starbucks was the partners themselves. He stressed that the power of the Starbucks brand is not external, but is the partners demonstrating what the company stands for.
Fast and Efficient
Being nimble and able to quickly take decisions and moving on them is a sign of an entrepreneurial, innovative company. When red tape, bureaucracy and hierarchy prevent organisations’ from being able to quickly act to take advantage of opportunities – the organization is too large and stale to innovate efficiently. Following the conference Starbucks was able to organise an ad campaign related to the upcoming US elections in just 4 days. The leadership team made decisions based on their gut enthusiasm and did not get bogged down in details and multiple opinions and potential roadblocks. Instead, they went for it, acted nimbly, and proved that the company had dusted off its entrepreneurial spirit. The experience reminded the company that it could act nimbly and not be grounded by its size or leashed to bad habits.
For Starbucks, fourth quarter profits plunged 97%, and earnings for the year were down 53% to $316‐million. The outlook was also bleak with sales expected to slow. As the financial crisis spread to Europe and Asia, and with sales figures at negative 8%, the board of directors urged the company to cut costs. As such the company decided to pull back plans to open as many new stores overseas. Back‐end infrastructure costs savings were identified, reducing manufacturing and logistics costs and finding procurement savings. Stores committed to reduce the cost of waste and labour by planning better. Such a deep cost analysis was a very healthy process for the company and its management.
While Starbucks could not control the economy, it could exert greater control over how it operated in it by freezing new spending and designing a less costly operating model.
A Board of Friends
Although Schultz never stopped believing that Starbucks would emerge from the darkness, he was experiencing an emotional roller coaster daily. He took comfort in being able to confide in board members that he trusted and was close to as an outlet. While some CEOs might not feel comfortable having a board member so close, Schultz knew that the entire board had the same goal as he did ‐ the success of Starbucks.
During dark times, Schultz was encouraged by mentors and friends around him to stay the course. To stay true to his values and true to the company’s core. Now was the time to stay focused on the moves he had made to right size the business, to innovate and to return to the core. A board of directors exists not to manage companies, but to make sure that companies are managed well. Boards are at their best when directors have complete transparency and can provide informed guidance, offering an outsider’s experienced perspective to push a company’s management further than they might otherwise go. When it comes to working with their boards.
CEOs 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 board members can help CEOs identify opportunities to selfcorrect.
Rekindling the magic
Over the years Starbucks had deviated from its first unquenchable desire to innovate. Not since Frappuccino, launched in the 1990’s, had the company really shocked the marketplace and created a significant product platform with a multimillion dollar revenue stream. The company’s will to risk had dimmed due to fear of failure. The CEO’s role is to instil in the organisation the excitement and courage to develop new products by pushing people further than they think they can go and yet not further than you believe they are capable of going.
Schultz’s long‐time friend and mentor, leadership guru Warren Bennis observed that a core capacity of leadership is the ability to make right decisions while flying blind, basing them on knowledge, wisdom and the ability to stay wedded to an overriding goal. For Schultz, successful leadership is not a single recipe. Effective leaders share 2 intertwined attributes – unbridled confidence about where their organisation is headed and the ability to bring people along.
Going into 2009, Schultz was insistent that Starbucks go after big, bold, original ideas, but also appreciate that those ideas could not be fuelled by instinct alone. They had to be relevant to the company’s business, scalable, thoroughly tested, integrated across business channels and embraced by partners. Taking this cautious, calculated approach to innovation goes against the ‘just‐do‐it’ entrepreneurial nature that typified the Sorbetto disaster, but Schultz realised that the company needed to shift the way it brought products to market, bringing to the process the same degree of mastery that it had applied to roasting coffee. And because Starbucks growth could no longer rely on building more stores, its future depended on the ability to innovate on several fronts.
One person’s passion cannot successfully launch any Starbucks product. Like all effective leadership, it is linked to the organisations ability to execute. So after many years of hard work, Starbucks launched Via instant coffee in February 2009. The positioning, the packaging and the name were all formulated to recast public opinion about what instant coffee could be.
During this time Starbucks also looked for other potential innovative ideas to drive sales. But when a potential partnership between Starbucks and World of Warcraft producers Blizzard entertainment was proposed, the leadership team concluded that World of Warcraft strayed too far from Starbucks core values and so could not be part of what Starbucks was building.
At the heart of every merchant is a desire to tell a story by making sensory, emotional connections. Schultz wanted every Starbucks store to tell a story about coffee and what the organization believed in through the taste and presentation of its products as well as the sights, sounds and smells that surround customers. Each stores ambience should be the manifestation of a larger purpose and define the brand. The Starbucks challenge has always been to authentically replicate this experience hundreds of thousands of times.
Schultz set out to create authentic personal experiences of the neighbourhood café, while building a profitable global company. He wanted store interiors to personify the company’s values but also be buildable at scale; he wanted baristas to serve customers with a sincere smile and also with speed; he believed the organisations flavours and environments could reflect local cultures as well as deliver consistent tastes and quality. Striving for this balance has set Starbucks apart from other consumer brands.
In an attempt to be constantly learning and developing, Starbucks decided to open two new coffee shops in Seattle that were not like any of the company’s existing stores. Each would serve Starbucks coffee but be unique in design and product mix, offering a heightened local experience. They would not look like traditional Starbucks stores, nor would they be called Starbucks, but rather named after their street addresses. The company was not trying to hide anything, only to explore and learn.
These two mercantile stores would function as independent businesses as well as learning environments allowing the company to experiment in an active retail setting and gain more insight into what customers want as their tastes evolve. It was research, creative and lots of fun.
Another learning initiative was the Lean program which refers to a non‐traditional way of managing and working that reduces redundancies and waste while making conditions easier for partners and improving product and service quality for customers. It has its roots in the assembly lines of the automobile industry and has been adapted for other industries. The philosophy hinges on involving partners by asking them for their opinions on how to improve their own work and environment. It is not about management telling employees how to do their jobs, but rather adheres to the culture of respect and dignity by asking partners to take more ownership over their working lives.
Concern for all Stakeholders
Starbucks sources coffee from tens of thousands of farmers in almost 30 countries, mostly from families who work on small farms of only a few dozen acres. Coffee farming is hard, hard work and sustaining a profitable business is a challenge. Harvesting high‐quality green coffee beans requires a unique skill set that is acquired over time and passed down from generation to generation. However, coffee farmers have a history of not being paid adequately or being charged high interest rates to borrow money to run their businesses. Too often the money the consumer spends to buy coffee never even makes it to the farmer but is distributed among many middlemen.
For Starbucks, to be able to pay a premium price to a coffee farmer, the company needs to source a premium product that customers are willing to pay a premium for. On a visit to Rwanda to visit coffee farmers Schultz saw the human side of the equation between people and profits that guided Starbucks. Starbucks had the power to help thousands of Rwandan farmers who had suffered through many trials and challenges with hard work and commitment. Schultz realised the enormous responsibility that Starbucks had in ensuring that these farmers get the fair price that they deserve.
He committed to being the kind of partner that they could depend on and to do as much as possible to help them and their families. While one person or one company can only do so much, Schultz knew that to do nothing was unconscionable.
During 2009 Schultz was pressurised by shareholders to cut Starbucks partners health‐care benefits.
The health‐care expense had been rising significantly to almost $250‐million of costs, up 50% from 2000. Eliminating or reducing the partners health‐care coverage would immediately effect profitability, but at a high cost to partners. Schultz felt that the very foundation of Starbucks was its culture and guiding principles, and that the reservoir of trust it had established with partners would be sapped by eliminating the health‐care coverage. While the company would have to ask its people to share in the rising expenses of health care, eliminating it was unthinkable.
Back in December 2008 the company had made the difficult decision to make its annual matching of funds that partners contributed to their retirement plans discretionary, instead of automatic, knowing that there was a very real possibility that they would not be matched. Many companies did the same in the weak economy. Schultz hoped that as performance improved, the company would be strong enough to go ahead and make the match in 2009. So in July 2009 Starbucks concluded that it would indeed be able to match the contributions of eligible employees helping them build their futures and care for their families. While it did not make headlines or mean much to shareholders, it was as important as anything the company had been able to accomplish all year.
Overall, achieving a balance between financial performance and its conscience or soul in helping people had long been Schultz’s definition of success.
Starting to see improvements
By June 2009, tangible signs that the transformation was taking hold began to emerge. Partners embracing Lean principles were resulting in improvements in service and satisfaction. Via instant coffee was exceeding expectations and ready for its nationwide launch. Online, Starbucks was ranked as the number 1 most engaging social media brand. The company’s cost savings initiatives were exceeding targets and expanding operating margins. Monthly sales figures began to tick up and the share price improved 41% from the beginning of the year to $13,89 a share.
By the third quarter of 2009 Starbucks profits were growing again and defied everyone’s expectations – marking the company’s first earnings growth since the first quarter of 2008. The company earned $152‐million compared with losing $7‐million a year earlier. Overall sales were down slightly but the number of customers frequenting stores was improving and fixed costs had dramatically decreased which meant that as the company sales continued to rise as a result of consumer‐facing initiatives, bottom line earning would continue to grow. Just as no one thing had led to the company’s downward spiral, no one thing was leading to its resurgence. Even failures such as Sorbetto had taught the company valuable lessons going forward. Schultz had begun to effectively balance entrepreneurial vision with patience of execution, paying the same degree of attention to the back‐end as the front‐end and the company had the strongest leadership team in its history.
Looking to the future
The third quarter of 2009 marked the turn of the tide and the beginning of a climb to create a new kind of company. The time was coming to turn the company’s attention beyond the US stores. Starbucks was no longer a failing house in need of mending – it was a stabilized global organization that could refocus on growth, with all the opportunities and risks that that implied.
Schultz is the type of leader who is at his best when being challenged or fighting for survival. He is comfortable with the rugged, steep ascent and the raw feeling of accomplishing something that others think is impossible. He rarely celebrates milestones, but is always looking around the corner for what must come next. So towards the end of 2009 Schultz began to shift focus to the company’s international opportunities which were by far the company’s most exciting and largest prospect.
China is the world fastest‐growing major economy and companies from all over the globe have been flocking there to reach the country’s 1,3‐billion consumers. Starbucks opened its first store in Beijing in 1999. Now the company has over 700 Chinese stores, which is small compared to what the market can sustain. The booming country is a huge market for Starbucks and now a top priority for the company. In China, people enjoy Starbucks stores as an extension of their homes or workplaces.
Because homes are particularly small, Starbucks clean, spacious environments are a welcome destination. The main challenge Starbucks faces abroad is to not chase growth for growths sake but to expand with diligence and attention to detail – remaining locally relevant and reflecting the cultures that the stores are operating in without diluting the brand.
Over the company’s transformation period, Schultz and Starbucks learnt many things. 16 key learnings were:‐
1. The company needed to pursue growth with discipline
2. Balance intuition with rigor
3. Innovate around the core.
4. Never embrace the status quo, but find new ways to see.
5. Never expect a silver bullet.
6. Get your hands dirty.
7. Listen with empathy and over communicate with transparency.
8. Tell your own story, refusing to let others define it.
9. Use authentic experiences to inspire.
10. Stick to the organisations core values for they are its foundation.
11. Hold people accountable but give them the tools to succeed.
12. Make the tough choices, but it is how they are executed that counts.
13. Be decisive in times of crisis.
14. Be nimble.
15. Find truth in trials and lessons in mistakes.
16. Be responsible and most of all, believe.
The company’s leadership knows that for Starbucks to be a company that its partners, customers and shareholders can be proud of, it needs to maintain balance on many fronts. Balance between the emotional and the disciplined, between instinct and information, between global and local, the personal and the professional and between profit and humanity.