Industry News | May 21, 2013 | QSR Exclusive Brief

FROM THE FLOOR: Howard Schultz's Balancing Act

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At the 94th annual National Restaurant Association Show in Chicago, Starbucks Howard Schultz delivered a powerful message to the restaurant industry: profitability and conscience can exist side by side.

In fact, the veteran Starbucks chairman, president, and CEO points to his Seattle-based chain, a quick-service behemoth that topped $13.3 billion in net revenues in fiscal year 2012, as tangible proof that the content of a company’s character propels performance. 

“We’re focused on creating value beyond coffee,” says Schultz, who came to Starbucks in 1982 at a time when the chain had four Seattle-area stores, but spearheaded its growth into an international brand with more than 18,000 stores across 62 countries.

While Schultz reserved the most candid part of his hour-long keynote on May 19 for a series of audience questions—addressing such issues as his leadership mentors (he pegged Costco cofounder and former chief executive Jim Sinegal as one) and his own political aspirations (slim)—he largely embraced a script relaying Starbucks’ tale of rise, fall, and renaissance.

In front of the capacity crowd, Schultz readily acknowledged that Starbucks’ journey included missteps and misguided decisions.

Under Schultz’s charge, Starbucks sought to build a different kind of company, one that demonstrated respect and dignity, offered a distinctive experience, and exceeded expectations.

Building that culture meant the launch of two landmark programs that underscored the importance of valuing a company’s people. First, Starbucks provided comprehensive health coverage to eligible full- and part-time employees. Second, the company offered employees equity in the company in the form of stock options, the aptly titled “Bean Stock.”

These early investments in people, Schultz says, showed that a company could share its success with employees and drive performance with a caring corporate hand.

Amid that giving culture, Starbucks thrived throughout the 1990s and into the 21st Century. For two decades, Schultz says, everything the company touched “turned to gold.”

“We thought we were invincible,” he says.

Yet, the success increasingly pulled Starbucks away from its roots and sparked devotion to the status quo. In the mid-2000s, the company’s focus clearly shifted from the tenets of dignity and respect to the profit line and stock price.

By 2007, Starbucks’ magical carpet ride had ended. After 20 years of same-store sales gains and a stranglehold on the specialty coffee market, dents appeared in the chain’s seemingly invincible armor. Customer connections became secondary to a ringing register and Starbucks paid the price.

Schultz, who had resigned as CEO in 2000 yet retained his spot as company chairman, admitted that the company had lost its way.

In 2008, Schultz returned to the CEO’s seat and Starbucks’ daily grind to discover a company lacking energy and devoid of the experience that had made it so transcendent, consistent, and revered. Standards softened, enthusiasm waned, and competition intensified as Starbucks struggled with sagging sales and a bleak future.

Immediately upon his return, Schultz offered a deep and humble apology to the entire Starbucks’ system. He pledged his commitment to fixing the company’s self-inflicted wounds.

To revive Starbucks, Schultz says, he wanted to return the company to its founding principles and recounted two bold and beneficial decisions.

Two months into his second tenure as CEO, Schultz decided to close every one of the chain’s 7,100 U.S. locations for the explicit purpose of retraining some 135,000 in-store employees.

“It was truthful and it galvanized our people to understand that we were returning to the roots of our brand,” Schultz says.

Later in 2008, Schultz called 10,000 Starbucks leaders, including all store managers, to New Orleans for four days of meetings and community service to create alignment. There, he detailed Starbucks plight and challenged employees to pursue the highest standards by rejecting a bystander mentality.

“Greatness is not 90 percent, not 99 percent, especially when you’re fighting for your life and every customer’s experience matters,” Schultz says. “That was a moment of truth for Starbucks. One customer at a time, we had to deliver and overachieve.”

Even amid the recession’s continued woes, Starbucks rebounded. Last year, the coffee chain earned record revenues and profit.

So what did Schultz learn from Starbucks’ fall and rise? That innovation is disruptive, not merely a line extension. That curiosity and courage are not only central components of the Starbucks brand, but also the necessary ingredients to fuel the chain’s performance.

That regardless of one’s success, the status quo cannot be an operating principle.

That in sharing success with its people, a company creates believers.

And that the essence of the Starbucks’ brand remains as much about its coffee and the in-store experience as its reliability and trustworthiness.

“We returned to the entrepreneurial DNA of our company,” says Schultz, who, while far more comfortable today with the brand’s present and prospects than he was in 2008, admits to being consistently motivated by fear.

Schultz confessed to learning another critical lesson amid the struggles.           

“Great brands, great companies, [and] great store experiences are very resilient because the customer can remember what it’s like and they’re longing for it to come back,” he says.

By Daniel P. Smith