The moment of truth for Starbucks came in 2008 when Howard Schultz had just returned to the c.e.o. post after eight years away. The company was in dire straights. Comparable store sales had gone negative for the first time, and he was running worst-case scenarios for the board that would have left the company insolvent.
Schultz had just spent almost $33 million to bring 11,000 store managers to New Orleans from all around the world. He was preparing a speech for them on the final day of meetings and his most trusted advisors told him, almost in unison, that he could not share with them how desperate the situation really was.
“That was my question of leadership, my moment of truth, of authenticity,” said the Starbucks’ chairman, c.e.o. and president in a speech at the recent National Restaurant Association’s National Restaurant, Hotel-Motel Show in Chicago. “I had to decide whether I could trust our people with all the information I had, with great transparency of how bad the situation really was, and tell them what I needed.”
Schultz then laid out the facts, in full detail. He asked his store managers two things: “What does it mean to be great, and what does it truly meant to be accountable to that greatness?”
“Greatness is not 90 percent. It’s not 99 percent,” he said. “Especially when you’re fighting for your life and every customer experience matters more than any other time in company history. I had to make it personal.”
Schultz detailed that story and more to a capacity crowd during his keynote presentation titled, “Transforming Companies for the Future: Balancing Profit with a Social Conscience.” His message to restaurant owners and foodservice operators was simple: “Success is best when it’s shared.”
But the story of the rise and fall of Starbucks, and its recovery after nearly hitting rock bottom in 2008, wasn’t so simple.
From the start
Schultz has always made it personal, from his earliest days at Starbucks in 1982 as the director of operations and marketing to when he took over the company in 1987 after purchasing it with the help of local investors.
“I have tried to build the company that my father never got to work for,” he said of his dream. It’s the reason Starbucks was one of the first to offer full health benefits in 1988 to all full- and part-time employees.
Schultz grew up in Brooklyn Heights, NY, the son of a blue-collar worker, a truck driver who slipped and broke his hip and leg and was dismissed without the safety net of workers’ compensation or health insurance. “At the age of 7, I witnessed firsthand the hopelessness of fractured dreams,” he said. “It scarred me.”
In 1991, Starbucks became one of the first privately owned U.S. companies to offer a stock option program (called Bean Stock) to all employees, including part-timers. A year later, the company went public with 125 stores and a total value of $250 million. “I thought I had hit the lottery,” Schultz said.
“For 20 straight years, Starbucks was on a magical carpet ride,” he said. “Everything we touched turned to gold.” Schultz transitioned from the c.e.o. role in 2000 to chief global strategist when the company had more than 3,500 stores.
'Albatross around the neck'
Schultz returned eight years later, when the company had more than 16,000 stores, but also had lost its way. When the global financial crisis was about to hit in 2007, “the bloom was already off the Starbucks’ rose,” he said, insisting his absence as c.e.o. and ensuing return did not cause the changes, good or bad.
“But what happened in that 21st year, a disease had entered the halls of Starbucks,” he said of what he saw when he returned in 2008. “Comp store sales became the primary purpose for our existence. Every session, every long-term plan was designed on how we drive comps. They were directly linked to the albatross around our neck, the stock price.”
After returning, he promised to turn things around. He stood in front of the entire company, he said, and apologized. He broke down and cried. Comp store sales had gone negative for the first time, down 8.6 percent, and if the declines reached 14.8 percent, Starbucks would be insolvent.
“The most important person for Starbucks then and now is the store manager,” Schultz said. “They create excitement and the brand. The brand is built by the experience every day in our stores. The store managers were the key relationship to the turnaround.”
That’s why he brought them all to New Orleans, even though the same shareholders and board members who had just brought him back as c.e.o. questioned his decision to pay $33 million to do it. The first thing the managers did was spend 50,000 hours doing community service in the Ninth Ward, the area hardest hit by Katrina three years before. “We began to rekindle the values and guiding principals of the company, the balance and benevolence between profits and responsibility,” he said.
Then came the moment of truth, his $33-million speech.
'Moment of truth'
“We made the mistake in ’07 and ’08 of talking about millions of customers and thousands of stores,” he said. “That’s ridiculous. The moment of truth for Starbucks, and for all of you, is one customer, one Starbucks partner wearing that green apron, and that one experience based on the best-tasting coffee on the planet. We have to live up to that and overachieve, so they not only come back, but tell a friend.”
He asked the store managers not to be bystanders. “How many things do you see, just on the edge of mediocrity, that we overlook? It’s not about title, not about manager, district manager or part-time. We are all wearing the green apron,” Schultz said. “We’re all accountable. You can no longer be bystanders to anything we see. The world does not need Starbucks Coffee. It’s completely discretionary. There are hundreds of places across the street that can provide coffee for a lower price.”
The following year, in response to quality concerns about the actual coffee, Schultz closed every store for retraining on how to make coffee. “Can you imagine that,” he asked the NRA audience. “The admission of guilt. The embarrassment. But it was truthful. It galvanized our people to understand that we were going to return to our roots and heritage of community, quality and consistency, and not compromising and not chasing comp store sales, of focusing on one thing: exceeding customers and our own people’s expectations.”
Comp store sales never got worse and in 2011, Starbucks posted record revenue that was topped last year as the stock price soared to new highs. The value of the company that now numbered more than 18,000 stores had grown to $48 billion.
“People want to be part of something larger than themselves, working for a company they believe in,” Schultz said in closing. “We want to create a connection with our customers, too, not only based on a ringing cash register, but by demonstrating a heartfelt commitment to the community they live in…
“I would submit that those companies that differentiate not only on features, benefits and operations, but on values, culture and the essence of this trust will be the companies that will win,” Schultz said. “Customers want to support companies whose values are compatible with their own.”
Through the years, Schultz has demonstrated that commitment to community. In 2011, he spearheaded a program called “Create Jobs for USA,” a campaign designed to foster and sustain small business job creation. He’s also written best-selling books— Onward: How Starbucks Fought for Its Life without Losing Its Soul (2011) and Pour Your Heart Into It (1997)—and donated all the profits to the Starbucks Foundation, which supports the company’s commitment to community globally, and the CUP (Caring Unites Partners) Fund, which provides financial relief to employees facing emergency situations.
“What we’ve learned the last few years, the essence of the Starbucks brand and our success is linked to the operational excellence of our business, but also to the values of our business and our customers knowing that this is a company they can believe in, trust and rely on,” Schultz concluded.