Onward (26 page)

“They have to stop taking themselves so seriously. Let's face it—it's still coffee, not brain surgery,” a corporate consultant told
USA Today
in an article sidebar doling out advice from a smattering of industry experts. Except for a few items, the list read like a page from our existing playbook: Smell good again. Embrace wired youth. Reward loyalty. Get healthier. Drop food that doesn't jibe with java. Cut the clutter. Revive “coffee theater.” Open fewer stores. Sell combo meals. And give coffee away. Applying such improvements to our business may not have been “brain surgery,” but outsiders failed to appreciate the nuances of invigorating a service-based business, especially a brand as emotionally charged as ours. Starbucks is not a coffee company that
serves people. It is a
people
company that serves
coffee
, and human behavior is much more challenging to change than any muffin recipe or marketing strategy. Many of the decisions I was making confounded others because they did not grasp the intangible value of preserving the company's culture.

Elsewhere, Clover took a PR hit when several independent coffee shops declared, after hearing about the acquisition, that they would sell their machines, complaining that they did not want to pay Starbucks for parts and maintenance.

Opinions about our first online community,
MyStarbucksIdea.com
, also varied from enthusiasm to doubt. “My initial grumpy skepticism was brutally arrested when I visited the site,” wrote Toby Ward of
IntranetBlog.com
. “The site is clean, easy to navigate and digest.” Less web-savvy folks remarked that Starbucks was taking a big risk by sanctioning a suggestion box it could not control—an emotional hurdle we'd had to overcome ourselves.

Time would tell if they were right, but from our perspective,
MyStarbucksIdea.com
had already exceeded our initial expectations.
Salesforce.com
's customized technology, as well as our moderators, held up to the wave of participation. After one week online, 100,000 people voted. And in the first two months, 41,000 ideas flooded in. “Turn down the music.” “Free drinks for frequent buyers.” Chris Bruzzo's team shared the community's input with our product teams and research and development, public affairs, and marketing departments, as well as with me and the leadership team. Among the themes that began to emerge were, one, an increasing desire for value—people wanted more for their money—and two, loyal customers wanted to be rewarded for their frequent purchases. These findings bolstered our optimism about the potential success of the rewards program, which would launch on the heels of our new brew, Pike Place Roast.

On a bitterly cold morning under a bright blue Manhattan sky, a perfect day for a hot cup of coffee, Starbucks officially launched its new “everyday” brew: Pike Place Roast. The huge national campaign was billed as the Nation's Largest Coast-to-Coast Coffee Tasting.

I'd flown to New York City for the April 8 event and arrived with Cliff as well as my wife, Sheri, at Bryant Park, the tree-lined oasis
behind the main branch of New York's public library. In the middle of the park stood a life-size replica of the original Starbucks store. I loved it! Amy Kavanaugh and her team at Edelman, our long-standing public relations agency that worked with Starbucks to orchestrate the national launch, had brought Seattle to the East Coast. We even flew in the store's former manager, Janeen Simmons, to run the mock store that day.

All around us, smiling baristas pushed coffee carts and offered passersby steaming samples of coffee. At the same time, in 7,100 US stores from California to Maine, free coffee tastings were being hosted by partners wearing black T-shirts imprinted with the word “bold,” “fresh,” or “smooth.” In another brilliant attention to detail, our coffee cups’ green siren logo had been replaced with Starbucks’ original all brown, and slightly sexier, one.

The Pike Place Roast launch was by far the largest, loudest marketing event Starbucks had ever executed. Because the company never budgeted much money for national advertising, we paid for it by scraping together funds earmarked for sporadic marketing activities around the country—and still we had a shoestring budget compared to what other national retailers typically spend. Pulling off something so grand so fast required logistical and creative heroics, and a lot of anxiety had preceded this day. I'd pushed our people, as had Michelle, Terry, Cliff, and Wanda, but every department had delivered, meeting once-unthinkable deadlines and acting as if we were one store with one goal.

Standing in Bryant Park, both Cliff and I sensed that something had gone very right. It had been awhile since Starbucks’ partners had galvanized around a mission other than growth, and the promotion did not feel like some hollow PR stunt, but rather an authentic celebration because it invoked Starbucks’ heritage, focused on our coffee, and involved our people.

Escalating Pike Place Roast to a reinvention of brewed coffee gave all of us something meaningful to rally around, which was vitally important to the transformation journey.

The windchill was unforgiving, and all I had on was a suit and tie as I stood in front of television cameras for interviews; at one point Cliff even insisted I put on his coat, which was a size or two too big for me. Wrapped in his oversized parka, I checked e-mail and received reports that our store partners around the country were having fun
sharing coffee samples and interacting with their customers. Also good news, customers liked Pike Place's taste and were pleased when they learned it would be served consistently. Brewed coffee sales were brisk that day, and Starbucks dominated the media; the newspaper and TV coverage alone was worth millions of dollars in advertising.

That afternoon we flew back to Seattle to attend another Pike Place event at the original store. On the five-hour flight we took time to consider why Pike Place Roast seemed to be working so well so we could apply what we learned to future projects. We eventually concluded that the product as well as the way we had brought it to market met three critical criteria for success at Starbucks:

It was right for and engaged our partners.

It was right for and met the needs of our customers.

And it was right for the business.

Unfortunately, I did not realize that not everything the company was trying to do that season met those three very important standards.

At the end of April 2008, we faced Starbucks’ second-quarter earnings. The numbers told a dispiriting story.

Compared to a year earlier, global operating income for the quarter had sunk an unbelievable 26 percent, to $178 million. Earnings were down 28 percent, to $109 million, as our operating margins shrank from 10.7 percent to 7.1 percent of net revenues. Most frightening of all, the company's total comps were negative for the first time in Starbucks’ history. In the United States alone, customer transactions were down 5 percent and ticket sales, how much each customer spent per visit, had gone up a mere 1 percent! It's hard to overstate just how much these numbers shocked many of us at Starbucks. After almost 16 years of 5 percent or higher comps, such poor performance was so unfamiliar, even unthinkable, that it quite literally took our breath away. Although Wall Street no longer knew our comps because we'd stopped reporting them, the numbers, which were printed in red on our financial spreadsheets, were branded on my brain.

Faced with these results, it was requiring more and more faith for Starbucks’ senior leaders to believe that we could actually transform the company. I had complete confidence that Michelle, who had worked closely with me to finalize the Transformation Agenda, and
Cliff shared my vision, but not all of the people on the team believed in or had the discipline to execute the strategy I was putting in place. I recalled what another second-time CEO had told me when I regained control of the company: “Most of your top leaders will be gone or new within a year.”

His prediction was coming true. In addition to bringing in Cliff to head our US business, appointing Michelle chief of global strategy, and naming Chris Bruzzo interim cto and Chet Kuchinad head of partner resources, I'd recently convinced one of Starbucks’ most talented former leaders and a wonderful architect, Arthur Rubinfeld, to rejoin Starbucks as president of global development to manage our real estate portfolio, new store designs, and creative concepts. His most pressing assignment was to review the quality of our current retail portfolio, a task whose outcome—closing stores—had the potential to cause enormous pain to a lot of people inside and outside the company.

Again, it was a chaotic period. Leading Starbucks continued to be a delicate balancing act as I authorized investments to improve the customer experience and boost sales while simultaneously insisting that we cut costs and closely manage expenses, especially in areas not directly related to our core business.

On the second-quarter earnings call, I felt a bit schizophrenic. On one hand I was promising revival. On the other I was reporting what felt like a slow death.

“There are no sacred cows,” I told the financial community prior to explaining another significant decision the company had announced earlier that week, one that for many people had come out of the blue.

Starbucks was overhauling its entertainment strategy.

Cutting this cord was particularly rough for me, especially since as chairman I'd been bullish on entertainment from the start, first seeing it as a natural extension of the brand and later championing deals with record labels, getting behind movies, and sanctioning a rash of non-coffee-related products. By now it was clear to most of us that the entertainment group, as it was currently structured, had devolved into a bloated distraction incompatible with our new mission and economic realities. Its president, who has a truly creative mind and much success in his wake, left the company, as did a number of other talented people.

My intent was not to abandon the role Starbucks had established as a cultural arbiter of sorts—music and books would remain part of the
Starbucks Experience—we just had to embrace the role in a redefined, more cost-effective manner while capitalizing on our existing relationships with AT&T for Wi-Fi, Apple for in-store technology, Concord Records for CDs, and the William Morris Agency for books. I asked Chris Bruzzo to oversee the entertainment division, which we agreed would refocus on digital strategy, CD compilations, and literature.

The second quarter did have some bright spots. Sales in our consumer packaged goods (CPG) business—primarily the coffee and Tazo teas sold in grocery stores—were up, and so was CPG's operating income. Since the launch of Pike Place Roast three weeks earlier, brewed coffee sales also had notably increased, especially in the Northeast, the biggest market for brewed. Pike Place Roast was already our number-one whole-bean coffee.

As for competitors, our internal research showed no indication that we were losing business to any one company, such as McDonald's. This was good news, yet we also had to fight public perception as well as the fast-food giant's aggressive marketing budget.

Our research also revealed that our declining sales were not primarily the result of our self-induced problems. “The economy is the top box why people are not coming as often or not coming in for a treat,” I told Jeffrey Bernstein, an analyst with Lehman Brothers, when he pressed me about the sputtering economy's effect on consumer spending in our stores.