Bringing Starbucks back from the brink

Schultz, a natural-born salesman who cut his teeth going door-to-door in Manhattan flogging word processors, knows how to spin a yarn, and this rather hokey one would sit perfectly in the treatment for a Hollywood film about the Starbucks story. In that version he’d be the hero. But the company with which he is synonymous is not everybody’s cup of coffee. While 60 million people in more than 50 countries pass through the doors of a Starbucks every week, the journey from neighbourhood coffee shop to global ubiquity has alienated others and Schultz has had to scrap for his reputation and his company.

Businessmen often share Schultz’s ability to express themselves vividly. But when Schultz tells the story of Starbucks, he documents mistakes and weaknesses, both his company’s and his own, with a candour that borders on self-flagellation. Certainly, this serves to heighten the drama of the turnaround story he wishes to convey. Nevertheless, he goes further than most chief executives in public self-examination. Here is a man born into abject poverty in Brooklyn who rose to one of the most high-profile and well-remunerated positions in American business, who is an intriguing mix of corporate tough-guy and New Age guru. A hard-driving CEO who cries in public and admits that he and his company were guilty of massive “hubris” (his word) that nearly brought them crashing to earth.

By late 2007 Starbucks was a company that was a very long way from providing shareholders, customers or employees with satisfactory service. “Success covers up mistakes and that is what happened here,” he says. Seven years earlier Schultz had handed the day-to-day running of the company he had built to others. But, “It wouldn’t be honest to say I wasn’t as culpable as anyone else. I should have been paying attention.” A “perfect storm” grew out of Starbucks’ own failings, the financial crisis and high and low-end competitors skimming off customers. McDonald’s launched a website called unsnobbycoffee.com that encouraged coffee drinkers to stage “interventions” to stop their friends drinking “hoity-toity” beverages.

The Starbucks stock price and profits plummeted. “We could have lost the company,” says Schultz now. Starbucks was guilty of “the arrogance that the wealth of the company and its track record for success had created”. He admits to “hubris born of a sense of invincibility”. The years of success were “a magical carpet ride”, but in reality the phenomenal growth was “a carcinogen” because it became the guiding principle, and mounting costs and mistakes were ignored. “You are never as good as you think you are.”

For many, the arrogance was epitomised by the discovery by The Sun newspaper that all Starbucks stores left a tap running in the “dipper wells” used for cleaning utensils, wasting millions of litres of water a day. The taps were switched off, but Schultz admits that it was very bad for the company’s image.

At the nadir, “The numbers were so bad I felt paralysed. I simply did not know what to do with myself. I couldn’t eat breakfast. I couldn’t enjoy my family. I could barely move.” I suggest that he is describing depression.

“I wasn’t depressed, but I was so concerned. To turn Starbucks around required every ounce of my energy and focus; you’ve gotta be all in. As a result of that I had no ability to absorb any other distraction.” At the best of times Schultz sleeps only three or four hours a night. On the day of our interview he had been e-mailing his secretary at 3.20am. “I just don’t require a lot of sleep.” Is that the secret of success? “It’s not a secret, it’s an illness, a symptom.” He’s smiling, but this is a singular work ethic. On a typical day he will work out at 4.30am before going to the office.

He describes his mood “spiralling” at the height of the crisis and talks of his inability to keep his feelings in check with colleagues. He got angry? “I don’t get angry; I get quiet.”

The drastic decision was taken to close 600 underperforming stores in America and about 50 in the UK. “The first thing I did when I came back was apologise to everybody.” I suggest that this sounds like those weepy public atonements that Japanese businessmen make when they screw up, only just stopping short of ritual disembowelment. “It wasn’t like that,” he demurs. But, he adds, “I think I am an emotional person. I have been less emotional this period of my life at Starbucks than in the first 20 years. I’m older, I would like to think I am wiser, and I was also very cognisant that my emotions had to be more balanced, to provide people with more confidence. It is not healthy when the leader is up and down. [But] I have cried since I came back. I cried when I apologised. I cried when we had to lay people off.”

Schultz can talk in fluent corporate-speak, but switch instantaneously into the touchy-feely language of the Oprah age, talking of “holistic restoration”. When I mention his use of “carcinogen”, he quickly says: “I also use the word ‘love’, though. When you love something as much as I love Starbucks, there’s a deep responsibility that goes with that.”

A fit-looking 57, with greying swept-back hair, Schultz is relaxed and smiley in open-necked shirt and loafers, but transmits the air of a man whose athletic body is struggling to contain all that nervous energy. The five cups of coffee he drinks each day might also have something to do with it. He talks of bouts of stress, which he likes to alleviate by cycling. Other business figures I have interviewed say that stress shows an inability to cope and haven’t admitted to it. Schultz says that such bravado is characteristic of a leadership style that is dated. “We are taught as males that the leader has to be this macho guy; General Patton maybe. The strengths that I was able to demonstrate were my vulnerability and transparency; being honest with people about my concerns and bringing them in with me.”

To signal a change of direction Schultz closed all the stores in America for several hours on one day to retrain all staff in how to pour a shot of espresso. He spent $30 million (£18.5 million) taking 10,000 store managers to New Orleans to do 50,000 hours of community service and attend a conference. “People thought I was nuts and I came under a lot of personal criticism inside and outside the company.” He says the event boosted morale and refocused staff so effectively that the turnaround in the company’s fortunes would have been impossible without it.

Starbucks coffee had long been criticised for its burnt taste, so Pike Place Roast, a filter coffee with a more rounded flavour, was created. Schultz ditched clutter from the stores and threw out some products in order to focus on the core business. Espresso machines that were so tall that people couldn’t watch their drinks being made were scrapped. Breakfast sandwiches, while lucrative, were so pungent that the inviting aroma of fresh coffee was masked, so they were replaced. Incredibly, in 2008, the stores could not access the internet or produce a spread sheet. In his new book, Onward, Schultz describes a rather pathetic scene in which the biggest round of applause at the New Orleans conference is for the news that every store will get a laptop.

On his desk he has a bottle of Mazagran, the soft drink Starbucks made with Pepsi and which nobody drank. “You are going to make mistakes and that’s OK,” he says. “It’s also OK to celebrate mistakes, if you learn from them. But don’t make the same mistake twice.”

To understand Schultz and the company he created, which reached its 40th birthday last week, we need to head back to the Brooklyn housing project where he grew up. His father, Fred, died in 1988 and never saw his son’s success – “one of my major disappointments”. Nevertheless, Fred Schultz still looms large.

“He was a taskmaster. He was strict, no question about that. He didn’t have to say very much, he just had to look at you. You kind of knew.” Has he inherited that? “My kids would say no.” I was thinking about the workplace and those forceful silences of his. “Ah, well. I drive the company to a level of excellence and overachieving because that’s what it takes to win. I don’t think a company should be trying to achieve mediocrity. That’s not what we do.”

Fred Schultz drove a truck collecting and delivering cloth nappies, but after he fell on some ice and broke a hip he was dismissed without any compensation. Seeing what had happened to his father was motivating. “I didn’t want to stay there,” Schultz says bluntly. “All of us are subject to the experiences we had as children and how that shaped us, and not a day goes by where I am not extremely mindful of where I’ve come from, what I saw as a child and what my father experienced.”

As a teenager he blamed his father for not doing more with his life, but, “When I think about that, I am highly critical of myself. He didn’t get the chances he deserved.” He took his daughter, Addison, back to his old neighbourhood recently and found that it was even more depressing than when he was growing up. “Hopelessness, drugs, violence… a lot of things that are part of the fracturing of humanity across the world where people are being left behind. My daughter’s response was: ‘I don’t know how you can be normal.’ ”

One of his neighbourhood contemporaries now runs the school American football team, and Schultz agreed to fund it. Football gave him a way out in the form of a scholarship to college. He says the optimism of his mother, Elaine, was also a powerful influence. She is still alive, but seriously ill, and he describes her as “a remarkable woman, uneducated but with a lot of wisdom and insight, [who] more than anyone else had this ongoing belief in the American Dream. For her, John Kennedy was everything and when he was assassinated it was like someone in her own family had just been killed. My mother gave me the ability to dream.” Years later he called her from the Clinton White House, where he had been at a meeting. “It was, for her, a stunning event because she couldn’t believe her son was with the President. I wanted to bring her, but didn’t have the juice then. I could do it today.”

A few years ago he showed her round the Starbucks HQ. “She was overwhelmed with how many people were working here and she stopped me and said: ‘Do all these people get paid?’ And I said: ‘Yes.’ And she said: ‘Who signs the cheques?’ ”

After college he worked in various sales jobs before joining Starbucks, then a chain of four Seattle shops selling coffee to brew at home. After a few years Schultz bought the company and, inspired by a trip to Italy, set out to bring the Milan experience to America. In 1998 Starbucks arrived in Britain and soon spread. The brand achieved global ubiquity with stores in 53 countries. Schultz was worth more than $1 billion a few years ago, but has since dropped off Forbes’ list of billionaires.

Schultz uses the word “balance” a lot. He says he always sought to strike a balance between making money and behaving responsibly, and cites the way that Starbucks extended healthcare benefits to its part-time workers at significant financial cost and won awards for the way it treated its employees. He wanted to “build the type of company that my father never got the chance to work for. He lost his self-esteem because he was devalued in the workplace as blue-collar, uneducated.”

His father was in the front of his mind when he was weighing up whether to take the reins of the company again. “Just as the sadness of my father’s work life had propelled me to pursue my own dreams as a young man, it was also partly behind my decision to return as chief executive. We lost the balance between profitability and the social conscience and the values of the company.”

Nevertheless, in order to avoid losing everything, he believed it was necessary to make a lot of people redundant, inflicting the sort of pain that had scarred his childhood upon thousands of families. “It was a very tough time. We had to lay people off and I had to stand up in front of the entire company and talk about that and it was very emotional for me. I felt so bad. I tried to explain to people that we were making this decision to pretty much save the company.”

The Starbucks HQ, or “support centre”, housed in a former warehouse, is a warren of passages, low-ceilinged rooms and windowless offices where casually dressed staff work in high-sided cubicles and make their own coffee at numerous bars. The boss is known to everyone as Howard and all employees are called “partners”. There is a faint whiff of a Howard cult, as there often is in a company so closely identified with one man. He is to Starbucks what Steve Jobs is to Apple. Jobs also returned to the helm after a hiatus in which his company’s fortunes dipped. “I didn’t come back as this saviour, this messiah,” says Schultz. “I came back to rekindle and remind the organisation of our guiding principles.”

Some of what he is doing is controversial. Starbucks has moved into instant coffee, which critics say goes against the ethos of the real thing. Schultz says VIA is not “like your mother’s instant coffee” and that it’s on course to become a billion-dollar brand. Isn’t that hubristic? He says no, because it already has sales of $180 million (£111 million) a year and he sees potential for international growth. (In Britain, 80 per cent of coffee drunk is instant.)

Even more extraordinary is that the words “Starbucks coffee” are being dropped from the corporate logo, leaving just the woodcut image of a mermaid. This is because the company is planning to sell all manner of other products to grocery stores. But isn’t that the sort of shift away from the core mission that contributed to the company’s previous troubles? “What we have done has given us the freedom to think beyond coffee,” says Schultz, but he adds that coffee will remain at the core of the business.

Customers will notice the cafés looking different. A greater choice of furnishings has been provided so that the stores have a more individual look. The revamped cafés in Seattle, like some in London, are more stylish, with earth tones and reclaimed wood. One Seattle branch is experimenting with evening sales of alcohol. In Britain, the chunky mugs will be replaced with bone china. The 700 or so UK stores will be overhauled at the rate of 100 a year. Whether they will get as much attention to detail as the flagships remains to be seen.

After all those 4.30am starts, profits are up and the share price has climbed to within sight of its peak of five years ago. But Starbucks still has work to do to win back those who regard the company as a heavy-footed colossus.

I mention that an attempt to open a store in a retail park close to where I live in southwest London was thwarted when more than 1,000 people signed a petition against it. Many thought that the one store that already existed locally was enough and resented the homogenisation of neighbourhood shops.

Schultz says that anti-corporate sentiment “is a pervasive thing. Most things that get big in the world are not viewed positively, and perhaps most things that get big don’t deserve to be viewed positively because they either lose their way or don’t stand for things that are small and intimate and have the kind of feeling that one store has. Having said that, I would never put Starbucks in the bucket of a faceless, soulless corporation because we have tried to use our size for good.” He reels off good works that the company is involved in around the world and mentions that it is the biggest purchaser of Fairtrade coffee. But, “It’s hard when you get big and you get defined: big is bad or ubiquity is bad.”

He says he won’t remain at the company into old age. There are a number of potential successors to him, including Cliff Burrows, a Welshman who runs the American operation.

Schultz’s office is one of the few with a view, out over the railway yard towards the city centre. The walls are hung with baseball memorabilia and pictures of him with his family and with Mick Jagger and Magic Johnson. He counts Bill Clinton and Bono as friends, but says most of his circle consists of non-celebrities he has known for 20 years.

His wife, Sheri, runs the family’s charitable foundation, but doesn’t get involved much in the business. Perhaps that was a mistake. An interior designer and architect, she was “very critical” of the cookie-cutter look the stores had. He didn’t listen to her? “No,” he laughs ruefully. She also championed the instant-coffee venture for years before he adopted it.

They have been married nearly 30 years and have two children. Their son, Jordan, is an aspiring sports writer at AOL and daughter Addison is at film school in New York. He credits his wife with keeping their feet on the ground and instilling in them her Midwestern work ethic and compassion. “They are normal kids who have grown up in a wealthy family, but it has not defined them.” He discouraged them both from working for Starbucks.

The family have a house on Long Island, New York, where they spend a week each summer, and they go to Hawaii for two weeks each Christmas. He doesn’t exactly chill out. The first thing he does each morning on holiday is check the previous day’s sales figures, before a three-hour cycle ride with friends including Michael Dell, the computer tycoon. How else does he enjoy his wealth? What car does he drive? “Don’t ask me that. Come on. I hate to do that. I just bought a new car. It doesn’t matter. Come on.”

We take separate cars down to Pike Place Market. The one I am in is driven by his head of security, a former Secret Service agent who protected Bill Clinton. We push through the tourists having photos taken at the first store, pick up coffees and walk through the market. A man selling chocolate linguine jokes: “Put this in your Starbucks – make it taste like real coffee.” Schultz affects not to hear.

If he was on a business trip and there was no Starbucks, would he drink a McDonald’s coffee? He looks appalled. “No! I wouldn’t go to a competitor.” He claims McDonald’s is no longer a threat. You don’t worry about them? “I worry about everybody. I’m paranoid and you have to be. We can’t rest; we can’t settle.

I don’t like to see people holding a different cup [from Starbucks]. I take it personally.”

We stop at a shop where you can watch the staff make cheese. “It is authentic, real. I went in here and it rekindled for me what it means to make something that is heartfelt.” Schultz is very earnest when he talks about artisans and craftsmen and how “more than a chief executive, I view myself as a merchant”. It is hard to be convincingly folksy when you are head of a corporation with a market capitalisation of $25 billion, which in China alone is aiming to expand from 400 stores to 1,500 in the next four years.

After the parable of the cheesemakers he strides over to the fishmongers who are, by happy coincidence, swigging from Starbucks cups and engaging their customers in friendly banter from behind a stall piled high with fresh Alaskan salmon and giant king crab. Their cheerfulness while working long days in a cold environment is the Schultzian ideal of customer service. “These guys inspire me. I want to respect the guys who do the work. I don’t want to lose sight of that. Again, maybe that goes back to my father who just never achieved that.”

He watches the men behind the counter intently for a few moments and a faraway look comes into his eyes. Could he see his father behind that counter? He smiles, a little sad smile. “Yeah, I can,” he says, and turns briskly and heads off. There’s another Starbucks store he wants to show me.