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.
An irony did not escape me during the call. Lehman Brothers, the fourth-biggest investment house in the United States, was in the midst of its own crisis as the market raised serious questions about its financial stability and continued to devalue its stock. And Lehman wasn't alone. Other stalwart financial institutions like AIG and Bear Stearns were crumbling, and their risky investments were the source of the credit and cash crunches that had the entire country reeling! Wall Street was on its own course to crash, taking the rest of us with it.
So why did I feel like Starbucks was a punching bag?
The “$4 latte”—that untrue catchphrase that cast Starbucks as a symbol of excess in frugal times—was hardly the consumers’ enemy during this period of economic turmoil. But it sure was an easy target.
I refused to give in to increasing external pressures and focused on anything that would keep the company moving forward, even if at times it felt like we were going the wrong way in a wind tunnel.
Chapter 18
A Lethal Combination
Each Starbucks store has its own fingerprint.
At first blush, they appear and sound alike—the music, the hues, the menu—and the Starbucks you visit on vacation may feel as familiar as the Starbucks in your hometown. But it's also true that, like any local café, every Starbucks is a little bit different. The reason is simple. The people.
On both sides of the counter, the people who frequent and work at Starbucks are undeniably unique.
In 2008, even as our traffic and sales slowed, Starbucks was still serving tens of millions of customers around the world each week. And wherever they were, whoever they were, customers could order their coffees and espressos in more than 80,000 different combinations. During their morning commute or a midday coffee break. On a blind date or with friends. While studying for exams, reading the Sunday paper, or writing a book.
Variety—to accommodate the habits, whims, and desires of human behavior—has always been a Starbucks staple.
Our retail partners are as diverse as the people they serve and the beverages they customize. People wearing our green aprons represent almost every race and religion. We employ twentysomethings and grandparents, single moms in need of health-care coverage, and artists in need of rent. For some, Starbucks is a stopgap gig between jobs, while others hope to build a career with the company. Whether part-timers or full-timers, Starbucks partners include high school kids saving for college, college kids in pursuit of degrees, recent grads, many in search of themselves, former executives, and people who vowed never to work in an office.
“Behind every barista is a story,” reads a poster hanging in the lobby of our Seattle support center. It's true.
Amidst all the variety in each store, one individual is responsible for finding common ground. One person is in a position to nurture a welcoming environment where everyone will feel comfortable and can connect.
The store manager.
Starbucks’ best store managers are coaches, bosses, marketers, entrepreneurs, accountants, community ambassadors, and merchants all at once. They are optimistic problem solvers who run their stores creatively yet analytically, calling upon passion and intelligence to drive customer traffic, partner loyalty, and profit. The best managers take their jobs personally, treating the store as if it is their very own.
Managing a store is nonetheless a challenging juggling act, and during our transformation I was aware of the stress our people were under. And even as I preached about how we all needed to put ourselves back in the shoes of the customer, I also tried to put myself in the shoes of our store partners and be empathetic to their feelings amidst the turmoil at the company and in the marketplace.
Many of us considered store managers our most influential people when it came to crafting the Starbucks Experience. Yet we were not empowering them to be the best they could be.
Cliff was growing increasingly concerned as he traveled the United States in the summer of 2008, visiting Starbucks stores and meeting with district and store managers. The more thoughtfully he observed and the more questions he asked, the more he realized that Starbucks’ field operations were inadequate.
“There's no emotional shortcoming,” Cliff told me at one point. “Our partners are passionate and want to do the right thing, especially from a values standpoint.”
But what many of our people had in spirit they lacked in business acumen and tools. It was not uncommon, for example, for a manager to report that his or her store was doing exceptionally well when in reality it was missing revenue opportunities, barely breaking even, or even losing money. Inventory was haphazard. Floors and tables were often dirty. Food displays lost freshness as the day went on.
We also observed too much waste. An inordinate amount of coffee was being thrown out. Pastries were often out of stock or overstocked, resulting in lost sales or more discarded product. Weekly labor scheduling—coordinating baristas’ availability with store traffic patterns—took managers hours, yet still stores were often understaffed or partners underutilized.
Something subtler was also being wasted: our people's time and energy. When Cliff walked into stores, he consistently witnessed partners working hard. Always, there wa
s a great deal of hustle and bustle and running around—as well as laughter and banter and smiles—but somehow, the line of customers and the line of empty cups waiting to be filled seemed too long given the effort our people were putting out. There was a disconnect between effort and result.
Speed of service is a large part of Starbucks’ value proposition—even if a customer plans to stay and sit for a while—and on this front Cliff believed we could do better, that we had to do better. Potential customers were literally walking out of our stores when faced with too long a wait.
The fault did not lie with our people in our stores. They were doing the jobs they had been asked to do with the resources and training they'd been given. For all of the brand's marketing success, Starbucks needed a more disciplined operations system to maximize our earnings potential.
The more rocks we turned over, the more problems we discovered.
One of the most glaring was our outdated technology.
In was 2008 and, as a company, we were not yet providing our district managers—who were constantly traveling and needed to stay in close touch with stores—with the same technology tools and collaborative software that most professionals around the world were using to conduct their business. It could even be tough for them to access the Internet from the road, and many used their personal e-mail accounts or lugged around heavy computers.
In the back room inside each store sat a big box of a machine so old that the screen had no modern graphics or multimedia capability. Just a constant black background. I'm sure some of our younger partners did not even recognize it as a computer! Amazingly, even in 2008, it could not access the Internet or use basic software such as spreadsheets and word processing and PowerPoint, let alone sophisticated data analysis programs to help our partners better run their businesses. Store managers could not easily e-mail people outside the company, and it could be very difficult to send and receive attachments. Watching videos, such as the one made for Espresso Excellence training, was not even an option on our stores’ computers (which was why we'd had to ship each store its own DVD player).
In short, a Starbucks store was essentially the equivalent of a $1 million-a-year business, yet an iPhone had more business application power than our stores’ technology.
In the front of the store, our point of sale (POS) system, a.k.a. the electronic cash register, operated on an old Microsoft-DOS platform that even Microsoft had stopped supporting in the mid-1990s. We'd upgraded our applications over the years, but the system had become so complicated that it could take six weeks to learn. It was also inflexible. If a barista did not input a beverage's ingredients in a particular order—size, drink name, then additions like an extra shot or soy milk—he or she had to void the order and ring it up again. And because customers rarely stated their beverage preferences in that order, confusion at the register was all too common.
Any moderately tech-savvy person applying for a job or working at a Starbucks—or for that matter just about anyone under age 30—was no doubt surprised by the old-school tools he or she was given to succeed. Worse, our partners were asking for help but we were not listening. It was both costly and embarrassing.
Starbucks may have started a coffee revolution, but when it came to the technology revolution, we missed the boat.
How did a $10 billion global company get to this point? It was not as if Starbucks had never invested in its skeletal backbone. Quite the opposite. In the early days, the company's leadership proactively invested in our people, processes, and facilities ahead of our growth by making such moves as building new roasting plants before they were absolutely necessary, a significant factor in our success. But some things, like the stores’ technology, had clearly fallen through the cracks. And while the situation was by no means dire, discovering it posed both problem and opportunity. We now had a chance to make the experience of being in our stores easier and more enjoyable for both partners and customers.
Cliff realized very quickly that if Starbucks was going to transform the customer experience, we had to be as bold in our stores as we were being in Seattle, and he embarked on the long process of reshaping our organizational structure in the field and improving store operations.
For me, the status quo could not stand. We had to elevate backroom and customer-facing technology to a more strategic, proactive level, a shift that had to begin at the top of the organization. Historically, our chief information officer had reported to the chief financial officer, but the time had come to seat technology at the executive table as part of the senior leadership team. On top of everything else, I also began the hunt for an IT leader with the chops, vision, and values to bring Starbucks into the 21st century.
I did, however, see a silver lining in our operational shortcomings. Actually, I saw two. First, our store managers had been amazingly successful in spite of their challenges, and second, once they received the right tools and knowledge, I believed that significant performance improvements were possible.
Unfortunately, not all stores could be fixed. And while I knew we might have to close some, I had no idea just how many.
I sat transfixed at the head of the conference table as Arthur Rubinfeld and Mike Malanga, our senior vice president for US store development and one of the company's most seasoned retail real estate veterans, recommended to Starbucks’ board of directors that the company close about 200 company-operated US stores.
“Are you sure that's enough?” a member of the board asked.
Arthur and Mike looked at each other and at me. We already knew that this number was huge for a retail organization that had never shuttered more than a handful of stores in its entire existence. In addition to taking an estimated $50 million write-off for that fiscal year, the move was destined to affect every department and would cause individual pain, rile the financial markets, boost our competitors, and make noise online.
Prior to the board meeting, Arthur and Mike had come to me with the same recommendation. It was as serious a conversation as I'd ever had at Starbucks, emotional for all of us. Other retailers were suffering from sales slumps as consumer confidence hit a 16-year low, but none had announced such drastic steps—at least not yet. What's more, we'd already pulled the plug on 348 planned store openings, a very tough decision in its own right. But this felt different. More than a correction, closing so many stores felt like a defeat, even if it was the right thing to ensure the company's health. I wanted to understand how Starbucks, as a company, had arrived at this point.
“If what you're proposing is true,” I'd said as we sat behind my office's closed door, “explain the filters to me so that I understand what is driving the decision.”
Arthur and Mike walked me through the analysis, which they had done in conjunction with our operations and finance departments, first telling me what I already knew:
Starbucks’ ability to build and operate profitable stores had succeeded for years because we had adhered to a simple yet ambitious economic model: a sales-to-investment ratio of two to one. During a Starbucks store's first year in business, it needed to bring in $2 for every $1 invested to build it. If the company spent $400,000 to lease and design a store, for example, we expected and almost always got at least $800,000 in revenue during the first 12 months of operation. Historically, the average Starbucks store in the United States had brought in about $1 million annually. These so-called unit, or store, economics were widely known to be best in class because few, if any, retailers could achieve what Starbucks had accomplished year after year.
But in 2008, Arthur and Mike informed me, Starbucks was, for the first time in its history, missing that ratio at hundreds of stores. There were longer stretches of time during the day when a store did not have enough sales to justify the labor costs. We knew some of the reasons why from our research. People were not coming in for their afternoon treats. Others were not spending as much. In some cases, one store's sales were being cannibalized by another Starbucks, or maybe the store was in a lousy location.
Adding insult to injury, many of our underperforming stores had been opened in the last two years, revealing a lack of discipline in real estate decisions that was, in my opinion, an example of the hubris that had taken hold.
I took another deep breath. From where I sat as ceo, the pieces of our rapid decline were coming together in my mind. Growth had been a carcinogen. When it became our primary operating principle, it diverted attention from revenue and cost-saving opportunities, and we did not effectively manage expenses such as rising construction costs and additional monies spent on new equipment, such as warming ovens. Then, as consumers cut their spending, we faced a lethal combination—rising costs and sinking sales—which meant that Starbucks’ economic model was no longer viable.
Onward: How Starbucks Fought for Its Life Without Losing Its Soul Page 17
