Onward: How Starbucks Fought for Its Life Without Losing Its Soul

by Howard Schultz

  These factors, together with the others that were bearing down on the company and every single store, caught us in a perfect storm of external pressures and self-induced imperfections that left us fighting for our life on so many fronts.

  The scope of our situation washed over me like a sudden storm.

  Back in the boardroom, Mike Ullman spoke up after hearing Arthur and Mike's plan. “Are you sure you looked at the number of store closures as aggressively as possible?” Jamie Shennan agreed with the sentiment.

  The room fell quiet. Mike Ullman had not made this suggestion lightly. Now was the time to make the most drastic changes to the business. If Starbucks Coffee Company had to close stores, if we had to lay off hundreds of partners, if we had to take a multimillion-dollar write-off and suffer the hits to partner morale and the brand's reputation in the marketplace, we did not want to do it twice.

  The board asked us to go back and take another, harder look at the number of stores that we should close to help support the overall business, and someone posed a hypothetical question: “If people who were not as emotionally attached to the stores ran the company, people who were not as concerned about how their actions would affect others, only the bottom line, how many stores would they close?”

  I understood the reasoning, but it would be impossible for me or Arthur or Mike to take emotion out of the equation. These were not just doors we would be closing. We would be disrupting lives, on both sides of the counter.

  For all the flak about Starbucks’ ubiquity, almost every store maintained a devoted following inside and out. A soul. With each closing, we would be erasing a fingerprint, and that was a reality I could not possibly ignore.

  Chapter 19

  Reverence

  Building a great, enduring company requires thoughtfulness and, at times, the courage to make very difficult decisions. For Starbucks, July 2008 was a moment when I had to make choices that I never, in my 26 years at the company, had imagined I would be faced with.

  Six hundred.

  That was how many US stores we ultimately decided to close, three times more than had first been suggested to the board. All told, it represented 8 percent of our US company-owned and -operated retail portfolio. Most distressing: approximately 12,000 positions, or 7 percent of our global workforce, would be eliminated.

  The evening before we publicly announced the news, on June 30, I considered the repercussions of other Starbucks events—the leaked memo, my return as ceo, closing 7,100 stores for Espresso Training, the six initiatives we announced at the annual meeting. All paled in comparison to the potential fallout, gossip, and, most significantly, the individual upheaval that 600 permanent store closings and the consequent layoffs would induce.

  Again and again I looked over the list of stores slated to shut: In Wichita, Kansas, a drive-thru that had been open barely one month. In Federal Way, Washington, a store that had served customers for 18 years. We would close 57 stores in Texas. Thirty-nine in New York. Twenty-seven in Minnesota. Arkansas would lose eight, Mississippi and Nebraska seven each, and North Dakota four. Two-hundred and thirty-four drive-thrus. Seventy-two stores in malls. Fourteen percent of the stores to be shuttered were in California and 10 percent in Florida—not coincidentally, both regions were hubs of the subprime housing bubble and bust. Almost every major city would lose at least one Starbucks. Seven stores were located in our own backyard.

  The choice about which stores to shutter was financially based. If we calculated that it would never provide acceptable returns even once we improved operations and the economy got back on track—which we knew it would, one day—then we most likely chose to close it.

  In addition, Starbucks would take $340 million in expected pretax charges, including $200 million in asset write-offs and another $130 million associated with terminating the stores’ leases. These were all necessary costs to fix the US business.

  One particular statistic, however, raised my ire: 70 percent of all stores slated for closure had been opened in the past three years, during the aggressive growth period when we opened 2,300 locations. It was staggering. We were closing almost 20 percent of our newest stores! We thought all we had to do was show up to be successful, I thought to myself. As I stared at the list of 600, a lesson resonated: Success is not sustainable if it's defined by how big you become. Large numbers that once captivated me—40,000 stores!—are not what matter. The only number that matters is “one.” One cup. One customer. One partner. One experience at a time. We had to get back to what mattered most.

  I shook my head before trying to get an hour or two of sleep. I was not proud of our past behavior, but I deeply wanted to be proud of how all of us, as a company, acted from this point forward.

  Starbucks Increases Number of U.S. Company-Operated Store Closures as Part of Transformation Strategy

  Approximately 600 Underperforming Stores Will Be Closed; Company Takes Significant Step Toward Improving Long-Term Profitable Growth

  At exactly 1:05 p.m. PST on Tuesday, July 1, five minutes after the stock markets closed on the East Coast, our press release hit the wires.

  By 1:15 p.m., the phones in our media affairs and investor relations offices were ringing, but Starbucks was in the mandated quiet period of the fiscal quarter for another month. I was not allowed to conduct follow-up interviews with journalists or analysts, nor could anyone from the company comment other than to clarify our official statement or refer people to the Form 8-K we had filed with the Securities and Exchange Commission.

  Our unavoidable silence provided a lot of room for interpretation, and the risks were huge. How could we maintain the integrity of our brand and the culture of humanity I espoused when we were disrupting so many people's lives? We were committed to transferring as many displaced partners as possible into new roles. This was paramount to our plan and something the leadership team and I had insisted upon. And we took solace in the fact that as many as 70 percent of those field and store partners could likely remain with the company. Second, we would give at least 30 days’ notice to our people whose positions would be lost once a store closed, an unheard-of runway for mass layoffs, especially in retail. We also made employee assistance professionals available to address people's more personal issues.

  At 1:17 p.m., my memo to Starbucks’ partners was e-mailed companywide. I had striven for honesty, trusting our people to honor the realities of the situation Starbucks was in.

  Throughout the history of the company, we have always aspired to put our people first. This makes our decision to close stores more difficult. . . .At the same time, we recognize that we must make decisions that will strengthen the US store portfolio and enable us to enter fiscal 2009 focused on enhancing operating efficiency, improved customer satisfaction and ensuring long-term shareholder value for our partners and customers.

  By far, this is the most angst-ridden decision we have made in my more than 25 years with Starbucks, but we realize that part of transforming a company is our ability to look forward, while pursuing innovation and reflecting, in many cases with 20/20 hindsight, on the decisions we made in the past, both good and bad.

  By 1:45 p.m., Starbucksgossip.com was buzzing with rumors and anonymous opinions.

  At 2:30 p.m., Cliff hosted an internal conference call with regional directors and district managers while our chief financial officer led the analyst conference call.

  Then, at 3 p.m., I began an open forum on the ninth floor. I took the podium in the tense hall knowing that one of our biggest challenges was not tactical, but emotional.

  Outside the company, investor sentiment was unfolding and the public dialogue was taking shape. Tomorrow's coverage would be widespread as negative momentum fueled itself.

  Starbucks’ closures could be cast as progress toward the company's commitment to transformation, but it was likely that some would frame them as a nail in our coffin.

  Six days after the announcement, on July 7, 2008, our stock fell to a 52-week low of $14.95 a shar
e. Wall Street wanted to see much more from Starbucks than just store closings.

  “Short-term investors may rally behind the restructuring theme ‘feel’ of this announcement,” read a research note from Goldman Sachs. “However, longer-term investors may need to see further clarity on current business trends.”

  “The first step is admitting you have a problem,” wrote Morgan Stanley's John Glass. “The rationalization is welcomed, but does not negate near-term fundamental challenges. While we believe the brand is and will remain relevant to the U.S. consumer, there is no quick fix to turn around this company.”

  The coverage by almost every major newspaper, business website, and national broadcast news outlet confirmed our predictions about the media's focus and tone.

  “Starbucks Goes from Venti to Grande,” wrote Time.com in one of the more neutral headlines.

  “Is the Global Domination of Starbucks Finally on the Wane?” asked an opinion piece that first appeared in the United Kingdom and was reprinted in the Seattle Post-Intelligencer.

  At Forbes.com: “Starbucks’ Dark Side.”

  In Fortune: “Starbucks Has a Bitter Plan.”

  A Motley Fool syndicated newspaper column claimed that a “tag-team of doughnut shops, fast-food joints, and quick-service diners” was crowding us out of the market, while the San Francisco Chronicle argued that our 600 store closures was proof that the US economy was in a recession. “Americans have decided to give up their $4 lattes,” it read. “In 2008, a better definition of ‘recession’ may not exist.”

  Then this from the Christian Science Monitor: “Why Starbucks Lost Its Mojo.” The piece hypothesized that Starbucks got into trouble because we created a sense of “cool” for customers by “giving middle-class Americans exactly what they thought they wanted,” a way to generate envy or status. Narrow viewpoints like the Monitor's aggravated me because they overlooked or perhaps begrudged Starbucks’ mission and very real social contribution: human connection. Yes, this raises cynics’ eyebrows, and yes, for some customers Starbucks is an aspirational brand or even a token of pride, but the latter is an unintended effect of what we originally set out to do.

  Starbucks never set out to be cool. We set out to be relevant!

  And few things were more necessary, were more relevant, than human connection, especially as the world was going through such upheaval and uncertainty.

  Starbucks never encouraged our baristas to be cool, but rather to be friendly and knowledgeable about our coffee and to engage with, laugh with, and reach out to their customers. The company does not make investments in health coverage and ethically source our coffee because these things are “cool.” They are the right ways to conduct business.

  The company's hard times could not be reduced to one cause or the death of some pop-culture trend. As I was learning every day, the story of our trials and tribulations was just not that simple.

  On July 9, 2008, The Wall Street Journal picked up on a national phenomenon that we were dealing with back in Seattle: “Not knowing whether their local Starbucks will stay open is making customers and employees jumpy,” began the article.

  In Starbucks stores around the country, not only were our baristas worried about their own store's fate, but our regular customers also feared their daily routine was about to be disrupted, and they came at baristas with a barrage of questions our people could not answer: “Will you close?” “When?” “What will you do?” “Where will I go?” A blog speculating which stores might get the ax sprang up, and as anxiety grew, Starbucks was widely criticized for not publicizing the complete list of closures.

  Clearly we'd underestimated the anxiety that would result from not identifying which stores were scheduled to close. Out of respect we had wanted to inform our partners in person before their stores’ fate went public, as well as prevent an employee exodus or lax customer service in the months before a store actually ceased operating. Originally we had planned to reveal the first 50 closures by mid-July and the balance over many months. But once we recognized the degree of public angst, we very quickly changed course and released the full store list on July 17.

  Then, in an ironic twist, something unusual occurred. After referring to Starbucks as a pricey extravagance, public discussion shifted as our customers and communities around the country pleaded “Save Our Starbucks.” Their calls came in many forms. E-mails. Letters. Even petitions piled on Cliff's desk. On one independent website—Saveourstarbucks.com—the posts rang with emotion.

  “Starbucks is more that just a coffeehouse,” wrote a woman vying to save a store in Chino Hills, California.

  You go to Starbucks to meet friends; bring the kids for some cold drinks on a hot, sunny day; study; work on the computer; read, or just enjoy some quiet time in a comfortable armchair. This Starbucks has really become a part of our little community and we want to do what we can to help.

  From a gentleman in Niles, Ohio: Please don't close our North Common Starbucks. My wife and I go there every day for our drinks. We know the staff and they know us. They have become our friends.

  From an Indiana resident: PLEASE PLEASE PLEASE DO NOT close the Starbucks here in Portage, Indiana, on Rt. 6!!!! This is the BEST Starbucks we have EVER been to. Not only is it clean and the staff, ALL the staff, is always friendly but they seem to take pride in the store. . . . We ALWAYS go to this location. . . . We love everyone who works there. They really go the extra mile to make everyone happy. . . . PLEASE reconsider!!!!!!!

  A few lines from a woman in Minnesota summed up so much of what we were hearing: “I can't believe that ‘my’ Starbucks is closing. You never know how important a place is until you are about to lose it.”

  My personal mail was filled with more of the same, and I noticed a theme:

  Dear Mr. Schultz,

  For the past two years I have been coming to the Starbucks on Phillips Avenue in Jacksonville, Fl. The staff here has been wonderful. This particular team has been genuinely warm and personable day in and day out. So from my viewpoint, I would certainly consider this store to be a winner for you.

  There were more like this. Most notably, the spontaneous flow spoke to our role in communities and the high quality of our store managers and baristas who provided the Starbucks Experience every day. From where I sat, I saw our customers’ sentiments as proof that our store partners were succeeding and that I was not the sole or even the most important ambassador of the brand.

  Back in Seattle, Cliff, Arthur, and Mike were spending an inordinate amount of time reading more heartfelt e-mails, some including passionate promises that their favorite store would bring in more business. Our people held conference calls with mayors, at least one governor, and city officials from around the country and also talked one-on-one with partners at “safe” stores who were standing up for fellow partners at closing stores.

  One day Mike, who had been through mass store shutdowns at other retailers over the course of his career, turned to Cliff. “You know, this kind of outpouring would not happen at other companies.”

  It was challenging for everyone to keep emotion out of the work that needed to be done, and for every single store we received a letter about—every single one—Mike's team conducted another financial review. But rarely, if ever, did the numbers justify reversing a decision. It wasn't easy for them to stick to their guns, but Mike and his team kept the bigger goal in mind: Rightsizing Starbucks’ retail portfolio as quickly as possible would, in the long term, secure the health of the company's future and of the 6,500 US stores that would remain open.

  For months Mike and his six-person team of real estate experts, with backup from lawyers and outside consultants, camped out in a conference room, perpetually on the phone with any one of hundreds of landlords, unwinding our legal obligations and leases. It was difficult, detailed work.

  For more than 20 years, Starbucks had been a desirable tenant, and a traffic-generating magnet for other tenants. Because of the financial strength of our company, develo
pers often felt more secure signing a lease with Starbucks than with other retailers. Now our landlords, many of whom Starbucks’ partners had established relationships with, were seeing another side of the company, and their reactions ranged from calm cooperation to intractable rage. Each developer or management company faced its own economic challenges. Huge public real estate developers, real estate investment trusts, had to answer to their own shareholders. For the independent landowner, a single vacancy at a strip mall might mean not being able to pay the bills or delaying retirement. We tried our best to strike fair deals and spent millions of dollars to make the best of a bad situation for all. Trying to put ourselves in the shoes of the landlord and act accordingly expedited the process.