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

by Howard Schultz

  With the bloggers being so merciless, a small part of me was still wondering what the mainstream media would say when, on February 17, 2009, I took the stage in front of a standing-room-only press conference in New York City to announce VIA. In the audience were individuals whom we wanted to taste VIA and understand the business opportunity before they rushed to judgment and influenced public opinion when VIA was launched as a test in stores in Seattle, Chicago, and London over the next few weeks.

  I looked out at these influencers quietly sipping the cups of Colombian and Italian coffee we had poured for them as part, we had said, of a routine coffee tasting, which often preceded Starbucks’ meetings. Which was true. Finally, with the tempered excitement of a kid quietly unloading a great secret he'd been keeping, I revealed that both coffees were—surprise—a new long-term strategy for Starbucks. VIA Ready Brew.

  “Yes, it fooled us,” The New York Times's Joe Nocera would write in his column.

  I had gotten their attention. Now I had to convince them that instant coffee was no Hail Mary pass for Starbucks, but a homegrown innovation grounded in our coffee roots with tremendous implications for the company's future.

  “This is not your mother's instant coffee,” I assured the room, “and it is a big move for us, an opportunity to reinvent a category, create new rituals, and grow our customer base.”

  I stated the business case. Starbucks, despite its reputation for ubiquity, had only a 4 percent share of the 65 billion cups of coffee consumed annually in the United States. VIA could potentially expand the market as well as our share of it by creating new coffee-drinking occasions.

  But the big prize was outside North America. Globally, the instant coffee market is worth more than $20 billion. In Japan alone, where Starbucks has 839 stores, the $2.9 billion of annual instant coffee sales account for more than half of all of Japan's coffee consumption. In the United Kingdom, where Starbucks has more than 700 stores, instant coffee is a $1.2 billion business, more than 80 percent of all the country's coffee sales. The data were impressive—most Americans had no idea instant coffee was so popular in the rest of the world—but as we had predicted, for VIA to be taken seriously it had to perform in the cup, and after the press conference we waited for the verdicts as journalists in news-rooms around the country held their own private taste tests. Slowly their reviews poured in:

  A panel of seasoned Ad Age newsroom coffee junkies surprised themselves Wednesday when they were unable to tell the difference between Starbucks’ new instant coffee and the chain's in-store brew.—AdAge.com

  Before you start accusing the iconic retailer of desperate measures, give Via a try. Here at Fortune, we have a machine that brews a fresh cup from Starbucks beans in less than a minute. We compared it to the Via and couldn't tell which cup was the instant. Both had a rich aroma and flavor.—Fortune

  [After trying several other instant coffees,] we all agreed the taste of the instant products was drastically different from fresh-brewed—dominated by bitterness in many cases, and lacking in complex flavor and aroma. So when we finally had the opportunity to sample Starbucks’ new Via instant, we were surprised: It actually tastes like coffee.— SmartMoney.com

  As always, our coffee and our company also had their critics. Some conceded only that VIA was better than other instant coffees, but not equal to brewed. Others scratched their heads at our strategy. “I see it as being a very short-term approach to a long-term brand problem,” one coffee industry consultant was quoted as saying. “To me it looks like a big gamble.”

  Wall Street also withheld its approval. The day we announced VIA, Starbucks’ stock closed at $9.65, down 48 cents from the last market close.

  Our battle was far from won. But we had advanced further than many people thought we ever would.

  I've never bought into the notion that there is a single recipe for successful leadership. But I do think effective leaders share two intertwined attributes: an unbridled level of confidence about where their organizations are headed, and the ability to bring people along.

  When it came to VIA, my conviction was already unparalleled; winning our partners’ confidence and enthusiasm was the greater challenge. But I did not doubt that by the time VIA launched nationally in the fall, and then globally, our partners in Seattle and in stores around the world would rally behind it—not just because VIA is a wonderful product, but because at this point in the transformation and amidst the wider economic turmoil, almost everyone was hungry for something concrete to believe in. Something to hope for.

  But for Starbucks in the fall of 2008, that “something” had to be bigger than a new espresso machine or a customer loyalty program, and more consumer facing and companywide than the New Orleans leadership conference. Starbucks needed an even more seismic event that, unlike Sorbetto, was authentic to our coffee heritage but, like Frappuccino, unequivocally original. We needed something that actively involved store partners and made them proud and positioned the company to capture share of a new market.

  However VIA ended up performing, it would be much more important to the company than the earnings it generated. VIA had the potential to awaken an entrepreneurial spirit and once again imprint the importance of innovation upon the organization, reminding our partners of the excitement that comes from assaulting the status quo and trusting yourself, your coworkers, and above all a truly great product. VIA could renew our courage to lead, and Starbucks is at its best when we lead, not follow, when we reinvent categories, create new rituals, and transform an industry. I had no doubt: VIA was helping us transform ourselves.

  Chapter 29

  Connecting Dots

  Barely a few hours after the VIA press conference, I was sitting in front of a television camera on the floor of the New York Stock Exchange doing a live interview with CNBC's Maria Bartiromo. The first question Maria asked me was not about VIA or Starbucks, but about the economy.

  On that same day, February 17, 2009, President Obama had signed into law an ambitious $787 billion stimulus package to try to rescue a nation reeling from an economy weaker than it had been in decades. Unemployment in the United States was on its way to a 25-year high of 8.1 percent. The country's gross domestic product, or GDP, the value of all the goods and services produced, had shrunk by 6.2 percent in the last quarter, its steepest decline in 27 years. Consumer confidence had plummeted to 25, its lowest level since 1967.

  “Is [the stimulus] going to be helpful in terms of getting the consumer out of this funk?” Maria asked me above the din of the Exchange. My perspective, which I shared with her, was that its most immediate effect would be to lift consumer confidence, which was so critical for people to feel comfortable enough to spend money again. But I also said that I did not think the current climate was going to dramatically improve anytime soon, something that all companies had to accept. The deteriorating economic situation was beyond any organization's control; all any of us could do was to affect how our companies responded to it. At Starbucks, we continued the incredibly complicated, sometimes painful work of cost cutting and making our processes more efficient. Revamping the supply chain. Streamlining store operations. Overhauling our IT systems. We were even closing 300 more stores than previously planned. Most difficult was that we had just gone through another round of layoffs, although not as large. In a perfect world, our partners would not have to endure such a painful experience more than once, but since July 2008 the economic situation had grown significantly worse, greatly affecting the assumptions we had made half a year ago.

  In addition to the operations of their businesses, companies, including us, also had to attend to the front end and put ourselves in our customers’ shoes as the recession deepened. Our customers were hurting, and we needed to find ways to offer value without damaging the brand through price cuts.

  Starbucks had been trying to do this with its Rewards and Gold Cards, the $2 beverages with the Treat Receipt, as well as offering food-and-coffee pairings for under $4. VIA, I told Maria
during the interview, which cost less than $1 a cup, was another way Starbucks was able to be relevant to consumers in the current environment. A three-pack of VIA would sell for $2.95, and a 12-pack for $9.95.

  “Tell me what you are seeing in terms of consumers today,” she further inquired, a question I got a lot because Starbucks stores around the world often serve as barometers, even early indicators, of spending behavior.

  “It has not really gotten any worse in North America since the fall,” I answered. “The place that concerns us is Western Europe and especially the UK. The UK is in a spiral. . . . I think consumer confidence in the UK is very, very poor.”

  Five minutes later, the interview ended. I left the studio for my next appointment, and by the time I went to sleep that evening in my New York apartment I was pleased but drained—and completely unaware of how events were unfolding in the city and across the Atlantic.

  The next morning, I woke up and, as usual, made myself a French press of Sumatra and immediately checked e-mail. I had an unbelievably large amount for so early in the day. I checked voice mail. I had at least three dozen messages!

  I thought someone must have died.

  What soon became apparent was that sometime after I had appeared on CNBC, Maria had interviewed Britain's business secretary, Lord Peter Mandelson, who was in New York to promote his country's economic stability. The very first thing she asked him to do was to respond to my dire characterization of the UK's economy. Mandelson shot back, “The UK is not spiraling, although I notice that Starbucks is in a great deal of trouble. But that may be because of their overexposure given the state of the market. So please do not project Starbucks’ performance on the British economy.”

  According to subsequent newspaper reports that went viral on the Internet, Lord Mandelson attended a cocktail event later that day where, obviously still upset, he made disparaging comments about me personally. It was perfect front-page fodder for England's tabloids.

  “Peter Mandelson Launches Fierce Attack on Starbucks Chief,” hyped England's Telegraph newspaper the next day. “Mandelson and Starbucks Clash on UK Economy,” shouted the Guardian's front page. Subsequent articles and blog posts exacerbated the issue, and it spread like wildfire online! Inundated with calls, Starbucks was compelled to release a reassuring statement about the company's confidence in and commitment to the UK market.

  The incident, which ended almost as quickly as it began, was significant mainly for what it represented. First, similar to the memo that had leaked two years earlier, almost to the day, in 2007, the experience signified once again just how quickly information flows—and can get out of hand, particularly in the digital age. In contrast to all the months spent preparing to tell VIA's story and business strategy, it took only a few hours for one unrelated comment to refocus the conversation about Starbucks.

  Second, Starbucks is a consumer brand that people talk about and want to communicate with. Negatively and positively. Whether we make big moves or small. And as I had believed upon my return as ceo, there was an opportunity for us to interact more in the dialogue, whether or not we initiated a specific conversation.

  Our presence on social networks such as Facebook and Twitter and our own MyStarbucksIdea.com were helping us listen to and connect with customers as well as improve the business. To date, 25 ideas had been adopted based on My Starbucks Idea posts; most impressively, the site inspired the first versions of our loyalty programs, the Rewards and Gold Cards. Over time, our loyalty program had evolved into one of the company's most successful and lucrative endeavors to date. On Facebook, Starbucks’ number of fans was nearing one million, and 150,000 people were following Starbucks on Twitter. These audiences wanted to hear from us.

  More than ever before, Starbucks was initiating conversations, engaging moment by moment with the people who were most interested in what we were doing. For us, social networks were proving to be an area where Starbucks could lead instead of using the defensive tactics the company had fallen into employing elsewhere. As long as we did not bombard our followers with coupons, as long as we conversed about issues that were important to both Starbucks and our customers—from coffee to recycling—and as long as we listened as well as talked, people would stick with us and perhaps even become more attached. More than adding a halo to the brand, Starbucks was developing a two-way digital dialogue that drove awareness of our activities, drove trust, and, ultimately, drove sales.

  During the previous holiday season, for example, we had used our then nascent Facebook page to tell our Facebook friends about (STARBUCKS) RED, exposure that helped boost Starbucks’ (PRODUCT) RED sales to provide the equivalent of more than 3.4 million days of antiretroviral medicine for people with HIV or AIDS in Africa. The next month, on January 20, 2009, when Barack Obama was inaugurated as the 44th president of the United States, Starbucks encouraged its online fans to come into our stores and pledge volunteer time. All told, our stores recorded 1.2 million hours of pledged service.

  With the understanding that digital and social media would continue to play a role in how we engaged with customers and went to market, we invited Facebook's chief operating officer, and one of Google's first 300 employees, Sheryl Sandberg, to join our board of directors. At the same time, I was pleased to also recruit Kevin Johnson to join the board. I had gotten to know Kevin when he was with Microsoft, where he was president of the group running the Windows and online services businesses. He had recently become the chief executive of Juniper Networks; his presence on the board would give us another active CEO point of view. And both Sheryl's and Kevin's combination of technology, business, and leadership skills would add more depth to our board.

  In the spring of 2009, I felt confident that few other companies were leveraging social and digital media as we would continue to do, and each day brought new possibilities.

  Yet we had to tread carefully.

  The wrong tone, message, or association risked diluting our brand or harming our customer relationships. We had to be incredibly selective in how and where Starbucks showed up digitally—stay open to innovative ideas, definitely, but act deliberately.

  Standing in front of the leadership team in our boardroom, Starbucks’ chief information officer Stephen Gillett was explaining how Starbucks could significantly increase monthly comps almost immediately.

  I had asked the team to think big and then think bigger. Even with VIA on its way to market, there was never a silver bullet and we needed to continue to challenge ourselves: What else could we do to add value for our customers as well as shareholders? How could we make better use of all the assets Starbucks had? Stephen, almost one year into his role, not only was overhauling our IT systems, but also had come up with something no one else at the table could have imagined.

  “How many of you know GameStop?” Stephen asked. No hands went up. GameStop, he informed us, is the world's largest retailer of new and used video games. And while the rest of the retail world was suffering, GameStop's comp sales at its 6,000-plus locations had been up 10 percent in the last quarter. Starbucks had been down 10 percent. Then Stephen posed another question. “Does anyone know the number-one–selling online game of all time?” Again, no hands.

  Stephen smiled. “World of Warcraft.”

  The name could not have been more foreign to me. Stephen went on to explain to the equally bemused Starbucks leadership team that World of Warcraft is an online, interactive, multiplayer fantasy game where—in a make-believe world akin to that in the Lord of the Rings tales—human players create their own digital characters that embark on adventures and quests, acquiring points along the way. Apparently, almost 12 million people around the globe play World of Warcraft, and Stephen was not only one of them, we would soon learn, but also among the most successful and renowned players, a star within the gaming community. And that community, Stephen said, consists mostly of males ages 18 to 34, a demographic that Starbucks had yet to capture.

  Stephen was suggesting that Starbucks explo
re the GameStop business model—clearly they were doing something right—as well as a possible relationship with World of Warcraft's parent company, Blizzard Entertainment. Maybe we could sell video games in our stores. Maybe a virtual Starbucks “pet” could become part of the Warcraft world of coveted characters. How about a Starbucks–World of War-craft Rewards Card?

  At first blush, such a relationship seemed unlikely. But the numbers Stephen had pulled together should such a relationship succeed were extremely compelling. A Starbucks partnership with Blizzard, he projected, could quite possibly usher millions of new customers into our stores around the world, leading to much-needed comp sales growth.

  I sat back in my chair. I'd asked for big, out-of-the-box ideas, and Stephen, who is not a merchant but an information technology professional, had certainly delivered. Although it was obvious that “war-craft” did not fit with Starbucks’ values, I resisted jumping to conclusions as people had with VIA when they had assumed without much knowledge that the idea would fail. I wanted to give Stephen the benefit of at least exploring the idea. So, in April 2009, a small group of us flew to Blizzard Entertainment's headquarters in Irvine, California.