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

by Howard Schultz

  Some people wondered why I returned to Starbucks as ceo. And why I stay. “He doesn't need to do this. Why is he so motivated?” Quite simply, I love this company and the responsibility that goes with it.

  Onward . . .

  Tribute

  Even after all these years, coffee still has the power to surprise me.

  In January 2010, I sat down with Dub Hay and Andrew Linnemann from our coffee department and asked them to create a very special blend for our 40th anniversary year. I wanted a coffee that captured the essence of our history and honored our most unique qualities as a company and a coffee purveyor and also had a taste profile that would resonate with our most loyal partners and customers. I requested a blend that was distinctively Starbucks yet like nothing we'd ever produced. A flavor that, unlike the easy approachability of Pike Place Roast or even the intensity of our coveted Christmas Blend, would pack an unequivocally bold punch.

  The brainstorming to choose the beans began.

  First, the coffee team selected aged Sumatra, because aging our own coffee to reveal its rich cedar and spice notes has become a defining Starbucks trait. Next, Colombian, because the dense, high-grown beans of that country's southern Nariño region are a cornerstone of our most popular blends and because Colombia is where Starbucks first began actively contributing to social programs and practices that improve the lives of farmers. Next, naturally sun-dried beans from Ethiopia, because the beans’ intense berry aroma reveal even before tasting that the coffee is unlike any other. Finally, the complex beans from the remote coffee farms of Papua New Guinea, which have been on our menu from the very beginning.

  It was a risky combination. The Ethiopian beans would be particularly difficult to procure at the speed and in the quality and quantity we needed for global roasting and distribution in early 2011. And rarely, if ever, had a blend of coffee mixed aged beans with beans that were dried naturally in their cherry skins. The tastes could conflict on the palate. But after five months of experimenting with small batches, the coffee team landed, as always, on just the right process—they roasted the Ethiopian beans separately, and the Papua New Guinean beans provided the needed balance. In October 2010, the final shipment of Ethiopian beans arrived and to everyone's relief met our high standards.

  I stood in the cupping room across from my office and tasted the new blend for the first time. The coffee hit my tongue with a beautiful aged cedar note that gave way to a robust fruitiness and ended with a balanced acidity.

  “This is exactly what I was looking for,” I said to Dub, Andrew, and Doug Langworthy, who had led the development. “This is a big, bold, knock-your-socks off coffee.” It really was spectacular. We hugged and shook hands, and I took a sample home to make for Sheri and me in my French press. Sipping the coffee the next morning, I knew it was exactly what I had hoped for and like nothing I'd ever experienced.

  “I have had two extraordinary cups of coffee in the last 24 hours, one was in the tasting room yesterday and the other was at 5:30 this morning,” I wrote in a thank-you e-mail to the coffee and Starbucks leadership teams. “I am so proud and so respectful of the work put in to produce something so special and fitting for this celebratory event.”

  Perhaps even more fitting, we named it Tribute Blend.

  As I write these words in the fall of 2010, just weeks after tasting Tribute, Starbucks and I find ourselves at a moment of culmination.

  First, the process of documenting our transformation period for this book has come to an end. Reliving these two years has given me a chance to reflect on a remarkable ride. I truly hope the telling has been informative and that it inspires others to consider the untapped potential within their own organizations as well as within themselves. Yes, it is possible to rise, fall, and rise again, recapture lost dreams, dream bigger, and succeed in our ever-changing, complex world—without abandoning what matters most. And at Starbucks, what matters most are our guiding principles and the culture that supports them.

  Starbucks has regained a healthy balance with a culture that celebrates creativity and discipline, entrepreneurship and process, as well as rigorous innovation. But perhaps the most vital thing that came out of the past two years has been the confidence we gained knowing that we could preserve our values despite the hardships we faced. Holding fast to those values steadied us throughout the tumultuous journey, and the ways in which we conduct our business will continue to bring our partners pride and fuel their engagement as we continue to grow.

  People will always be our most important assets and Starbucks’ competitive advantage, which is why, on the cusp of celebrating our 40th anniversary, foremost on our minds as we head into 2011 is how to mark the occasion in ways that honor our partners. Developing Tribute Blend was just one of the many ways we will do so.

  A New Blueprint for Profitable Growth

  In fiscal 2010, Starbucks revenues increased to a record $10.7 billion, and our operating income increased by $857 million to $1.4 billion, up from $562 million in fiscal 2009. Our full-year operating margin of 13.3 percent represented the highest consolidated operating margin in our history, surpassing the previous high of 12.3 percent achieved in fiscal 2005. These results enabled us to share a special bonus with nearly 100,000 of our store and roasting plant partners.

  The record fourth quarter of 2010 was not just a triumphant end to a single year, but also an exclamation point capping a defining period in our shared history. I could not be more proud of Starbucks’ partners. And although I have never been one to bask in celebration, our company's performance gives me pause, a reason to step out of the day-to-day business and reflect on choices and lessons and what they mean for the future. Today we see new possibilities on the horizon, possibilities that will continue to grow the company, further enhance the culture, and evolve present-day Starbucks in ways few can imagine.

  Growth, we now know all too well, is not a strategy. It is a tactic. And when undisciplined growth became a strategy for Starbucks, we lost our way. But no longer are we growing the company the way we did in the past.

  In short, Starbucks today aims to be a very different type of company.

  Sourcing, roasting, and serving the highest-quality coffee will remain our core, of course. And we will continue to invest in our retail stores and the Starbucks Experience. The stores are our foundation. But now we are going further, in a way that only Starbucks can.

  For more than 20 years, I've said that every company must push for self-renewal and reinvention, constantly challenging the status quo. For Starbucks, doing so means we are once again thinking big and dreaming big, embarking on a road we have not taken before. Creating innovative growth platforms that are relevant to our core and worthy of our coffee was a critical element of the Transformation Agenda—it was one of the seven goals we announced in March 2008. Not only are we achieving this today, but we are also engaging in new product innovation, as well as extending coffee to other forms inside and outside our stores. All are key to our growth.

  Our experience with Starbucks VIA proved we can create new product categories, while raising the bar on quality. In just 10 months on the market, VIA's US sales reached $100 million. To put that in context, only about 3 percent of US products generate more than $50 million in sales during their first year on the market, and only 0.3 percent ever makes it to $100 million in sales, according to SymphonyIRI Group, a research and consulting firm that specializes in retail and consumer products. VIA, however, is not just a product, but also a brand platform, and by September 2010 we had launched VIA decaf, iced coffee, and flavored VIA in vanilla, mocha, caramel, and cinnamon spice. Perhaps most surprising, even to us, has been consumers’ overwhelming adoption of VIA as a single-serve solution, in place of home-brewed coffee and pods. Single-serve is a huge category where Starbucks has lagged in the past, but today we are becoming a significant player—and not just with VIA.

  Although my friend Don Valencia was definitely a visionary, I don't think he ever imagined that the
product he once called JAWS would one day reach $1 billion in worldwide sales.

  In this respect, VIA will not be alone. Starbucks envisions building a portfolio of $1 billion brands, which will also include Seattle's Best Coffee. Less than a year after we unleashed SBC in 2009, the brand's look and feel and its strategy had already been overhauled. Under Michelle's leadership, SBC is adding more retail concepts and packaged products, and aggressively expanding its distribution. SBC is now offered in more than 40,000 locations, up tenfold since fall 2009, including Subway, Burger King, and AMC movie theaters, as well as in 550 retail outlets such as Borders.

  And just as we had yet to tap SBC's potential, Starbucks also had not taken full advantage of, nor had we exerted enough control over, our consumer packaged goods (CPG) business, which includes Starbucks branded products such as packaged coffee, ready-to-drink beverages, premium ice creams, as well as Tazo teas.

  In 2010, CPG was a $700 million global business. Respectable, but nowhere near the size it could or should be. Now, under the leadership of Jeff Hansberry, whom I named president of our consumer products business in June 2010, CPG is poised to grow in pace and size, significantly more than it ever has. With Jeff's prior experience at E. & J. Gallo Winery and his 17 years of working for Procter & Gamble, Starbucks is finally building a global consumer products organization that mirrors our retail footprint in terms of capability, reach, and consumer understanding.

  Most crucial, however, is how we are integrating Starbucks’ consumer goods business with our retail stores and our powerful customer engagement tools and resources. Consider:

  There are companies that operate huge global networks of retail stores, like us.

  Others distribute their products on grocery shelves all over the world, like us.

  And a few do an extraordinary job of building emotional connections with their customers, as we have learned to do.

  But only Starbucks does all three at scale, and we increasingly see a future where each complements the others, forming a virtuous cycle that allows us to go to market and grow the company in a unique way. The engaging customer relationships that we create through our partners in our thousands of stores—plus the customer connections we foster in digital venues and with our loyalty cards—are paving the way for us to introduce new consumer products and rituals to consumers, in our retail stores and in other distribution outlets such as grocery.

  STARBUCKS UNIQUE GROWTH MODEL

  Again, we saw this play out with VIA. Our customers’ trust in our coffee and our partners—and the relationships they have with our brand online and through our loyalty programs—yielded trial, acceptance, and sales of VIA in our stores and in other venues. With one voice, we marketed VIA through multiple, complementary channels.

  Few, if any, other retail brands have been able to create a significant global footprint through multiple channels of distribution outside of their core stores. Yet this, I believe, is Starbucks’ destiny.

  So it is with this strategic vision that we embark on the next chapter of Starbucks’ story. We could not, however, turn the page without having first transformed and stabilized the retail business and the brand in the United States. That is the foundation from which our growth will always spring.

  A Transformation Realized

  Just as no single product, person, or initiative is determining Starbucks’ future, no one thing is responsible for having transformed the company to be in a position to grow as never before. Since my return as ceo, many sustaining initiatives have taken root and blossomed, each helping us to meet the goals of the Transformation Agenda that we articulated back in early 2008.

  To conclude Onward, I want to revisit these goals as well as provide a snapshot of the progress we continue to make on the initiatives that supported them. Doing so, I believe, brings this part of our company's story full circle, illustrating how the plans we created and executed not only brought about the transformation of our business, but also continue to solidify our ability to pursue the type of sustainable, profitable growth we envision.

  Revisiting these initiatives is also a fitting tribute to our partners’ hard work and diverse talents; without them, Starbucks would not be here today.

  BEING THE UNDISPUTED COFFEE AUTHORITY

  From day one, I knew we could not transform the company if we did not excel and lead in our core business, and so a goal that began with Espresso Excellence Training evolved into innovative products and practices that continue to improve the quality and delivery of our brewed and espresso beverages. Today, customers tell us that our brewed coffee and espresso-based drinks taste more consistent and significantly better than they did two years ago. The proof of Starbucks’ coffee authority will always be in the cup.

  Pike Place Roast Since launching Starbucks’ signature approachable blend in April 2008, we've served one billion cups of Pike Place Roast to customers. Today, the breakthrough brew is our top-selling whole-bean coffee.

  We also no longer send any preground coffee beans to our stores, instead grinding all beans, including bold and decaf, just prior to brewing a batch. That means our coffee tastes fresher and, much to the joy of the merchant in me, the rich aroma of freshly ground coffee once again permeates our stores throughout the day.

  The Mastrena With this elegant espresso machine now in almost 70 percent of all of our US company-owned stores and its rollout continuing throughout the world, our baristas have more control over each shot and the steaming of milk, and once again they can more fully connect with customers by making eye contact and conversation with them as they wait on the other side of the espresso bar.

  Clover The transcendent little coffee machine born in Seattle's Ballard neighborhood produces one of the top five best-selling beverages at the more than 100 stores that serve it in cities in the United States and Canada. Clover is finding its way into more locations, giving customers an opportunity to enjoy the nuances of our traditional blends and the flavors of our exotic, smaller-batch Starbucks Reserve coffees.

  IGNITING THE EMOTIONAL ATTACHMENT WITH OUR CUSTOMERS

  People continue to come to Starbucks for coffee and human connection, and we have put our customers back at the center of the Starbucks Experience by addressing their needs, providing value in a manner congruent with the brand, and developing programs that recognize and reward our most loyal customers.

  Starbucks’ Loyalty Program Our customers have thanked us for thanking them. In December 2009 we rolled the Rewards and Gold Cards into a single new program called My Starbucks Rewards. Customers cite the program as a reason they are visiting our stores more frequently. To date, more than $1.5 billion has been loaded onto Starbucks Cards. It is hard to overstate the value of our loyalty program, to our customers and to the company . . . and much more is planned for its future.

  MyStarbucksIdea.com Since launching in March 2008, the site's 250,000 registered members have submitted 100,000 ideas. We've launched 100, including enabling a customer to remotely buy someone a drink, selling reusable cup sleeves for our hot beverages, and bringing back salted caramel hot chocolate. As long as customers talk, we'll continue to listen and respond.

  Social Media With more than 27 million fans around the world, Starbucks is currently a top brand on Facebook. One million people follow Starbucks on Twitter, and each month our website receives 12 million visitors. Popular applications that people download to their mobile devices allow them to locate the nearest Starbucks store, get nutritional information, even pay for your purchases. More than just a marketing tool, our digital presence further engages our customers, which is an essential element in our growth model going forward.

  Digital Ventures In the fall of 2010, in partnership with Yahoo!, we launched the Starbucks Digital Network, finally tapping into the value of our vast Wi-Fi network by bringing community information and free premium content to our customers on laptops and mobile devices in our US company-owned stores. Even at its nascent stage, the Starbucks Digital Network has amass
ed an impressive collection of carefully selected providers that includes: The Wall Street Journal, The New York Times, and USA Today; free music downloads from Apple's iTunes; educational games from Nickelodeon; exclusive book excerpts from major publishers; career and job information from LinkedIn; Zagat restaurant reviews for local eateries; and health and wellness tips. The Starbucks Digital Network is designed to be a meaningful differentiator that will dramatically enhance the Starbucks Experience for our customers.