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“We Had to Own the Mistakes”

An Interview with Howard Schultz

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Starbucks CEO Howard

Schultz on the challenges of

leading a turnaround at the

company he made a

household name.

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An Interview with Howard Schultz

harvard business review • july–august 2010 page 1

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Starbucks CEO Howard Schultz on the challenges of leading a

turnaround at the company he made a household name.

By the time Howard Schultz stepped down as chief executive of Starbucks, in 2000, the coffee chain was one of the world’s most recognizable brands—and on a steady trajectory of growth. Eight years later Starbucks was suffering from a rough economy and its own strategic missteps, and Schultz felt compelled to return to the CEO seat. His previous tenure had seen promising growth, but now he faced a challenging mission: to lead a turnaround of the company he had built. In this condensed and edited interview, Schultz discusses what it’s like to retake the reins in the middle of a crisis.

HBR:

We thought we knew the HowardSchultz story. You had a vision, built a suc-cessful company, and moved on. But thenStarbucks ran into trouble, and two yearsago you had to return as CEO. How hard hasit been to get things right?Schultz: The past two years have been transfor-mational for the company and, candidly, for mepersonally. When I returned, in January 2008,things were actually worse than I’d thought.

The decisions we had to make were very diffi-cult, but first there had to be a time when westood up in front of the entire company as lead-ers and made almost a confession—that theleadership had failed the 180,000 Starbuckspeople and their families. And even though Iwasn’t the CEO, I had been around as chair-man; I should have known more. I am responsi-ble. We had to admit to ourselves and to thepeople of this company that we owned the mis-takes that were made. Once we did, it was apowerful turning point. It’s like when you havea secret and get it out: The burden is off yourshoulders.

To what extent did the financial crisis add tothe management crisis?For some reason we seemed to become theposter child for excess. It’s easy to laugh about itnow, but people said that buying a latte at Star-bucks wasn’t smart. McDonald’s put up bill-boards saying that four dollars for a coffee isdumb. Gas went as high as five dollars in someplaces, coupled with the financial crisis—and


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all of a sudden we saw a seismic change in con-sumer behavior. Weekends have always beenour busiest times, but people changed theirdriving habits. There were times during the daywhen we didn’t have enough sales per hour tojustify the labor. And this for a company thathad always hit not singles or doubles but homeruns. We didn’t really know how to respond, be-cause it’s not something you’re taught, andwe’d never had any such experience. I spent alot of time reaching out to people muchsmarter than me, who were managing big retailbusinesses and consumer brands, and I wasstunned that every time I called someone, theywanted to know more from me than I could getfrom them, because they were in the same posi-tion. No one had any answers.

Also, you were suddenly facing seriouscompetition.We had never had much competition. Every-thing we did more or less worked. And that pro-duced a level of hubris that caused us to over-

look what was coming. Big-time people beganto notice that this coffee business is a good busi-ness and highly profitable. McDonald’s andDunkin’ Donuts were on the very low end. Let’scharacterize them as willing to do anything tocapture or intercept customers—free coffee,coupons, say anything, do anything. We respectthem as companies, but we didn’t respect theirpractices. At the higher end were the indepen-dents who went to school on Starbucks. Andthere was this feeling of “Let’s support the localcompanies.” So Starbucks was being squeezedto the middle, and that is an undesirable placefor us to be.

And by this time, bloggers were making lifetough for you.Social media suddenly started defining Star-bucks. We were an easy target. Bloggers wereputting holes in the equity of the brand, and itwas affecting consumer confidence, our peo-ple, everything. I woke up one day and went tomy desk, and I had 75 to 100 e-mails and phone

A Stark Challenge: What Schultz Is Trying to Fix

When Howard Schultz stepped down as CEO, in 2000, revenue and operating income were soaring. When he stepped up again, in 2008, the share price had dropped by almost 50%, and he faced what would become a comparable decline in operating income.

REVENUE

OPERATING INCOME

Schultz steps down as CEO.

Jim Donald becomes president and CEO.

Starbucks stock

customer traffic drops for the first time.

Schultz returns as CEO.

Stock more than doubles in price.

VIA instant coffee is launched.

Starbucks jobs are cut.


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calls about an issue I had never heard of. Therewas a sensational story in the

Sun

, in London,that Starbucks was wasting water throughsomething called the “dipper well.” My phonerang, and it was a reporter asking me to com-ment on the dipper well. “I have no idea whatyou’re talking about,” I said. The reporter said,“Mr. Schultz, I suggest you Google Starbucksreal fast.” The Sun claimed that we were pour-ing “millions of litres of precious water downthe drain” as a result of the method we used tosanitize equipment. The report was wildly ex-aggerated, and we had been working for sev-eral years to find a better solution, but we sud-denly became the target of conservationgroups. We had a real problem. The lesson wasthat the world had changed. Something thathad happened in London had created a world-wide story that positioned Starbucks withvenom and disrespect. And we didn’t knowhow to respond. The issues of social media,digital media, and getting smart about therules of engagement emerged as a tremen-dous weakness for the company. Ultimatelyour reputation didn’t suffer, but we spentcountless hours defending ourselves when infact we have a very strong track record in envi-ronmental stewardship.

What was the low point after your return?The challenge was how to preserve and en-hance the integrity of the only assets we have asa company: our values, our culture and guidingprinciples, and the reservoir of trust with ourpeople. There was unbelievable pressure frommultiple constituents. I’ve saved every analyst’sreport and major story, and what was saidabout us and about me. My favorite was “Nevergive an 800-pound gorilla caffeine.” There wasa death march of comments like “Starbucks’sdays are numbered,” “It’s no longer relevant,”“McDonald’s will definitely kill Starbucks,” and“How could the board bring back Schultz, whois responsible for all this?”

How had things gone so wrong?There was a different team here—very goodpeople, who deserve respect and not the bur-den of responsibility, because I was chairman ofthe company, and I am culpable. Success is notsustainable if it is defined by how big you be-come or by growth for growth’s sake. Success isvery shallow if it doesn’t have emotional mean-ing. I think there was a herd mentality—a rea-

son for being that somehow became linked toPE, the stock price, and a group of people whofelt they were invincible. Starbucks isn’t thefirst company that has happened to, and thank-fully we caught it in time.

Do you feel there’s a clash between trying tobe a premium destination with a premium-priced product and being a public company?I don’t think so. Hundreds of public companieshave a premium position in their categories. Ithink the tension is about can you be big andstay “small”? Can you maintain intimacy withyour customers and your people? We under-stand our business very well, and we under-stand our customers. And to a person, we un-derstand that we are only as good as yesterdayand we have to come to work every day and tryto exceed the expectations of our people andcustomers.

Yet every company that begins small and“authentic” eventually finds it hard to re-tain that image as it expands. How can youcombat that?You have to have a 100% belief in your core rea-son for being. There was tremendous pressurein the first three or four months after my returnto dramatically change the strategy and thebusiness model of the company. The market-place was saying, “Starbucks needs to undo allthese company-owned stores and franchise thesystem.” That would have given us a war chestof cash and significantly increased return oncapital. It’s a good argument economically. It’s agood argument for shareholder value. But itwould have fractured the culture of the com-pany. You can’t get out of this by trying to navi-gate with a different road map, one that isn’ttrue to yourself. You have to be authentic, youhave to be true, and you have to believe in yourheart that this is going to work. Someone saidto me, “You are roasting 400 million pounds ofcoffee a year. If you reduce the quality 5%, noone would know. That’s a few hundred milliondollars!” We would never do that.

How did you start to get things back ontrack? To what extent was it an advantagethat you had been in the CEO chair before?There were a number of things I did that per-haps a new CEO couldn’t have done because hewouldn’t have had the license I had. For exam-ple, I shut our stores for three and a half hours

“You have to have a

100% belief in your core

reason for being.

Franchising the system

would have fractured the

culture of the company.”


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of retraining. People said, “How much is thatgoing to cost?” I had shareholders calling meand saying, “Are you out of your mind?” I said,“I’m doing the right thing. We are retrainingour people because we have forgotten what westand for, and that is the pursuit of an unequiv-ocal, absolute commitment to quality.”

What has been your big leadership momentsince you came back?I decided—against the advice of many peopleat the time, because it had a high cost attachedto it—to take 10,000 store managers to New Or-leans. I knew that if I could remind people ofour character and values, we could make a dif-ference. The conference was about galvanizingthe entire leadership of the company—beingvulnerable and transparent with our employeesabout how desperate the situation was, andhow we had to understand that everyone mustbe personally accountable and responsible forthe outcome of every single customer interac-tion. We started the conference with commu-nity service. Our efforts represent the singlelargest block of community support in the his-tory of New Orleans, contributing more than54,000 volunteer hours and investing morethan $1 million in local projects like painting,landscaping, and building playgrounds.Projects took place in several New Orleansneighborhoods over the course of the week,and I personally assisted with the restoration ofhomes in one of the hardest-hit areas of the city.

If we hadn’t had New Orleans, we wouldn’thave turned things around. It was real, it wastruthful, and it was about leadership. An out-side CEO would have come into Starbucks andinvariably done what was most expected,which was cut the thing to the bone. We didn’tdo that. Now, we did cut $581 million of costsout of the company. The cuts targeted all areasof the business, from supply chain efficienciesto waste reduction and rightsizing our supportstructure. But 99% were not consumer-facing,and in fact, our customer satisfaction scoresbegan to rise at this time and have continued toreach unprecedented levels. We reinvested inour people, we reinvested in innovation, andwe reinvested in the values of the company.

To what extent do you feel a clash betweenbeing the person you want to be, with thevalues you have, and the responsibilities ofrunning a big public company?

That’s a very important question. Being the CEOof a public company over the past couple ofyears has been difficult. And lonely. The tensionyou describe assumes that one can’t be values-driven or values-based and achieve success or therespect of the Street. I don’t think that is true.But the only ingredient that works in this envi-ronment is performance—so we have to per-form. If we don’t perform, either we have thewrong strategy or we don’t deserve to be here. Ithink we’ve demonstrated that the strategy isright and the balance between profitability andhaving a social conscience and being a benevo-lent company will lead to significant long-termvalue for shareholders.

What’s an example of a decision you’vemade that Wall Street didn’t like?Health care. Our health care costs over the past12 months were approximately $300 million.[Starbucks offers health care benefits to any el-igible employee who works at least 20 hours aweek.] The thought that we would cut thatbenefit—I couldn’t do it. Within this past year Igot a call from one of our institutional share-holders. He said, “You’ve never had more coverto cut health care than you do now. No one willcriticize you.” And I just said, “I could cut $300million out of a lot of things, but do you want tokill the company, and kill the trust in what thiscompany stands for? There is no way I will do it,and if that is what you want us to do, youshould sell your stock.” What I stand for is notjust to make money; it’s to preserve the integ-rity of what we have built for 39 years—to lookin the mirror and feel like I’ve done somethingthat has meaning and relevancy and is some-thing people are going to respect. You have tobe willing to fight for what you believe in.

How do you ultimately define shareholdervalue?I do not believe that shareholder value is sus-tainable if you are not creating value for thepeople who are doing the work and then valuefor customers. Quintessentially we are a people-based company. You couldn’t find another con-sumer brand that is as dependent on humanbehavior as we are. We built Starbucks notthrough traditional marketing or advertisingbut through the experience. And that experi-ence can come to life only if people are proud, ifthey respect and trust the green apron and thepeople they are representing.

“Quintessentially we are

a people-based company.

You couldn’t find another

consumer brand as

dependent on human

behavior.”


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To what extent did the cuts and layoffs youmade break the internal trust that you hadbuilt up?

There are a lot of ways you can communicatebad news. We decided that we had to be infront of our people, so we held a companywidemeeting with me at the center to announce thelayoffs and closures. We had an open mike, andpeople went after me. I stood there and an-swered the questions, and I apologized for mak-ing decisions that people thought fractured thetrust we had built for so many years. I tried toexplain that these decisions were made on thebasis of preserving the whole, and that I under-stood there would be damage. I also explainedthat we felt incredible compassion for the peo-ple who had to leave. You have to be honest andauthentic and not hide. I think the leader todayhas to demonstrate both transparency and vul-nerability, and with that comes truthfulnessand humility and obviously the ability to instillconfidence in people, and not through sometop-down hierarchical approach.

You talk a lot about values. How do you bal-ance these with more-standard strategicthinking?Unfortunately, we live in a sea of mediocrity inall walks of life. We also live amid a fracturingof civility. Everywhere we go as consumers,we’re getting people who don’t want to reachinto our hearts or know who we are; they wantto reach into our wallets and get some money.The equity of the brand is defined by the qual-ity of the coffee but also, most importantly, bythe relationship that the barista has with thecustomer and whether or not the customerfeels valued, appreciated, and respected. That isour aspiration every day. The reputation of thecompany is the reason we can put bottled Frap-puccino on a supermarket shelf, or VIA [instantcoffee], because there is a level of trust and con-fidence in the brand name. The only way wecan succeed and sustain growth and innovationis linked to the basic elements of one cup of cof-fee, one customer, and one barista at a time.

You obviously are a very emotional guy andput a lot of stock into your relationship withyour staff. To what extent are you a metricsguy?I think I am an intuitive person to a fault. Overthe past year and a half I have become morereliant on what you call the metrics, but that

has never been a primary guide for me. Moreoften than not I’ve taken the road less traveled.We got nailed for instant coffee because peoplethought it was the most desperate thing wecould be doing. The research said it could bebrand dilutive, that no one would pay a dollarfor a cup of instant coffee, that it would canni-balize our sales. But it’s going to be a majorbusiness for the company, and people will lookback and say, “Boy, they were smart.” VIA con-tinues to exceed our expectations in every mar-ket where we’ve launched, and we remain ex-tremely excited about its prospects as we addnew markets during the coming year. We ex-pect a positive contribution to profit for the fullfiscal year 2010 based on the strong perfor-mance of VIA to date.

How do you execute your vision and strategy?Whether you are a high-tech company or a cof-fee company, your responsibility has to be toconstantly create the kind of excitement thatprovides differentiation and separation in themarketplace. Not innovation for innovation’ssake but innovation that is relevant, usable,and, in our case, core to the culture. In terms ofexecution, we’ve unplugged a lot of things thatwere taking up mind space and time, and we’veunderstood that less would be more. Innova-tion is a way of life for us, but we put every newidea through a tremendous amount of scrutiny:Is this what our customers want? Can we scaleit? Can this help us provide an even better expe-rience for our customers? We were asking ourpeople to do too much, to chase after too manynew ideas that took us away from our core busi-ness, so we pulled the plug on lots of things andfocused on the ones that were most important.

Let’s talk more about the role of social me-dia. There are people out there who adoreyou, and people who criticize everythingyou do. How do you take advantage of thenew tools?The rules of engagement in traditional market-ing are over. Whether you are creating a brand,building one, or running a big one, you’d betterunderstand social media, because there is a seis-mic shift in how people are gaining access to in-formation and, as a result, how they are behav-ing. Information can’t be from the company tothe consumer; it has to be a level playing fieldwhere consumers feel that they are opting inand that there is a sharing of information.

“We got nailed for

instant coffee because

people thought it was the

most desperate thing we

could be doing. But it’s

going to be a major

business for the

company.”


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Cracking the code involves understanding howto create an opportunity for people to feelpride, a sense of discovery, that they want toshare this with someone they care about.

How, exactly, do you reach out?The dipper well was a lesson. We assembled agroup of very smart people who understandthe world I just described and live it every day.And we created not a tool kit but a new way ofbehaving, of being proactive and creating waysin which we could connect the dots through alandscape of multiple digital media and socialmedia channels and could become a relevant,trusted source rather than a promoter of aproduct or ideas. With help, we set up a websiteto seek ideas from customers. There was greatresistance inside to allowing the outside worldto tell us what we are doing wrong. But theopenness led to a different mentality. Weweren’t myopic about who we were and howwe were going to go to market. We becamemore open and vulnerable, listened to people,and as a result started creating a new methodol-ogy, a new language, and new tools and tacticsthat enabled us to become best of class. We’rethe number one brand on Facebook.

What does that get you?It means that 7 million people are very inter-ested in what we are doing and what we have tosay. It has changed our go-to-market strategy—how we communicate, unveil, and innovate,and ultimately how we arrive in the market-place. The success of the things we have donethis year is directly linked to the fact that thecost of customer acquisition and communicat-ing to the outside world is significantly lowerfor us than it is for people who are spendingmoney on traditional advertising or haven’t gotthis right. The feedback loop is making us bet-ter because of the insight we are gaining fromthat audience. We never were a traditional ad-vertiser, and our marketing dollars were typi-cally spent in the store, because our baristasand word of mouth built that brand. Whilethat’s still the case today, social media now giveus another way to connect to customers.

Well, your numbers do seem to be startingto turn around.The numbers don’t tell the whole story, but Q1represented the best financial results in the his-tory of the company, and Q2 was the first time

in 13 quarters that we’ve had incremental trafficin our stores.

Now what? Is the café business played out?If so, where will you find future growth?I dispute that the relevancy of a Starbucks retailstore or café doesn’t have staying power. Iwould say the opposite. We are living in a soci-ety where there is a need for human connectionand a sense of community. And what we doevery day is bring people together. Last week Iwas in four Asian countries in six days. In allfour places there is a mirror image of what hap-pens in a Starbucks store in Seattle—the senseof community extension. People are using Star-bucks stores as their own, and drinking coffee.So the growth of the company is going to comefrom continuing to optimize the retail foot-print. We’re not nearly close to saturation inNorth America, despite what the cynics or pun-dits might say, and certainly the runway forgrowth outside North America is significant.We have less than a 1% share of coffee con-sumption outside North America.

What are your plans for new sources ofgrowth?In the past 10 years we’ve created a unique com-bination of assets. We own our retail stores andalso have been able to leverage the Starbucksbrand to bring products to the grocery channel.The best case study of that is Frappuccino,which is now a $2 billion revenue business.Most national retailers franchise their busi-nesses, which limits distribution opportunitiesoutside their retail stores. Our differentiatedmodel—added to the culture and values thatdefine our company—gives us the nimblenessand flexibility to offer our products to custom-ers through multiple channels. We’re now sell-ing VIA through this model, at 30,000 distribu-tion points. Instant coffee is a $23 billion globalcategory that hasn’t seen much innovation inyears. Most of it is low-grade. We’ve cracked thetechnological code and can deliver with VIAthe same Starbucks coffee quality.

How big can you be in China?We will have thousands of stores in China. Chi-nese people are drinking Starbucks coffee andusing our stores as an extension of their homeor work. China is an extremely complicatedplace to build a relevant consumer brand thatdoesn’t become faddish and out of favor. It’s

“China is an extremely

complicated place to

build a relevant

consumer brand. We will

get it right.”


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filled with a lot of navigational challenges.Every consumer brand in the world is lookingat China as the answer to its prayers. There willbe lots of winners, and there will be many,many more losers who don’t get it right. We willget it right. We have to be thoughtful, highlydisciplined, and extremely respectful of localChinese customs, food preferences, and con-sumer behavior. In order to do that, we have tosee the world through a Chinese lens. We arereally turning upside down the go-to-marketstrategy whereby things in the past few yearshave been invented and executed here. Theynow have to be invented and executed by thelocal Chinese team. The challenge is makingsure that we do it within the guardrails of theStarbucks brand.

Like Steve Jobs, you were a seminal leader.And when you handed over the reins, therewas trouble. Can you ever leave again?Would Wall Street panic?It’s a fair question. I’ve talked to friends whofounded companies about this issue and therole of a founder, and what it means when atsome point you do leave. One of the lessonslearned is about succession planning. In all fair-ness to Jim Donald [the CEO from 2005 to Jan-uary 2008], I don’t think I did that well. And asself-serving as it sounds, I don’t think an out-sider would have succeeded [as CEO]. Theground was crumbling underneath us becauseof self-induced issues, the financial climate, andseismic changes in consumer behavior. I knewwhere all the bones were buried, so I couldmove quickly. An outsider would not have hadthe time to learn. As a result, he would haveyielded to the easy place to go, which would becuts, and that would have taken all the heartand soul and conscience out of the company. I

am very aware of my duty and responsibility toget succession planning right the next timearound. But I am here to see this through for awhile. I’m not leaving soon.

What will the Howard Schultz career legacyultimately be?There is a sensibility of the brand. Our role asleaders is to celebrate the human connectionthat we have been able to create as a company,and to make sure people realize the deep levelof respect we have for the work they do andhow they act. That is the legacy of the company.It’s not to get bigger or to make more money.

Here’s a true example: A woman barista inTacoma, Washington, sees a customer everyday, and they become friendly as a result ofher work. She begins to see that the womanlooks ill. Finally she gets up the courage to say,“You just don’t look well—what’s wrong?” Thewoman says, “If I don’t get a kidney transplant,I am going to die.” A miracle occurs: The bar-ista is a match for the customer, and she givesher a kidney. It’s incredible. I drove to Tacomato see her, and I said, “Who are you? I’ve neverheard a story like this.” There are a lot of reallygreat companies out there, and wonderful cul-tures, but something like this doesn’t happenvery often.

You’ve probably been asked this a milliontimes, but what’s your drink?My favorite coffee is aged Sumatra. My typicaldrink is a doppio espresso macchiato.*

*A double espresso topped with steamed milk.

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