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tv   Book TV  CSPAN  April 24, 2011 7:00pm-8:15pm EDT

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is somehow lost in the limestone buildings and the tourist comes and says what a pretty clean place. it wasn't always a pretty and clean place. >> and mr. evelyn, what role to the politicians play in your book on this? >> politicians over the years that have made decisions that affect the city and putting rehabilitating the mall of washington. .. >> for example, the site where
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the lincoln conspirators were hung, that famous painting, that famous photograph is now a tennis court at fort mcnear. the place which garfield was shot on his way back to his williams college reunion was right in front of the imk building on the mall. there's a little tiny marker about as big as a frisbee that says this is where a president was shot. part of the thing is discovering this layered history of the city and going back to amazing things in the civil war. fort stevens, a part of washington, where abraham lincoln, there's a battle in washington. the confederate troops are approaching the city. abraham lincoln stands up, and they shoot at him. and somebody says, mr. president, you fool, they pull him down. one of the problems with the battle at fort stevens was the soldiers had to keep the citizens, sight seers back from getting killed. and so what we tried to bring to
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the city was this vibrancy, this wildness that was really here all along and which has sort of been now demured and limestoned down. >> "on this spot," now in its fourth edition. douglas evelyn and paul dickson. >> you're watching booktv on c-span2, 48 hours of nonfiction authors and books every weekend. >> you're watching booktv on c-span2. here's our prime time lineup for tonight.
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>> next on booktv, howard schultz, chairman and ceo of starbucks. he recounts his return to a leadership position in the company in 2008 after an eight year absence. mr. schultz explains some of the setbacks that the company faced during the economic recession, his thoughts on starbucks' deviation from its original concept and his decisions that returned the company to profitability. [applause] >> thank you. >> well, it's not much of an overstatement to say that greater washington is powered by
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starbucks. that's, that really is the key. i've shared over the years that while we're one of the more highly educated regions in the country with all of the attainment levels, pretty good on the household income because the nine of the top 15 median household incomes are here. more starbucks per capita in washington, d.c. proper than any place in the country, so my shorthand of how i pitch greater washington is highly educated, highly compensated, highly caffeinated. >> okay. [laughter] >> and, boy, i tell ya, your stores do quite well. we're really honored and pleased to have you join us here this morning, and congratulations on the book. >> thank you. >> it's a pleasure to welcome you to greater washington. >> thank you very much. happy to be here. >> well, it's quite an undertaking to put a book like this together, and as everybody in the room gets to go through it, you were very candid in this book. starbucks, in your estimation
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and quite a few other critics', lost its way for a period of time. you came back as the ceo to restore that, but not just to bring it back to where it was, but "onward" is the title, and onward really is the plan. talk to us about why you put a book like this together, because you share some insights here that are remarkably valuable to business leaders. but it's, it is kind of peeling back the inner workings at starbucks in a rather candid way. >> sure. well, thank you for coming this morning, and thanks to thex bod of trade for hosting this. it's an honor to be here this morning. you know, the book in many ways is a narrative of what we went through over the last few years, and i think what i was trying to describe is that starbucks was on this magical carpet ride for about 15 years. we went public in june of 1992, and almost everything we did turned to gold. and new cities, new countries, new initiatives, and can the
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stock price -- and the stock price was almost a 6,000% gain for those people who invested in if '92 and kept the stock. there was a period of time, though, from about 2005 to 2007 where i thought without any blame that the company began to demonstrate a virus inside the company. and that virus i would loosely categorize as hubris, entitlement and believing they were invincible. and what i would describe is that growth began to cover up mistakes. and growth became a strategy as opposed to what the core purpose of the company has always been, and that is to focus on the customer and our people. and i wrote this memo in november of -- actually february of '07 in which i was sharing with the leadership of the company at the time -- i wasn't the ceo, i was the chairman of
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the company -- >> right. >> -- that i was quite concerned that even though the stock price was at record levels, there were things that i was kind of smelling that i felt needed to be examined. well, i woke up 24 hours after writing that memo, and it was leaked. and my world was turned upside down. but it turned out to be a catalyst for conversation. and to fast forward, i returned in january of '08 at a time when the things that i began to uncover really began to unveil themselves coupled with the cataclysmic financial crisis. and all of a sudden not only the self-induced mistakes that we had made, but the financial crisis kind of turned everything upside down, and we were literally facing a very desperate situation. >> howard, you know, you alluded to things that you said didn't smell right. >> yeah. >> you really address the details here from the aroma or lack of aroma when you're or not
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grinding the coffee any longer in the stores and now it's bagged. you address things about the machines and the height of machines. the level of detail as chairman or then, subsequently, again as ceo that you go into is anathema to a lot of people in management that say, well, we'll set the policy or the direction, but then we'll leave the details to others. but details is what -- >> yeah. i think it was even more than that, and if i could rewind the clock a little bit, starbucks set out to build a different type of business model. and not better than anyone else, but it was very, very different. and that was that we believed very strongly that we were trying to build a business that achieved a balance between profitability and a social conscious. and as a result of that we put in two unique benefits 25 years ago. one was comprehensive health insurance for every employee -- >> right. >> -- the other was equity in the form of stock options, and we did that even for part-time people. but in addition to that there
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was a fanatical view towards exceeding expectations around the customer experience. and i would say that, you know, for 20 years or so that was the foundation of the company. when the company got to thousands of stores and hundreds of thousands of employees and a pe and a stock price that was very high, what happened was -- and i don't think starbucks is, is much different than, perhaps, other public companies -- is that the pe and the stock price began to, in a sense, intersect into the strategy of the company. and i think what happened was that there wasn't anyone who said we're going to do this, but what happened was we became complicit with wall street. >> you say in here or that it wasn't one cataclysmic event -- >> no. >> it was a whole combination of different things. but let's go back a little bit on wall street. you changed and kind of ticked off a number of analysts when
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you said we're going to stop looking at per-store. it's not going to be the comps in per-store. we're focused on the wrong thing in certain respects. talk to us a little bit about why that change happened and what came to mind. >> sure. well, i think as managers we, the results that we get more often than not is what we measure and what we reward. and we were measuring, and i believe, rewarding the wrong thing. as a public retail company, wall street has a primary metric which they call comp store sales. and that is year-over-year sales to demonstrate whether or notç existing stores are growing. >> and on the phone with them you go, oh, we're going to stop measuring. >> yeah. we weren't going to stop measuring it, we were going to stop all reporting it. i felt i needed to remove the albatross of comp store sales off of the backs of retail store managers because it was driving
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the wrong behavior. >> so you had store managers that were selling lots of things outside the core. >> yeah. the thing was people were driving, at almost any cost, revenue, sales per hour, transaction. we're not in the transaction business. we are in the business of trying to exceed expectations of our customers. whether we ring the register or not. and i think what we had to do is press the pause button inside the company and outside. and if you go back into the book, the first quarter i came back we did something that was very unorthodox, and i don't know if anyone's ever done it before. and it wasn't that we were trying to be smart or coy, but we had to stand up to the world and say, you know what? the quality coffee that we are brewing and making is not as good as it once was. so we closed every store in america and in canada for retraining. >> yeah. you had lots of people here just walking around for blocks just wondering, what am i going to do for the next three hours? [laughter] >> you know, you can imagine what the reaction was from the street, from competitors, there
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the media, shareholders. it was terrible headlines. it was one analyst report that said -- it was about me -- it said never give an 800-pound gorilla caffeine. [laughter] and, you know, my son saw that and said, dad, have you seen this headline? it's terrible. what are you doing? and i said, listen, we can't worry about what people are going to say. we are going to define the future of the company, not the outside world. and then we did something else which was the beginning of the turn around of the company. and i think it's worth repeating. at the height of the cataclysmic financial crisis when no company in america was traveling, we decided that we needed to have a company-wide meeting with the most important person in starbucks which is the retail store manager. so we brought 10,000 people to one place. now, every municipality including d.c. wanted this convention because there was no
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company spending any money. and, in fact, municipalities visited starbucks and made a pitch. the short story is we decided to go to new orleans. >> right. >> and we went to new orleans first and foremost to commit 50,000 hours of community service to help those people who were left behind after katrina. and then we had our 10,000 store managers meeting in one place. but what galvanized the company was the rekindling and reminding of the values and core purpose of the company which was very, very important. and then we had this meeting. and in front of 10,000 people what i asked for was two things. one, with great transparency and vulnerability as a leader i described the situation. our stock price was below $7 a share. we had lost $25 billion in market cap in 18 months. we had negative compression in our stores when for the first time in our history we didn't have enough sales in certain
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parts of the day per hour to justify the labor. and we laid it out. and people said, if you cothat, people are going to get so scared, howard. you can't tell them everything. and i thought the opposite. that there's times when you've got to be totally authentic and truthful and absolutely tell the real story. and once i did that, i linked it to what we need from them. individually, we needed primarily a higher level of personal accountability and responsibility and for everyone to leave new orleans not being a bystander and recognizing they had a voice. we left new orleans on fire. and it was the beginning of the turn around of starbucks. now, if we fast forward last 12 months was record revenue, record profit. last quarter the strongest profit in our history, and the stock prices $3 or $4 away from the all-time high. >> well -- >> go ahead. >> let me just say in the book, and i get a chance to read through a lot of business books.
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because the times are different, because i imagine you had a lot of people pulling back on your coat tails going, howard, maybe we don't share that part in the book, maybe that's not something that we're ready to be as transparent about in your presentation at new orleans. but you really did take risks to lay it all out there. i know the passion that you felt about the direction for the company. when you, when you bring the people together and share that, you really do engender an awe they authentic, a strong bond with the people that they're in the battle with you. it wasn't just you saying, here's how we're going to go. it was you leading and bringing them all together. i think the results speak volumes. it was funny to see in the book that bono wasn't the rock star in new orleans, it was your person on staff that brought in the black laptop -- >> right. >> -- opens it up out of the case and says, now we're going to give every store the technology to do the job that we want you to do. >> right. >> you were outfitting the troops in this certain respects. >> well, and i think, you know,
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as leaders i think sometimes, especially men, you know, we're imprinted with this macho component that we shouldn't show emotion, perhaps we shouldn't cry. and let me say something which i think is important. this book and my relationship with starbucks is about a word that's not used very much in business. and it's love. i love this company. i feel a deep responsibility to 220,000 people and their families who are relying on all of us as leaders to preserve and enhance the company. when we went to new orleans, there was a point where i felt if we don't turn this company around in the next three to six months, we may lose it. and we were fighting for our lives. and i had to share a higher level of emotion and compassion than ever before. but it wasn't invented. this was real, it was authentic, and i think what the street and perhaps the media at the time
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underestimated was the resiliency and the emotional connection of the values of 40 years of these people coming together recognizing that we have a company that we love and we have to defend and we have to change our behavior. now, we had to link that with significant changes operationally and a higher level of innovation. and the innovation that came was spectacular. over the last year and a half, we reinvented a category that for 50 years was dormant, and that was instant coffee. and when people said you're going into instant coffee, there was another point when people said the best days of starbucks are clearly over. this is a desperate, hail mary move. it was quite the opposite. great entrepreneurs have to have the courage to see around corners. and have to have the curiosity to understand what's coming and what's possible. and then having the courage to execute against it. >> well, the owner of the capitals and the wizards and a
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friend of yours spoke to us and said i don't want the capitals and the wizards and what we put on the street to be wanted. i want it to be loved. >> uh-huh. >> it's not enough to be needed, but you have to be loved. it's not only that you love the company, but the product that you put out there is loved by a lot of people. very passionate about it. >> yeah. >> i want to talk a little bit about it, but let's spend a second on the instant coffee. >> okay. >> the origin working title, stardust. i like that. >> we found out that was already trademarked. we couldn't use it. we tried. [laughter] >> may not have been for anything legal. but okay. [laughter] but you went through the instant coffee, and it didn't chafe you that people referred to it as instant, you were actually recommended to embrace the term, at least maybe not refute it. how has that gone? because it was a big risk for starbucks to get into the equivalent of instant coffee. >> yeah.
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well, it was a risk when you look at it from the outside world. when i looked at it, what i saw was a $24 billion globalcat guy that had not had any innovation for 50 years dominated by one company who hasn't really brought much to the category. what -- >> huge internationally, though -- >> yeah. >> okay. >> was if we could replicate and crack the code through technology of replicating a cup of brewed starbucks coffee in an instant form, that was the litmus test. now, it took us many years to get there, but many 18 months -- in 18 months once we turned on the team, we developed a piece of technology that gave us the ability to do it, and about 90% of the people for months in blind tests could not tell the difference. and once we realized that, we were off and running. this is a $250 million business in less than 14 months, and we haven't even begun to take it globally where 84% of the instant $24 billion market is. so we're going to build a
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billion dollar business, and what it did also was it galvanized our entire company for them to be refind minded about the spend gruel dna of the company and the fact that we were going to take the road less traveled once again. >> you also did that with pike place. >> yeah. >> you infuriated a number of your customers who were like, what, you're putting out a light beer there. that's not the starbucks coffee. and yet there's a passionate group of people who think that's the best coffee you brew. talk to us about the roll out because it was another element.g as you came back, you needed a couple of singles, doubles, triples and maybe even a few home runs. you couldn't come in quietly and go, okay, we'll tinker around and make some adjustments. >> some of the learning that i personally had was that i was looking for a silver bullet that, perhaps, could change the land scape of starbucks. and the more i looked, the more i realized the there wasn't one
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silver bullet. pike place coffee was an example of appealing to a grape of people -- group of people who were perhaps not coming to starbucks because the coffee was too strong and too bold. so we created a lighter roast for people and, i think, a more accessible coffee. even though we're serving 60 million customers a week, we have less than 5% share of all coffee brewed in america. there's a big market out there, and how do we get a bigger access to the pie? but at the same time we had competitors, small and large, that were, that smelled blood and were trying to destroy us. mcdonald's and dunn -- dunkin doughnuts on the low end, and the worst place we could be was in the middle. we had to significantly create innovation and redirect the efforts of the equity of the brand so that people were not defining us. we were going to define ourselves. >> so let's talk about some of the people that weigh in, and it's exposure to the media
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that's overwell ming if your business. you open the door to have them tell you, we'll talk about that in a while. >> okay. >> here's "usa today"'s corporate consultant told "usa today" in an article sidebarred doling out advice from a smattering of industry experts. smell good again. this isn't personal, this is the store. [laughter] embrace wired youth. reward loyalty, get healthier, drop food that doesn't jibe with java, revive coffee theater. open fewer stores, sell combo meals and give coffee away. applying such improvements to our business may not have been brain surgery, but outsiders failed to appreciate the nuances of invigorating a service-based business, especially a brand as emotionally charged as ours. starbucks is not a coffee company that serves people, it is a people company that serves coffee. you really went back to putting
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the focus on the bries thats, the partners in your stores, the people of starbucks beyond just the product. talk to us a little about how important that is to you and why that focus had sort of gone off sight. >> sure. well, if you, if you look at the history of consumer brands perhaps over the last 50 years, starbucks is really an anomaly in that most consumer brands have been built through traditional advertising and marketing. when we started our company, we had no money, and so marketing or advertising was completely out of the question. so if you look at starbucks today, it's, you know, we are a top 20 brand all over the world in terms of recognition and respect. you've got to ask yourself, we spend more money on training than we do on advertising. how did you do it? and, you know, i'm not smarter than anyone else, but it happened in a very unique way, and that is starbucks
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quintessentially the brand was built by the experience in our stores. and that experience comes to life from our people. so we're not a franchise system, we're company-owned. the culture of the values and guiding principles of the company have been and continue to be the significant competitive advantage we have. and that, that's why it was so important to go back to the heritage and the tradition of starbucks in which the person who wears the green apron is the most important. and i think of all the attributes that have built great enduring brands over time, the most important attribute -- and it sounds trite -- is trust. we can't exceed the expectations of our customers if we as a company don't exceed expectations of our people. and i think we had to go back to reminding people it's not about growth in the next store. it's about you. and i think for us to have transformed the company financially and leave our people
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behind would have been a tragic and very, very shallow result. the transformation of starbucks, why it's so gratifying, and -- and the reason why financially we're so sound right now is because people have been brought along. and i think we've done everything we possibly could not only to focus on the customer, but to focus on enhancing the experience for our people. >> so as you decided to step back into the company, i'd like to go back there for a minute. you really did get a sense that things were off kilter. it wasn't one big event, the a series of different events. it was cheese being burned in the sandwiches, the lack of the coffee smell when you walked in. so as you're going through the thought process, i won't take you back to the trip in hawaii with michael dell, but i want to take you back to before you get back to the office and make the announcement to the assembled team, i think we saw the shot in the video -- >> yeah.
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>> you went back to the original starbucks store. you had -- he still had the key to the original starbucks store. apparently, if you're the ceo of the place, you can just walk in anytime you want. so before you gave the presentation to everybody, you did go back to the roots because you worked there for a period of time. >> well, you know, it sounds very sentimental, but i do have the key to the original store. the day that i came back, i went back to that store in the morning before it opened. and i wanted personally to be reminded, you know, there's an education presentation that -- expression that walls can talk. you know, i worked in that store, i trained in that store. i just wanted to go back myself and spend some time revisiting what it was like when the company was small and we were fighting for survival. and, you know, i remember those days when we couldn't make payroll. i remember those days when we had vendors lined up with sheets of paper which were invoices, and we had to decide who to pay and who to tell a story to. and i just, i think it's
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important to understand that there was a process when we were fighting for survival and respect in a very unique way, those days had repeated itself. and i was about to come back. now, the day that i came back i did something that was very uncharacteristic. i stood in front of the entire company, and i apologized. and i apologized for the fact that i believed as leaders we had let the company and let our people down. now, that apology was also link today a promise, and that was -- linked to a promise, and that was that i promised we would restore the glory back to the company, and i wouldn't ask anything of them that i was not going to ask of myself. now, a night before that i had summoned -- that's a bad word -- i had asked -- >> invited. [laughter] >> invited. >> come on over for a cup of coffee. >> the direct reports of the ceo in the past to come to my home to literally tell them, tell them on a sunday night that i was coming back.
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and i think that's an important moment as well. when you are trying to transform a business against the worst cataclysmic financial crisis known to mankind, the rules of engagement are going to change completely. and you're going to -- you're not going to have the tools and the resources that you once had. and it's going to require just an unbelievable, monumental effort of everyone. and what i asked the team in the privacy of my home was i want you to understand that what we're about to do is going to be a climb like no other climb we've ever had, and there's going to be great resistance and great challenges. and you have to ask yourself whether or not you are up for this. now, i was told by another ceo who came back that that team would be gone in six months. >> right. >> and i said, no, that's not possible. the truth was that i had to replace nine of the 11 direct
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reports that i inherited that sunday night. because the truth was they did not believe in the future of the company. they had lost their passion. and i think a lot of them didn't believe in me. and i just think sometimes as leaders we overlook something that's quite important, and that is we convince ourselves that we can change people. i can count on one hand how many people i've seen change. but we convince ourself we can do that, and we wait six months, we wait a year, and all of a sudden we have to make a very tough decision. we've lost a year. perhaps they have left their own legacy which is bad, and then we've got to hire somebody else. i think the most important thing that i can say during the crisis was the need to be decisive. on every action. even when you don't have perfect information. and the last thing is you must have people with like-minded values who have a skill base and an experience beyond you. but if they don't have
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like-minded values that are consistent with the culture of the company, it's not going to work. >> so let's go back to trust for a second. because you assembled these people, you invite them over for this discussion at your house. after you've spoken to the, at that point ceo jim. >> yes. >> and so now he has been told personally which i think demonstrates a real level of respect by you. it's not he's hearing it from wall street or getting a call from a reporter. but you had a leaked memo that burned you pretty bad. >> yes. >> and then you assemble the people on a sunday and say i'm going to share things with you that we're not ready for prime time tomorrow, we'll share this with everybody, but, you know, when you sneeze, wall street catches cold. there's certain things you're not allowed to share or roll out carefully. i was stunned and impressed by the level of detail in this book about how you and the different groups and the experts that worked alongside you played this all out. i mean, you just laid it out for
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the level of detail. but it was impressive about how you retrusted this team. probably somebody in that team was the person who leaked the original memo. >> well, the truth is i had about a month and a half to both mentally prepare for coming back and, as you mention, i spent some time with michael dell, and he shared with me what he had done when he came back. so i had a script already in mind that was really well documented so that i could hit the ground running. i didn't come back asking what the plan was going to be. i had a battle plan from day one. now, as a public company once we kind of played the first card, we had to be ready to go. so telling jim in the afternoon, telling the team that night, everything was completely ready before the market opened monday morning to tell the world. and i should say something which i think is really important. the person who ran the company as the ceo was a great leader,
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great person. but for whatever reason it just wasn't working. but he wasn't to blame. there was a whole host of people and me included. and even though i wasn't the ceo, i was as culpable as anyone else because i was not paying attention, i was off doing other things. and what i said to the group that day and what i said in months subsequent to that is we're not looking back, we're not placing blame. this is about today and the future and all of us, and we are going to right the ship. >> when you came back, i imagine there was a pretty good amount about, okay, you apologized to everybody. only you could do that. back? us about not why you came back, why you came back.
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that worked out well for ya. [laughter] >> you know, i was off doing company and what i felt was my responsibility. the crisis was so acute that a new person coming in to the company would have had to learn so much. i knew where the bones were buried, i knew the people, i knew the issues and be i -- and i also felt i would be given a license from the street to do certain things that would give me time. because of the relationships i had with them as the founder of the company. and it turned out well. now, there were many people who thought this was a disaster, the board should be shot. he was part of the problem. but, you know, it turned out pretty well. >> yeah. so far so good. so let's talk, as you come back,
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part of my question was did you do things too fast? then i came to this page on 144 where it says as you would eventually concluded that the product as well as the way we had brought it to market met three critical criteria for success at starbucks. this was about pike place. it was ripe for and engaged our partners, it was ripe for and met the needs of our customers, and it was right for the business. unfortunately, i did not realize, i did not realize that not everything the company was trying to do that season met those three very important standards. at the end of 2008 or april 2008 we faced starbucks' second quarter earnings. the numbers told a dispiriting story. you use the word "dispiriting." i imagine it was a real body blow to you because all of the energy, all of the drive, all of the passion was exciting. and then the numbers came through. how do you rebound from that? because now you have to pick everybody up and get 'em fired up yet again.
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>> right. well, i think we were, we were introducing new initiatives and trying to create relevancy with our customers and faith and confidence with our people. finish but the -- but the cloud over the economy and the anxiety over the consumer was so great that it was very, very difficult to break through. and starbucks, if you remember, became kind of a poster child. mcdonald's had billboards all over america that said $4 is dumb. i don't know if you ever saw any of those, but i did. >> i didn't look at them. [laughter] >> and so the crisis made it very, very difficult. and i think the question that i was asking of myself is how long is this going to take? and the faith and confidence that you had to have in the brand and the resiliency of our people believing that there was a point when this was going to break through. and, again, you know, we had these meeting with the board
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where we had 8 and 9% negative comp store sales. and the board asked us to model if it got to to negative 19 or negative 0. and i was talking to friends of mine all over the country, my friends at coach and all these other great retailers, and they were seeing mid double digit negative comps, and we had not gotten it yet. and it if it got to negative 15 at starbucks, we probably were going to be in a situation where we were going to run out of money. no one really knew how bad the going to get, but the truth is it never got worse than -9, and all of a sudden the initiatives we were doing began to resonate with the customer. and one thing did kind of crack the code which was the loyalty program. and i brought the founder of costco in to talk to us because he's an expert on the car business.
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and he gave us some great advice. and one of the things he said was during this period of time the thing that you must do is focus on your core customers, not trying to attract new ones. and we were doing the opposite. and he said that because the cost of losing your core customers and trying to get them back is going to be much greater than the cost of losing them. and so we shifted the focus of the company in terms of loyalty and rewards on our core customers, and we created this loyalty card. and that loyalty card had a life of its own. and today the card business at starbucks is 22% of transactions, and that had a significant effect on beginning to kind of put our feet in the shoes of our customers and give them value for the starbucks without diluting the equity of the brand. and, again, it wasn't one thing. but over time the connective tissue of relevant innovation, a high degree of expertise and
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initiative on operations, making the perfect shot of espresso, retraining our people, redesigning stores, closing stores that were nonperforming and all of a sudden we began to get not the wind at our back, but a little bit of breeze where we thought, i think it's going to happen. >> well, and you had some big splash events. of course, you didn't close the stores for the big splash. i don't mean close the stores, but the three hours to retrain people, you didn't do it for the public relations. in fact, there were some pretty big hits. you did it to retrain. >> yes.; >> let me ask you a coup of questions -- a couple of questions. on page 140, rarely did i sleep more than four hours a night. back on page 89, you talk about how you didn't get any sleep. did you ever think it could have been the caffeine? [laughter] i didn't know if -- so now we get into here's the issue, and there are two places that you address it. you go in to the stores, and you
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heard from people what the problems were. e mean -- i mean, they were laying it out on a regular basis. here's the section 149 said cliff had realized that starbucks' field operations were inadequate. 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 barely breaking even or even losing money. we also observed too much waste. pastries were often out of stock or overstock resulting in lost sales or more discarded product. weekly labor schedules coordinating baa risk thats' availability took managers' hours, yet still they were often understaffed or partners underute lite z. and later this book you talk about the toppings for the oatmeal weren't being delivered, there were shortages in different stores. it really was a return to basics
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that needed to be addressed to restore the credibility and the expectations of your customers. that must have been a herculean effort to unundertake all of that. >> well, i think what you just outlined is, in essence, what i said earlier, and that is when you are growing at the rate we were growing at and every new store met expectations and every new country opened with great fanfare and revenue and profit as a corporation exceeded expectation and the stock price had a life of of its own, it covered up the fact that the underbelly of the company was not very healthy. ask we did not address these things -- and we did not address these things because success overpowered all of this. and the music at some point was going to stop playing. and it did. and i think the crisis in the many ways -- in many ways not that anyone would want to manage through this, but it gave us an opportunity to address all these things and in a sense the muscle memory and the discipline that
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we put in place in the last 18 months to not only examine all this, but check every box and fix all these things once and for all produced such a healthy environment that now the revenue has come back, and the cost structure of the company, and all the things you've just described are being, have been taken care of. so that is why we're now at a place where this record revenue. but anyone who's been in the retail business knows there's an old a adage in retail, and that is retail is detail. we were not paying close attention to the details of the business, and we were focusing on things that didn't matter. and we were driving towards metrics that had nothing to do with what was most important, both satisfying and exceeding the expectations of the customer, and the back of the house was just in a very, very bad order. and we fixed all that. >> and people told you, howard, and i don't mean people within the company told you, your clients, your customers told you. and you invited that comment. talk to us a little bit about how when you opened up the
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e-mail and said, okay, fire off your comments to me. 5400 comments came in a matter of days. there was no shortage of we like this, we don't like this. now i'm talking about the product and the problems. >> sure. >> i'm going to talk about the store closings and the passion people had about their neighborhood starbucks in a second. >> one of the first things i did in the first few months i came back was i went around the country, and i had these open forums for customers. and we would close a store from about 7-9 and have these listening tours where customers were invited in. >> you would do this. >> i did that. i did that in about two markets in the u.s. and two markets overseas. and i walked in and i felt like, god, these people hate me. and i -- but what -- >> you probably didn't have high expectations walking in. >> well, i didn't know what to expect. but underneath it all was this high level of emotion where people feel so passionate about starbucks. and the passion was don't, don't
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even think about closing this store because this is my store. and, by the way, the music's too loud, the muffins are stale, the coffee's never made hot enough. we're hearing all of this. and we put it all on videotape, and we got permission from every customer to share that. and we would go back to seattle, and then we would have an open forum meeting with our own people, and we would show the tape. and people couldn't believe that this was our customers. first off, why were they still customers? because they love the brand. but the feedback was so positive in terms of our ability to take that and start refining. and we did this all over the country, and it began to give us the connective tissue as to what to do. >> it's funny, you cover it here. during the recession people didn't stop going to starbucks. >> just came less often. >> they just came less often. it wasn't like we're going to turn our backs on your company because we don't like what you're doing, we're just not
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going to be this as off. art of that, of course, is -- part of that, of course s the economy, but part of it is because of the sense of community one gets that you push very hard to accommodate in the starbucks. that was pretty telling. now, i'll say you're also, probably, the worst customer to ever walk into a starbucks because you know how long the milk should be steamed and should be sitting this and go back to the company and say we're leaving the steamed milk sitting around too long. i learned stuff in this book you can't imagine. i sound like a chemist now. but this is your life. and you really apply that level of attention to what's going on in the stores and listen to your clients. it's a lesson in here that is just a wonderful business lesson for everybody. i commend you for doing that, really making some substantial changes in the store, and then i'll twist that around by saying and clearly not everything works. you -- >> you're going to get to that?
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>> i'll get to a few. but you have a brown bottle on your desk. >> yeah. >> i'll get to the quote real quick and then ask you about that. masagran. >> yeah. >> it's a grabbing name. >> it's masagran. >> yes. the name was printed across the bottle, but the product's symbolism was also imprinted on my psyche. celebrate, learn from and do not hide from mistakes. masagran, a cold, effervescent beverage had been any mist attempt in collaboration with a board member to extend starbucks coffee outside the walls of our stores in an unfamiliar forum. i have to tell you, i read a lot of business books, they're not all put anything the things that didn't work. they just want to brag on the things that did. that seemed to be a lesson that you've got the bottle on your desk to remind you -- >> well, it's a great reminder, but the flip side of the story is it turned into a $2 billion business.
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i've got to tell the linkage. >> please do. [laughter] >> so when we developed frappucino in our stores, we developed a sub brand which is this blended beverage. but before frappucino, we had an idea to create a ready-to-drink bottled beverage which was carbonated coffee. it was my idea, i thought it was a great idea, and it was the starbucks edsel. it was a brutal disaster. [laughter] however, frappucino was doing so well and i went back to pepsi, and i said, you know, i think we had the idea right, but it didn't need to be carbonated. and to pepsi's credit they looked at frappucino and said, okay, let's leverage the subbrand of starbucks in our stores, frappucino now is a $2 billion brand with bottled beverages in many parts of the world. and that gave us, i think, the impetus to realize that perhaps we could be the first consumer brand that had retail stores and leverage that into the grocery
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channel. so we have a $500 million roasting ground business which we just got control over on march 1st, so the future of the company is going to be to introduce brands and products in our stores, leverage it in grocery and do things that perhaps has not been done before. >> so two things, you have cards on your tables. if you'd like to submit a question, we're going to open it up in about ten minutes for questions. if you have a starbucks card in your wallet or your purse, please take them out because i'll have a question for you in a second on that. so now i want to hit two other topics before we open up for questions and answers. the store closings. >> yes. >> it was like taking a rib from some people with the passion that people have about the starbucks stores. you had when you were doing a tour, you had one lady, elderly lady get down on on her knee and plead for you to not close that store, and you said we'd take another look, but sometimes --
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oftentimes -- the numbers don't lie. >> yeah. >> it was, it's ingrained in people that growth is good, growth, growth, growth. but you actually did some significant pruning in the spirit of spring. talk to us about what led to the decision, and it was emotional for you. it was very difficult for you, and it's clear here -- and i imagine elsewhere -- that it wasn't just closing stores. now you're talking about the partners. so talk to us a little bit about what led to the decision, though it's all laid out in the book, and then what, what that was like for you. displl well, i think in the history of starbucks we never had any situation where we closed stores because they were nonperforming. we probably closed 20 stores in 40 years. that was the track record that we had as a company. however, when i did come back, i began to financially examine the stores that were open the last two years. and at the height of the
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subprime mortgage crisis, we had a lot of stores that were linked to these areas all over america, especially in california and florida. we looked at those stores, not only were they nonperforming, these were 10 and 15-year leases, and there was no way they were going to make it from an economic level. the tragedy was that we were closing stores that primarily had been open less than 18 months. >> okay. >> and these were, it ended up being we thought we were going to close 200. then it became 400. we looked at it again, we ended up closing close to 800 stores across america. and, of course, that had impact into the infrastructure of our building in terms of the support structure. and, you know, the challenge i had personally which was very emotional is how are we trying to restore trust and confidence in the company around the culture of starbucks and at the same time we're going to close all these stores? and i remember the night before looking at the list of stores, and i wanted to see every single
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starbucks' partner's name who was going to be asked to leave the company in our stores and in our office so i could be assured there was not going to be politicizing. i knew a lot of these people personally, and this was the hardest decision we had to make as a company. but what was clear is we were trying to save the corporation, and in order to do that, we had to close stores and ask people to leave the company. and in that tape you saw me stand up and say i apologize if the actions of today have fractured the core values of the company, but we had no choice. >> it was like, you know, being in high school, and you go look at the list to see if you were cut from the team. i don't mean the staff, i mean in washington you're looking, like, did we lose any? and we did. we lost one over at 21st street so now i have to walk two more blocks to get to my starbucks. but it was an interesting wave of publicity, good and bad -- >> it was bad. >> but there was --
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[laughter] but i guess on the good side maybe it was yet another opportunity for people to demonstrate to you their emotional connection. people don't get worked up about a whole lot of different things closing in the world. >> yeah. >> starbucks was, like, you can't do that to me. >> and i think, you know, what we built over the years was we created something in america that previously did not exist. and we loosely and within starbucks call it the third place between home and work. but at a time in america where there's such a lack of human connection and humanity and the sense of community that starbucks stores have created, people look to starbucks and its place as a respite, as an oasis s. and it meant a great deal to lose that in the neighborhood. and also there are times when a starbucks arrival in a neighborhood is kind of a badge of honor. and if we were losing it, what does that mean? it's true, i will tell you it may have been the place between home and work.
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my concern is when it becomes the place between work and work. >> yeah. >> you should close your stores between, like, 9 and 5. that's just my recommendation for work force productivity. now we're going to talk a little bit about some of the companies and the efforts moving forward. >> sure. >> talk to us a little about seattle's best coffee, talk to us about green mountain, and, ooh, you couldn't call 'em ipod, sorry, you can't get that one. >> k cups? >> the little cups. >> right. >> because i was astounded by how big that market is for starbucks into the future. >> well, first off, we are witnessing a seismic change in consumer behavior primarily because of two factors. one is the pressure on the consumer for a lack of disposable income is real, consumer confidence is low, unemployment is still high, small businesses have, still
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having trouble getting credit. and as a result of that people are making buying decisions on products and services very different than they did in the past. the second thing is that as a result of social and digital media, the consumer has access to information so quickly and in a very unique way that the rules of engagement in marketing and building the brand are very different. so having said that, we want to be able to embrace technology in a unique way, and i'll get back to that. but the truth is we believe that we can create multiple billion dollar brands for starbucks that don't have to live inside starbucks stores. so seattle's best coffee is a brand that's underneath starbucks that we think appeals to a broader audience because starbucks is not for everyone both in price and in taste. and so that's sbc. green mountain, you know, we announced that deal two and a half weeks ago, and our market cap went up $2.5 billion in one day as a result of the fact that 80% of starbucks' customers do not have a green mountain curd
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machine because we're not on the system. so once we announced we were going on the system and we would be exclusive in terms of premium coffee, there's a whole big market for that. that'll be a billion dollar business in a number of years. >> and from the numbers i read on the rollout, the upside of that it really is an unbelievable number, the number of people who have machines, the number of people who don't have access then to starbucks and that delivery mechanism and the growth. the upside. >> the whole area of single serves. wewe have a relationship with courtesies, this is a whole big market for us. the other thing i want to mention is just going back to technology for a moment. over the last 18 months, we have invested heavily in social and digital media. starbucks is the number one consumer brand on facebook, twitter and four square. what this has done is two things. it has lowered our cost of customer acquisition, our cost of advertising, but most
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importantly, given us the ability to emotionally engage with our customers in a very, very unique way. the other thing what's going on in our stores with regard to mobile payment. if you examine what's happening in korea and in china and in japan, for that matter, is what's coming to america is that the digital wallet is going to be on your phone in 18 to 2 months max. -- 24 months mack. and the amount of transactions we as americans are going to do in terms of using smartphones as a wallet is going to be ubiquitous. we turned that on 82 days ago, and in 82 days we have become the number one brand in america in terms of transactions in dollars. and this is just the beginning of what's going to happen. youyou know, you're going to get coupons, offers, all the kinds of things from many, many companies, but most importantly the smartphone is going to be the primary way in which we as americans are going to pay for things over the years. >> i agree, and here for the metro system when you're getting
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on the train or on the bus into the future you'll be able to use that mobile device. >> yeah. >> will that expand to also how i order my beverage at starbucks? >> it probably will. and i think it speaks to a broader macro issue, and that is whatever business we are in, small or large, embracing the status quo as an operating principle today is a, is not going to have a good result. every company must push for self-renewal and reinvention while preserving the core values. but technology and seismic change and consumer behavior has left the station, and every company is going to have to embrace it. >> you have the ability for customization already. now with the technology on the customization, but here's the quote, so i appreciate that you wrote this out so i could follow it. page 134, i'd like an iced grande latte with nonfat milk to
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the bottom line only, with a super stiff foam with a dome lid. that's a drink diane ordered almost religiously, brett in bellevue was committed to two double cup venti breve. wow, i feel like a piker with my pike place grande every morning. but the level of customization, it is part of the starbucks experience. and it is the barista, it is the receipt of that and the technology to get it right. you've got the sign up there, if it's not right, we'll make it right. >> right. >> technology is one part on making that happen, but talk to us a little bit about the recommendations that come in from people. you, every time you meet somebody, they go, hey, howard, i've got a great idea. or somebody knows someone who works at starbucks and i've got an idea. you solicit those ideas. >> right. >> comment cards, technology on the web and more. boy, that's exposing yourself to
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quite a bit of -- >> well, you bring up, first off, there's 87,000 different types of concoctions that people can order at starbucks. >> there's less in the tax code, just so you know. [laughter] >> and that is a competitive advantage but also puts tremendous pressure on our people. but customization is a big area, i think, of building a competitive difference between us and everyone else. but the other issue is that we have to be in a position where we're not just pushing information at our customers. so when i did return, michael dell gave me this great idea which was put up a web site, and we named it and, again, there was great resistance from some of the most senior people at starbucks to do this because they were afraid we were going to get complaints. and it was okay to get complaints because we wanted to hear from customers.
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but the ideas that started coming in were ideas that were generally authentic and real from our customers and, again, it gave us this loop of being able to interact with our customers in a unique way, and that fits today. and then we created one internally from our own people so there's two kind of floods of information all day long between our customers and our partners. >> so then the decision is made to change the logo, and you get it with both barrels from people who go, changing the logo, what are you prince now? it's just a symbol, and there's no more starbucks on it or no more coffee? >> >> right. you're pretty funny, you know that? [laughter] >> it's new york. >> you should be doing stand-up, this guy. well, the logo, we just celebrated our 40th anniversary, but it's not about that. i mentioned the strategy to go beyond our retail stores, so the logo change removing coffee and the name starbucks, gives us the
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autonomy and the freedom to develop products that perhaps won't have coffee associated with it because we are going to build a significant consumer products business in grocery that probably will have a lot of products not associated with coffee. that's why we changed the logo. >> i won't ask because the answer will be we're not ready to announce it yet, so i won't ask. my daughter asked not to change my caramel latte.
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that's it. and then we have an open mike and the open microphone is tell us what your feeling about how we are doing and tell us anything you want about the concerns and complaints. >> for 25 years we've had these meetings where there hasn't been any retribution, there hasn't been any cause and effect of the than we want to hear from you and we want to improve. during the years when we were doing so well and perhaps some of these things were not being addressed i don't think we were at our best and i don't think we have renewed this high level of sensitivity within the company people understand the have a
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voice in the future of and the most important person in all of starbucks is wearing a green apron and we want to respect our people. >> how was the approach different than it once was? >> we pressed the pause button for about 18 months there's no growth whatsoever and we can return the company to being a growth company at about double digit levels. i would overtime get to 10% from 11% growth this year but i think if you are not a growth company in the industry that we are in it's very difficult to attract people and sent all of our people participate in the equity of the stock we want to create liquidity and return for them so we are going back to being the
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growth company but not the kind of growth company that is hellbent on growing the company for the growth sake. and is well thought out. >> sam will and others to a version of what you're giving of the town hall meetings and sitting down with the associates and partners and others. who are the people you emulate and the people than you look to as real innovative leaders and retail? you, by the way, in the book you of times with a real source of pride and you don't shrink from that at all. it's what you are. it's what starbucks is and what you do. when you look at the other successful merchants around the country who do you emulate, who do you look for? >> being a merchant is a lost art in america. i think that mckee drexler is the great american merchant today. he basically invented the gap
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and reinvented jay crew. for 30 or 40 years he's an extraordinary things that the limited. i think jim, the founder of kosko is an unbelievable merchant in terms of what he's been able to win the business he created. i taught in the book about the two situations that happened to me one at the age of ten when my aunt took me into new york city for the first time we. we went to the radio city musical and after that to a restaurant and was a very strange restaurant and for those of you there were probably 50 or over he will know what this is. it was and although map and i walked into the although matt and you put five or 10 cents in the window and the food came out and i said how did that happen? she convinced me that there was a magician. [laughter] behind the wall. i remember that day as if it were right now. and there was the kind of katulis for me believing that the emotional connection of the
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discovery and telling the story demonstrating was quite unique and the experience with this unique marchant in italy who has one store for 85 years as the recovery story and i sat down with him and there's this unbelievable story that said how many stores do you have? and we had an interpreter and i was embarrassed to say and i whispered 16,000 the translator gave him 16,000 said what? 16,000 coffee stores? america, what a place. [laughter] >> when you get a chance to go through the smithsonian you will see an exhibit at the automat. anything from starbucks in the smithsonian yet? anybody here from the smithsonian? we've got one or two people. you have to decide whether it is that brown a soda bottle. when soliciting the feedback how do you decipher between wining
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and credible feedback? >> well i think if people were winding -- if people are concerned about something, generally there is a reason and there is validity. we aren't perfect. we've made mistakes. we will make more mistakes. the human condition and behavior is very fragile and i think sometimes we don't get it right. i don't think there is a terrible big difference between the people concerned about things and the people who are suggesting it's real and a think to -- authentic. >> on a personal level, what keeps you ground it? >> my wife continues to tell me to take the garbage out. >> how does starbucks continue going on word when how were shultz leaves for good? >> i got that question because of the turnaround i'm probably
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getting more credit than i deserve. there's an extraordinary level of talent. i'm here for the long term. it's really not about me and i didn't get secession write the last time but i understand it better today. >> dewitt seamlessly carry on and it's never been about one person. >> starbucks is well known for its focus on the corporate responsibility as the company moves onward. how much more will starbucks continue to pioneer social responsibility initiatives like energy efficiency, water storage shed and the rest? >> i've said some things in the last few weeks publicly about the response of the of corporations in america. let me say at this by. we all have parity in the marketplace in terms of the organization and things we do, and i feel very strongly that
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the consumer today has begun to make decisions not only on what things sell for they are making binding decisions on the values of the company's stand for and whether those values are consistent with their own so first and foremost it's very good business to embrace the social conscience of what a company needs to stand for but what i said publicly is if i look at wisconsin and i look at ohio about what's going on there i think one thing that is evident to me is that we are living in a time when states are having significant challenges with their operating budget. i'm told the state of california might be $50 billion in debt. i don't know if it's true or not but if it is, think about the challenge they have. it's very possible the state is going to be a will to do the things they've done in the past especially as it relates to the legacy cost of certain issues. and i think that corporations in america are going to be asked to
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and are going to be required to do more. and i think the responsibility that i feel to our people, the communities we serve, to the areas in which we buy coffee is we have to demonstrate the balance of building the great company isn't just making money. it's a pretty shallow bowl that making money and getting back is what we should be about and as a result of that we would be a better company and probably better in terms of profitability. >> a good chapter in the book and more than just one but the one that comes to mind, but also one internal and one externals. that spoke to on a number of things and things people being left behind domestically and internationally
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in the things we want to do that we feel deeply about. we have had an emergency fund in our company for over a decade which we call the cut fund. it's managed by a group of starbucks people, not by senior leaders, and that fund is designed to help those people in need both in terms of their personal crisis or things that happened as a result of things out of their control. a good example of that is the cup fund's contribution we just made to the people of japan, especially those people affected wearing the green apron, and the situation of japan is didier. the people of japan can respond to that catastrophe. >> so the cup fund provide some assistance? >> both have made sycophant contributions about japan. >> bill gates, steve jobs select your leaders to solidify
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yourself and ceo and the sweeping changes quickly partly due to your innate connection within the company. how would the strategy of the change or what advice would you give to a less tenured leader attempting such a large shift squawks? >> that's a big question. at the height of the crisis and i mentioned in the book i wasn't sleeping and i was quite concerned -- i was quite depressed, and it's hard to insulate yourself from the outside world, that it's constantly beating the drum with it was wall street, the media or the competitors saying starbucks is done. i think the leader today must provide vision and hope and aspiration for the organizations. and people need to understand what the role and responsibility is, and then i think you have to
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answer a rhetorical question in the affirmative and that is what is in it for you? people need to understand that this is -- for not doing this for the corporation, you are doing it for one another. and i'd think you've got to reduce it down to the lowest common denominator and insure that people understand that when you do this action, when you make the change we collectively are going to participate in the success of the company and that the finish line of success is not going to occur for a select few, and when i think that the company and the discipline within starbucks marketing manufacturing real-estate design, the most important discipline in the entire company and a person who must have a seat at the table with all of the strategic issues is human-resources. >> said yesterday on with a corporate executive and going through some difficult times and his question was or maybe his observation, i'm not sure if i'm
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making the changes fast enough or too fast. when you look back losing the 2020 hindsight did you move too fast or not fast enough or were you right where you needed to be? >> i don't think all of the decisions are equal. i think people within the company in the crisis needs a decisive leader. but not everything can be made in the decisive fashion. but if you're not making a decision quickly, if you have to explain to the organization why it's taking longer and with the issues are. i think one of the things i did in the first year is i have a leak had indicated to the organization and as much physical meetings like this one as well as in small groups and i was writing a weekly e-mail to the entire company in terms of the progress reports and issues at hand and i entitled them transformation number one, two,
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three and it went all the way up and people started looking for that memo as a kind of litmus test how we are doing and also i was pulling my heart out to explain what i was feeling and what the issues are. people on the outside read some of these things and i think they were skeptical that it was too touchy-feely and why is he doing that? but i wasn't writing it for the outside world. i was writing for the person in the company perhaps working for the hours a week in the store and needs to understand what it is we are trying to do and why and be able to explain when asked to the customer. >> when you look for talent within the company, upper levels, partners right through all the stores, how we as who you are finding changing over the years are to getting more qualified people, are you having to do more intensive training of people? where do you see the work force in america going? >> the senior team that was


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