A Changed Starbucks. A Changed C.E.O.

Stuart Isett for The New York Times

Some Starbucks locations, including one in downtown Seattle, have been updated to make them feel more like a neighborhood shop.

By CLAIRE CAIN MILLER
Published: March 12, 2011

http://www.nytimes.com/2011/03/13/business/13coffee.html?pagewanted=1&_r=1&ref=business&src=me

Ramin Talaie/Bloomberg News

Starbucks is expanding in new directions, with ventures like instant coffee.

RAISE your hand if you remember when Starbucks seemed cool.

Anyone?

Think back. To before the planet groaned with 17,000 Starbucks shops. Before the pumpkin spice lattes and the Ciao Amore CDs. Before the Strawberries & Crème Frappuccino ice cream, the Starbucks cream liqueur, the Pinkberry-inspired Sorbetto.

In short, to before Howard D. Schultz and his trenta-size ambition turned a few coffeehouses here into the vast corporate Empire of the Bean.

The world has often seemed three espressos behind Mr. Schultz — which is why the low-key guy sitting in his office here doesn’t quite seem like Howard Schultz.

Did he just say “but”? As in, “We have won in many ways, but …”? Was that a “we” instead of an “I”? A note of humility?

Yes, this is Howard Schultz: the man who willed Starbucks onto so many street corners — and then, for a moment, looked as if he might lose it all.

Not even Mr. Schultz could have predicted how Starbucks would change our culture when its first shop opened here, in Pike Place Market, on March 30, 1971. Like it or not, Starbucks became, for many of us, what we talk about when we talk about coffee. It changed how we drink it (on a sofa, with Wi-Fi, or on the subway), how we order it (“for here, grande, two-pump vanilla, skinny extra hot latte”) and what we are willing to pay for it ($4.30 for the aforementioned in Manhattan).

But during the depths of the recession, Starbucks nearly drowned in its caramel macchiato. After decades of breakneck expansion under Mr. Schultz, tight-fisted consumers abandoned it. The company’s sales and share price sank so low that insiders worried Starbucks might become a takeover target.

So, after an eight-year hiatus, an alarmed Mr. Schultz returned as chief executive in January 2008. He shut 900 shops, mostly in the United States, drastically cut costs and put the company back on course.

Friends and colleagues say this hellish experience left Mr. Schultz a changed man. Starbucks, these people say, is no longer “The Howard Schultz Show.” The adjective that many use to characterize his new self is “humble” — a word that few would have applied to him before.

“Everything Starbucks did in the past, more or less, had worked,” Mr. Schultz said in an interview in January at the company’s headquarters, with a view of Puget Sound south of downtown Seattle. “Every store we opened was successful, every city, every country.”

He continued: “Growth had a life of its own — and that’s O.K., when you’re hitting the cover off the ball every time, but at some point, nothing lasts forever.”

One thing hasn’t changed: the man dreams big. In that same interview, Mr. Schultz spoke of expanding into still more products and in markets like China. He is pushing, of all things, a brand of instant coffee. The words “Starbucks Coffee” were just removed from the company’s green mermaid logo because he wants to waltz his brand up and down the grocery aisles. On Thursday, he announced that the company had struck a deal with Green Mountain Coffee Roasters to distribute Starbucks coffee and teas for Keurig single-serving systems. Shares of Starbucks jumped nearly 10 percent on the news, reaching their highest level since 2006. The stock closed at $36.56 on Friday.

Mr. Schultz and his colleagues say Starbucks will keep its feet on the ground this time, but some outsiders have doubts. Detractors say Starbucks long ago ceded its role as a gourmet tastemaker to become a “billions-and-billions served” chain like McDonald’s. Starbucks — “Charbucks,” to those who complain that its heavily roasted coffee tastes burned — will never rekindle the old romance, these people say.

“Has anybody said they came back because people love the coffee again?” asks Bryant Simon, a history professor at Temple University and author of “Everything but the Coffee: Learning About America From Starbucks.”

“They came back because they’re remaking themselves as a brand that competes on value, largely — a brand that’s everywhere, easily accessible, predictable,” Mr. Simon says.

HOWARD SCHULTZ, now 57, is a tall, sinewy man with a toothy grin and a silky sales pitch. He rarely sticks to script, preferring to speak off the cuff, whatever his audience. In conversations, he leans in, locks eyes and gives the impression that, right now, there is no one else in the world he would rather be talking to. When he speaks of “soul” and “authenticity” and “love,” you could almost forget that he runs a multibillion-dollar business that has become an uneasy symbol of globalization. Or that the British actor Rupert Everett once likened Starbucks to a metastasizing cancer.

The story of Mr. Schultz’s life and career has been told many times, not least by Mr. Schultz. (His second book, “Onward: How Starbucks Fought for Its Life Without Losing Its Soul,” is to be published on March 29.) But some highlights bear repeating:

He grew up poor in the Bay View housing projects in Canarsie, Brooklyn, received a football scholarship to Northern Michigan University and, after a variety of jobs, joined the fledging Starbucks in 1982, as head of marketing. Inspired by Italy’s coffee culture, he left Starbucks and opened his own coffee shop. Then, in 1987, he bought Starbucks, which at the time had all of six shops. By 1995, Starbucks had 677 shops. By 2000, it had 3,501, and that year Mr. Schultz stepped aside as C.E.O.

And so it went for Starbucks, one success after another, until the recession hit and exposed the company’s overreach to the world.

In December 2007, Mr. Schultz was worried that the Starbucks brand was losing its luster, and he and the board decided that in the new year, they would push aside Jim Donald and announce that Mr. Schultz would return as C.E.O. That month, Mr. Schultz, his wife, Sheri, and their two children flew to Hawaii for their annual getaway.

But on the beach in Kona, he just couldn’t relax. He kept checking the company’s daily sales figures and was horrified to see that they were falling by double digits.

Also in Hawaii then was his friend Michael Dell, who had recently returned to run Dell Inc. On a long bicycle ride along the coast, Mr. Dell told Mr. Schultz that when he returned to Dell, he wrote what he called a “transformational agenda.” Mr. Schultz then created his own plan for Starbucks.

His goals were to fix troubled stores, to rekindle an emotional attachment with customers and to make longer-term changes like reorganizing executives and revamping the supply chain.

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He returned to Seattle, handed copies of his plan to the company’s senior executives and posed the big question: Are you in, or are you out? Eight of those top 10 executives have since departed.

Stuart Isett for The New York Times

Some Starbucks locations, including one in downtown Seattle, have been updated. New stores are being decorated with local woods and art, to make them feel more like a neighborhood shop.

“What the company needed then was what he used to be to us — the innovation, the refusal to not be a champion,” says Troy Alstead, the chief financial officer. “A lot of people were questioning, in that span before he came back, ‘Were we done?’ And Howard came back, and it wasn’t even a question anymore.”

MR. SCHULTZ usually rises at 4 a.m., without an alarm, downs a Starbucks Sumatran coffee at home, followed by a short double latte or espresso macchiato from one of two Starbucks stores he visits on his way to work. He arrives in his office by 6:30.

Friends and colleagues agree that he is as fanatical as ever about Starbucks. Millard Drexler, the chief executive of J. Crew, recently e-mailed Mr. Schultz to complain that the coffee lids at a Starbucks on Astor Place in Manhattan kept spilling coffee on his shirt. Mr. Schultz’s reply: “On it.”

Mr. Drexler, who has a habit of e-mailing C.E.O.’s with complaints, says: “I can give you many more examples when they say, ‘I’ll send this to a research department or a gatekeeper.’ ” But, he says of Starbucks, “to have that kind of quality control they have around the world is pretty extraordinary.”

It was on such a morning in early 2008 that Mr. Schultz was convinced he had a product that would re-energize the company’s tired sales. It was called Sorbetto after the Italian for “sorbet,” and the drink was a twist on Pinkberry, the frozen yogurt chain in which Mr. Schultz is an investor.

Mr. Schultz had flown to Italy to taste the ingredients of his new product and thought he had the next Frappuccino. By that summer, 300 Starbucks locations in California were bathed in pink to promote the new drink. Starbucks had shipped in ingredients from Italy, and Mr. Schultz had primed investors.

But customers didn’t like the sugary concoction. And neither did Starbucks baristas, who had to spend an hour and a half cleaning the Sorbetto machines at the end of their shifts. A few months later, Mr. Schultz abandoned Sorbetto.

“Sorbetto, we did too quickly, and that was my fault,” Mr. Schultz says.

The headlong introduction was a mistake, but it was also classic Schultz.

“He likes things moving quickly, he likes people to be decisive, he’s got this energy level, this need for driving and for winning, and I think at times it’s hard for some people to keep up,” says Michelle Gass, the president of Seattle’s Best Coffee, which Starbucks owns. After his missteps, Ms. Gass says, Mr. Schultz has become more disciplined and a better listener.

Mr. Schultz concedes that he can no longer run Starbucks through the Cult of Howard. And he readily acknowledges that he badly misread the economy and underestimated the extent to which his customers would pull back during the recession.

At the time, he says, he had a hard time accepting that Starbucks would become a poster child for excess.

After his return, he halted new store openings and, with a P.R. flourish, closed every Starbucks in the nation for three hours to retrain baristas. The chain ran its biggest ad campaign ever, emphasizing the quality and freshness of its coffee. It ordered baristas to dump brewed coffee after 30 minutes.

But growth in same-store sales dipped below zero for the first time ever, and the company’s share price kept falling. It was a new feeling for Mr. Schultz, like the A student who breezes into college and then gets C’s.

Executives concluded that Starbucks had to close 200 American shops. The board suggested 600. Executives said that if sales and the economy got worse, they would also cut $400 million in costs. The board said no, let’s start cutting costs immediately, while closing locations. Starbucks ultimately closed 900 locations worldwide and cut $580 million in costs. As the decline in same-store sales neared 10 percent, board members asked executives to model what would happen if the sales slide hit 20 percent — which once would have been unthinkable.

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“Nobody knew where the bottom was,” recalls James G. Shennan Jr., a venture capitalist who has been on the company’s board since 1990. “The general agreement around the table was we better have the doomsday plan.”

In December 2008, almost a year after he returned as C.E.O., Mr. Schultz flew to New York on the company jet. He and his team were scheduled to meet with analysts from Wall Street, where Mr. Schultz, once a darling, was now being doubted as never before.

On the plane, he reviewed the grim quarterly numbers: Profits were underwhelming, and holiday sales looked dreadful. Just before the meeting, the company’s chief financial officer, Pete Bocian, resigned.

Mr. Schultz reread the script for the presentation — and didn’t like what he saw. He worried that the stock price might drop so low that someone would swoop in and buy the company.

He summoned his executives to his Fifth Avenue apartment. Late into the night, around the dining room table, they revised the presentation.

The next day, as the executives rehearsed, Mr. Schultz kept interrupting. Vivek Varma, who had recently joined Starbucks as head of public affairs, told him that he should leave.

No one could remember anyone talking like that to Mr. Schultz. But he left. The next day, he and the other executives painted a somber picture for analysts and laid out the recovery plans. Rather than plunge, the company’s share price rose 20 cents that day.

Over the next year, Starbucks made much deeper and more difficult changes than Mr. Schultz had originally envisioned. By April 2009, same-store sales, though still down from a year earlier, were finally rising. By the holidays, they had turned positive.

INSTANT coffee: the very words leave a bad taste in many people’s mouths. But Starbucks has been developing instant coffee in earnest since 2006. Mr. Schultz says his industry considers instant a “death category.” It is, however, a $20 billion one.

Before he returned, Mr. Schultz complained that if Apple could develop the iPod in less than a year, Starbucks could surely develop an instant coffee in that time. Finally, in January 2009, the new product, Via, was scheduled for a full-scale introduction.

But there was a problem: market research was showing that skeptical customers needed a lesson about instant coffee. Some executives worried that a big rollout might flop. Ms. Gass and a few others told Mr. Schultz that Starbucks should delay Via and introduce it in two cities before going national.

“That was hard for him,” Ms. Gass says. But rather than overrule his executives, as he might have in the past, Mr. Schultz agreed. It turned out to be the right decision. After testing Via in Seattle and Chicago, Starbucks rewrote the plan for a nationwide introduction. For instance, instead of just giving away free samples, which customers forgot in the bottom of their briefcases, purses and backpacks, it prepared Via in the stores and gave customers a blind taste test.

In 2010, sales of Via were over $200 million. The instant coffee is now also sold in grocery stores and in Britain, Canada, Japan and the Philippines.

The methodical introduction of Via offered a sharp contrast to the old Howard Schultz whose gut told him — wrongly — that Sorbetto would be a winner. But he has also gone so far as to embrace big-company ideas like focus groups, which he used to shun. Delegating, and accepting other people’s conclusions, is now easier for him. “There’s been more arguing, challenging and debate in the last two to three years than there’s ever been,” says Mr. Alstead, the chief financial officer.

Mr. Schultz’s take: “What leadership means is the courage it takes to talk about things that, in the past, perhaps we wouldn’t have, because I’m not right all the time.”

Born entrepreneurs are not necessarily born managers. You need creativity and drive to start a company, discipline and delegation to run one. In the last year, people who work closely with Mr. Schultz say, he has shown he can make the leap.

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Perhaps the bigger question is whether Mr. Schultz can, as he likes to say, preserve Starbucks’s soul, or whatever soul it has left. In a switch, the company is designing new stores with local woods, furniture and art, to make them feel more like a neighborhood shop. It is also buying specialty beans in limited supply, as artisanal shops do.

Whether Starbucks can recapture a neighborhood feel, as Mr. Schultz insists, is anyone’s guess. For many people, especially in areas where carefully made, lighter-roast coffee from the likes of Stumptown and Intelligentsia is trendy, Starbucks has become a place to go for free Wi-Fi, or to use the restroom, or to buy a coffee on the go.

There is a market for a convenient coffee chain, as the recent Starbucks sales rebound shows. But some customers and analysts say that the mass-market approach conflicts with Mr. Schultz’s vision of a global giant that somehow feels local everywhere.

Mr. Simon of Temple University says: “When you’re selling stuff people don’t need, you’ve got to be selling something else, and that’s what Starbucks lost. There’s a kind of dissonance between the messaging and the actual practice.”

Mr. Schultz no longer plans to blanket the United States with new Starbucks stores, sometimes with multiple locations on one block — a practice that inspired a contest on Flickr to see how many Starbucks shops people could fit into a single photograph. Instead, like so many other executives, he has his sights on China. Starbucks already has roughly 430 stores in mainland China and plans to have 1,500 there by 2015. India beckons as well. The company also plans to sell a wider variety of drinks and foods in grocery stores and its own shops, like Kind fruit and nut bars, which Starbucks put on the map.

IT may be difficult to believe, but there was a time when McDonald’s was a novelty. But, like Ray Kroc, who took over a small hamburger business and built it into the most successful fast food operation in the world, Mr. Schultz has learned that growth can be seductive, and that it can exact a price.

Starbucks and its leader are more measured than during his last stint in the corner office. “I think we are very conscious of the things that we have done wrong over the years, particularly when we just got caught up in the growth phase,” says Mr. Shennan, the Starbucks director. “We are not going to do that again under Howard’s management, I tell you, or the current board’s.”

In January, three years after his return, Mr. Schultz stood before 1,100 employees at the headquarters here. Three thousand more from around the world were patched in via Webcast. The company had finished its strongest holiday season ever, and Mr. Schultz had just unveiled its new, “coffee”-less logo. Yet his words were laced with caution.

“We have won in many ways,” he said, “but I feel it’s so important to remind us all of how fleeting success and winning can be.”

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