Daily Grind
Interview | Jamie Oliver He gave us the ‘third place’, but can Starbucks CEO Howard Schultz keep his empire from becoming another chain of coffee has-beans? HOWARD SCHULTZ DOESN’T look like a worried man. Smartly dressed and groomed, the CEO of Starbucks is on a UK charm offensive, to talk up his ubiquitous coffee chain’s [...]
Interview | Jamie Oliver
He gave us the ‘third place’, but can Starbucks CEO Howard Schultz keep his empire from becoming another chain of coffee has-beans?
HOWARD SCHULTZ DOESN’T look like a worried man. Smartly dressed and groomed, the CEO of Starbucks is on a UK charm
offensive, to talk up his ubiquitous coffee chain’s future plans. But behind the headlines about Fairtrade coffee and innovative customer loyalty programmes, the reality for the Seattle-based coffee shop giant is a sharp drop in profits and a nose-diving share price.
It’s a tough time to be the man at the top as this year shows no signs of it being any easier for Starbucks – or the coffee sector as a whole. “I think there will be a shake-up in the new year, but we will be left standing,” he says. “I think the strong will be stronger as a result of the difficult year ahead.”
It’s been an incredible journey for the 55-year-old. He grew up in a housing project in Brooklyn, New York, and attended Northern Michigan University on a football scholarship where he played quarterback. Leaving college with a communications degree, Schultz joined Xerox before becoming a general manager at a business that supplied coffee machines to Starbucks, then a small coffee shop in Seattle.
In 1982, he joined Starbucks as the director of marketing but had ideas and plans for the business that the founders didn’t share. They wanted to focus on selling beans and equipment to people who wanted to prepare top-quality coffee at home. Inspired by a trip to Italy, Schultz thought that there was more money to be made from selling the drinks themselves to busy Americans. So he left and set up a rival coffee house chain, Il Giornale. In 1987, the original owners sold out to Schultz and he rebranded Il Giornale with the Starbucks name.
Schultz had a vision – to grow Starbucks into a national chain of coffee houses, a so-called “third place” between work and home. Not everyone shared his dream. “I had real trouble raising private equity money,” Schultz says. “It was very difficult. In fact I had to downsize the number of outlets I hoped to open from 100 to 75 but I couldn’t afford to have the prospectuses reprinted so I crossed the 100 out by hand and wrote in 75. I was trying to convince people to invest in this plan for a national chain of coffee houses and one that was planning to offer all staff health insurance and a stake in the business.
It simply hadn’t been done before. I was turned down by 224 people – I’ve got a dossier to prove it.”
The fact that Schultz even continued trying after 223 rejections tells you everything you need to know about him. “We were passionate and we almost willed it to happen. There was nothing like what we were looking to offer. We had no money for advertising so we needed people to spread the message through word-of-mouth. Our people and our customers became our ambassadors.”
STAR DATES
1971 The original Starbucks opens
1982 Howard Schultz joins the firm as marketing director
1985 Schultz leaves to open Il Giornale coffee bar chain
1987 Original owners of Starbucks sell out to Schultz and he rebrands Il Giornale to Starbucks. Company rapidly expands
1992 Lists on Nasdaq with 165 outlets
1996 Opens first Starbucks outside US, in Tokyo
1998 Acquires UK-based Seattle Coffee Company, re-branding all its stores as Starbucks. By November 2005, London has more outlets than Manhattan
2003 Acquires two more coffee house chains, bringing total number of Starbucks-operated locations worldwide to more than 6,400
2007 Starbucks forced to close its outlet in the former imperial palace in Beijing due to protests
2008 Announces that by year-end 2009, 100% of the espresso coffee sold in Starbucks stores in the UK and Ireland will be “Fairtrade certified”
It worked. Within five years the chain ran 165 outlets and was listed on the Nasdaq stock exchange. Today, it operates more than 16,000 outlets globally and had fourth quarter revenues in 2008 around the $2.5bn mark. But while the growth of the business has been nothing short of phenomenal, conditions in the global economy are starting to have an impact.
Two years ago the company’s share price was $38.41; today it’s under $10. The profit for the last three months of the year fell to $5.4m, compared with $158.5m for the same period the year before. In its annual statement, Starbucks said it expects to suffer from a “very difficult environment” this year. “As a retailer that is dependent upon consumer discretionary spending, the company will face an extremely challenging fiscal 2009 because Starbucks customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to
credit and sharply falling home prices,” it warns. The statement also reveals that to date the retailer has closed 205 stores in the US out of an expected 600. This is Starbucks’s acknowledgement of overexpansion in the US, while at the same time an attempt to
bolster its international presence.
Schultz admits the problem but simply states that a robust approach is needed to counter this. “As a company, we need to put our feet in the shoes of our customers. We need to understand the pressures they are under and earn their loyalty. We need to work even harder.”
IT’S NOT THE FIRST problem Schultz and the business has faced. From accusations of anti-competitive behaviour to protests against its outlet in the former imperial palace in Beijing, Starbucks is used to receiving stick. The CEO, though, is unrepentant. “I’m happy with the way we have expanded,” he says. “We’ve become part of culture around the world and it’s all very positive. We have created an industry, jobs, a whole supply chain that didn’t exist. We offer healthcare to workers and ownership to staff both in the US and the UK. We use our size as a positive thing.”
The company is also moving to head off criticism it receives for its stance on Fairtrade coffee and coffee farmers by introducing a commitment that 100% of the espresso coffee sold – both whole bean and espresso-based beverages – in Starbucks stores in the UK and Ireland will be “Fairtrade certified” by the end of 2009. Again, Schultz is defiant. “Thousands of people have benefited from this company,” he says, “and we do more for coffee growers than the rest of
the industry put together.”
Ultimately, despite the way the company splits opinion, it is undeniable that Schultz has created an incredibly successful business and one that serves something like 50 million customers globally every week. After the boom, and with difficult trading times ahead, perhaps now, more than ever, it’s time for a stiff double espresso to go.
