Grounded in coffee

In this edited interview with the founder of Starbucks, from the Marketing Society's recent event, Colin Cameron talks to Howard

Schultz about the origins of the iconic coffee company and what it takes to stay brand leader in today's more competitive environment

Colin Cameron: I wondered if you could take us back to the beginning and tell us what inspired you to take hold of the

company and begin to build what we know today.

Howard Schultz: The answer to the question is really twofold. There were two pivotal moments and both of them involved me walking

into a store. The first one was in 1982.

I walked into a Starbucks coffee store – it happened to be the first that ever opened in the Pike Market Place – and immediately I felt a

sense of place and quality. Even though Starbucks was not selling cups of coffee, only pounds of coffee, there was a sense of community.

I was moved by it and felt this was a place for me. I convinced the founder to hire me as head of marketing in 1982.

A year after that I was sent on my first trip to Italy. Walking around Milan I saw an Italian coffee bar, with all its romance, theatre,

elegance and style. I was shocked to realise that the coffee business we were in was not the business which the Italians were in. So I

raced back to Seattle to try to convince the founder that although he had got a great business, he was on the wrong track.

CC: What was the local Seattle coffee shop like in those days?

HS: This was a store that had about 150 customers a day, that primarily sold coffee for home consumption. It was a shrine for coffee.

There was no coffee heritage in the city and none in America whatsoever. The Italian experience really was the epiphany for trying to take

Starbucks in a different direction.

CC: When you bought the company, having started your own coffee chain, were you conscious that you were beginning to

build a brand?

HS: I should make a confession. I have no business degree, I never took a marketing course in my life before joining Starbucks so the

word brand would not have been part of my vocabulary. What we were trying to do was raise money for a coffee company that potentially

could build 100 stores in America. It took nearly a year to find the capital but finally we acquired Starbucks for $3.8 million in 1987. We

had 11 stores, 100 employees and a dream. It wasn't to build a brand, it was to build a different kind of company. And the kind of

company we wanted to build required a different kind of business model – one that would achieve the fragile balance between profitability

and a social conscience.

So the first thing we did in 1988 was provide comprehensive health insurance for every single employee and equity in the form of stock

options.

CC: What was your reasoning?

HS: Once we decided to provide equity in the form of stock options for every employee we realised that everyone was going to be a

partner in the business. So we had to convince the private investors that providing equity in the stock options and giving healthcare would

create a much more stable, productive and inspired workforce.

We were not going to franchise the stores, we were going to be a wholly owned company in which the culture, values and guiding principles

of the company would be a competitive difference.

CC: Where did the inspiration for this structure come from?

HS: I grew up in a place that I think you refer to as council estates. In America it's called subsidised housing. I grew up in a family that did

not have health insurance.

I saw first hand the fracturing of the American dream when a family loses hope, and I wanted to build the kind of company that my father

never got a chance to work with.

I do not believe that Starbucks would be the company it is today if it had been defined by traditional advertising or marketing. It is what it

is because of the people.

CC: The growth in terms of outlets and range of products has been amazing. Did you have any idea that it had the

potential to grow to even 200 stores, never mind 1,600?

HS: We were very successful in the Pacific North West – Seattle, Vancouver BC and Portland. But we needed to see if Starbucks could

travel outside the West Coast. So we opened up in Chicago and it was a disaster. We picked the wrong locations. The store had an outside

entrance of a big office building but didn't have an inside one, so when the winter came people had to go outside.

CC: How much advice were you taking or was your planning instinctive and intuitive?

HS: We had no experience – it was intuition, passion and will. When we opened in Japan in 1996 there wasn't anyone in the company that

had any international experience, so we hired a consulting company to advise us.

They came in, did a study, charged us a lot of money and recommended that we would fail in Japan because no one there would ever hold

a Starbucks cup in the street. They would lose face, and we had a non-smoking policy and it would be a disaster. Now we have almost

1,000 stores in Japan.

What the consultant didn't understand was that we created something with universal appeal. The sense of community is part of the human

condition.

CC: How easy is it to harness the power of Wall St with the Rwandan coffee grower and make both feel involved in the

same endeavour?

HS: The answer I think is in the product. It is a romantic beverage, a social beverage, it brings people together. It is also something you

do often. Starbucks is a unique company in that it is a brand, a product, a place.

The mistakes we made along the way were because we didn't fully understand all of these issues.

CC: When marketing the company globally, have you finessed it for different regions in advance?

HS: In the early days we found that the customers in most new countries wanted the authentic Starbucks experience. They didn't want it to

be watered down or refined for the local issues. I think today, because of the size and ubiquity of the company, it's more important for us

to demonstrate local relevance. If you look at the London store we've just opened on Conduit Street, you'll see a reflection of new designs,

and this is the way we're going to move forward.

CC: What was the thinking behind the decision to start advertising?

HS: Originally we created a new industry. For 15 years as a public company we pretty much did not have a competitor. Now we have a

plethora of companies trying to steal market share. So we have to become more marketing driven, and we have to invest in advertising

for the first time in our history. For the first 13 years of our company we spent more money on training than we did on marketing.

CC: What other marketing initiatives are you using to address that?

HS: Against the backdrop of the cataclysmic financial crisis, there has been a seismic change in consumer behaviour. I believe it's going to

continue for a long time. The consumer today is highly educated, sensitive and is going to be very careful about who they support, and will

look for companies whose values are consistent and compatible with their own.

What that means for me and for Starbucks is that there has to be a high degree of authenticity in what we do. No one believes that

standing on a stage with a big cheque and press releases is a good way to define your corporate social responsibility. This is not

marketing, it is an authentic pursuit of doing the right thing.

You can't attract and retain great people if they don't believe they're working for a company that they are proud of and trust.

CC: The coffee crop in Brazil failed in 1994. How did that compare with the current economic situation?

HS: The past 24 months of trying to navigate through the financial crisis has been unlike anything that I could have been prepared for. And

what I've found is that most people did not have the answers.

Philosophically, we felt that if we lost our core customers the cost of getting them back would be much greater than keeping them. We had

to remind our core customers why they came to Starbucks in the first place. So I did something that was quite controversial at the time.

We assembled 10,000 Starbucks store managers at a convention in New Orleans. We refocused on the core purpose of the company and

said that to survive this crisis and the mistakes we had made, we needed to see things from our customers' viewpoint.

We had been operating in too lofty a place and we have to remind ourselves what it was like when we were fighting for survival and

couldn't make payroll many years ago. That meant the customer had to be part of every conversation, every decision.

And so we started doing things we had never done before – a value proposition for a significant loyalty programme, for example – things

that were anathema to Starbucks because we're not a discounter. But we had to do it through the lens of the values and the premium side

of our business.

CC: Obviously many people use Facebook, MySpace and the like to communicate with customers. How did you meet that

challenge?

HS: September 2009 I woke up with a deluge of voicemails and emails and frantic messages about a dipper well problem in the UK. We

were wasting water and we didn't know it and one of your tabloids discovered it. It went around the world in an hour and all of a sudden we

had a major firestorm.

Overnight the digital age had changed the course of history for our company. Everything that we thought was in our control no longer was.

But within a year we had invested in social media and digital experts. Now Starbucks is the number one brand on Facebook and we also

have a tribute site.

We're the number one brand in our category on Twitter and this has become a major way to engage with our customers.

CC: There are many videos on the Starbucks website including those involving the Red Campaign which the company is

immersed in. What drove you to take on a responsibility over and above just sustaining the corporation – for example,

the video urging people to vote in the last election?

HS: In many ways we have become part of the consciousness of America. Coffee and conversation have been linked for centuries. I felt

strongly this was a most important election in my lifetime and I was concerned that people were not taking it as seriously as they should.

Only 52 per cent of Americans voted in the last election, which is tragic. So that was one reason.

I also believe we have a bigger responsibility beyond just making a profit. I know that sounds trite and perhaps some people would think it

cynical. The flipside is we've been more successful as a company because people give us the benefit of the doubt that our heart is in the

right place.

Remember we're not just a retailer. We're completely vertically integrated and so we're buying coffee, roasting coffee, and selling coffee

from source to end user. I believe we have a responsibility to try to enhance the future.

Howard Schultz was inspired to bring the Italian coffee culture to the first Starbucks in Seattle after a trip to Milan

CC: In the world capital of cynicism, namely London, is it particularly tough during an economic downturn to maintain this

conviction when you haven't an absolute majority of the people buying into the earnestness of it?

HS: You have to try to get the benefit of the doubt in many ways. I think it would shock most people to know that we spend about $300

million a year on healthcare for our US employees. There was tremendous pressure on us to either remove that benefit or significantly cut

it, but we felt strongly that the conscience of our company was based on that particular benefit, and we would not do it.

I think you have to try to resist the temptation to take the short term and try to find ways to create a long-term value proposition and

convince those stakeholders that this is the right thing to do at a time like this, when many companies are doing the wrong thing.

In the history of polling in America we had reached a low point in terms of trust and confidence in the country's government, Congress,

banks, public institutions, political leaders and public figures. The institutions that we should believe in have let us down. So we have to try

to do the right thing, and I believe people will support those enterprises that do try.

CC: I know you've done work with the Prince's Trust and you're very involved with the Red Campaign. How do you choose

your partners?

HS: We need to ask ourselves, is this decision going to be equated to the brand, and specifically is it going to make our people proud to

represent the company?

The Red Campaign and Product Red was absolutely a no brainer – the transparency, the authenticity of what they do, the fact that it's in

Africa, a place where we're doing business and can see first hand the way in which the money was being used.

CC: Looking back to 1987, what do you think about where you've come from and where you're going?

HS: I've always had a hard time celebrating so I have never spent a lot of time revelling in what we've done. But I talked to the leadership

of our company here in the UK, and my message emphasised the responsibility we have to exceed the expectations of our customers.

Obviously I'm extraordinarily proud and blessed to have been part of something like Starbucks.

ABOUT THE AUTHOR

Howard Schultz is chairman, president and CEO of Starbucks