Onward (33 page)

Inside Starbucks, July 29, 2008, was dubbed Black Tuesday. It definitely was a dark time. In addition to the layoffs, some of our people were questioning what we stood for. Our sales growth was hitting new lows, especially on the weekends. Our cost structure was not sustainable.

And tomorrow I knew there would be headlines all over the world proclaiming that Starbucks had lost money for the first time in its history, because we had reported a net loss of $6.7 million for the third quarter. No matter that it was the one-time costs associated with the transformation that had taken us into negative territory—we'd actually made money before accounting for those charges, albeit not as much as the year before. A loss was still a loss. When I thought about our thicket of challenges both known and unknown, the word that came to mind was familiar and apt: “Onward.” More than just a rallying cry or an attitude, “onward” seemed to connote the dual nature of how Starbucks had to do battle and do business in these increasingly complex, uncertain times.

“Onward” implied optimism with eyes wide open, a never-ending journey that honored the past while reinventing the future.

“Onward” meant fighting with not just heart and hope, but also intelligence and operational rigor, constantly striving to balance benevolence with accountability.

“Onward” was about forging ahead with steadfast belief in ourselves while putting customers’ needs first and respecting the power of competition.

Yes, everyone at Starbucks could indulge his or her passion—be it for coffee, the environment, marketing, or design—but only if we did not lose sight of the need for profits.

“Onward” was about getting dirty but coming out clean; balancing our responsibility to shareholders with social conscience; juggling research and finances with instinct and humanity.

And “onward” described the fragile act of balancing by which Starbucks would survive our crucible and thrive beyond it. With heads held high but feet firmly planted in reality. This was how we would win.

I knew this to be true.

Thankfully, I was not alone in my conviction. The following
e-mail from Cindy Gange-Harris, a district manager in Edmonton, Canada, whom I had never met, arrived just before midnight on July 31, 2008.

Howard,

From the tone of your voice mail, the assorted press reports and blogs it sounds like you have many people voicing their concerns and disappointment to you around the business decisions that have been made.

I want you to know that you still have many partners who believe. I have been with Starbucks almost 11 years and know that to aspire and maintain greatness, difficult decisions must be made and sacrifices taken. I trust in the decisions that are being made to keep us on the right path. We will need to work harder than ever, with great diligence and attention to the operation of our business to keep us moving forward.

During my visits to stores I make it a point to connect with all of the partners in my stores, not just the manager, and talk to them about their training, their experience and ask for their feedback. I talk about what we are experiencing as a company and assure them that although we are facing challenges we have not faced in the past, I have seen countless examples of Starbucks facing adversity and how we work hard to “do the right thing” and make decisions based on our mission statement.

Thank you for all you are doing and creating a company that has given me my dream job. Even when some of the days are tough, they are overshadowed by all of the people that I have made a difference for and who have made a difference for me.

We ARE a different company, one of the best to work for in the industry, and I have absolute faith that fantastic things are ahead.

Part 4:
Hope

On September 15, 2008, the economy spun into a free fall.

Lehman Brothers Holdings, the investment bank founded in 1844 as a general goods store, declared the largest bankruptcy in US history despite last-ditch efforts by the US Federal Reserve and competitors to prop up the failing institution. Between prep sessions for a board meeting in Los Angeles later that week, I watched on the television in my office as stunned Lehman employees filtered out of office buildings carrying boxes of belongings.

That same day, stalwart brokerage house Merrill Lynch and Company agreed to be taken over by Bank of America, essentially saving itself from Lehman's fate. Global insurer AIG was almost out of cash and teetered on the brink of collapse, a condition whose devastating consequences would ripple through dozens of countries.

And in Seattle, Washington Mutual, the Northwest's homegrown bank that had proudly flourished to become the nation's largest savings and loan institution, was under siege from its own massive portfolio of troubled mortgage-backed assets.

Few people understood, myself included, the degree to which the complex, risky investments made by the world's biggest banks were dangerously intertwined, but by the end of the day we would all have an idea. Wall Street fell more than 500 points on September 15, its biggest one-day point drop since the days following the September 11, 2001 terrorist attacks. While Starbucks’ stock, which had been hovering at around $15 a share, did not take a big hit that day, hundreds of billions of dollars of personal wealth vanished, affecting millions of people, including our partners and their families.

Wrote Andrew Ross Sorkin that day in
The New York Times
:

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments. . . . “My goodness. I've been in the business 35 years, and these are the most extraordinary events I've ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group. . . . It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street and threatened the broader economy . . . which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation's growth rate has slowed.

So many respected companies had fallen so far so fast, to the shock of so many.

For the financial system and economy—as well as for Starbucks—it was taking a crisis to reveal fatal flaws. On one hand, Starbucks’ problems
as well as our mistakes paled in comparison to the financial devastation caused by the banks’ mismanagement. On the other hand, our missteps could, like the banks’, be our undoing, and thus it was more important than ever that Starbucks Coffee Company fix all that ailed us. We had so much at stake. Our thousands of partners needed their jobs, and our shareholders did not deserve to have their investments and trust in us disappear, too. We were better than that and had to keep accepting where we had gone wrong and fight to get it right.

This was especially true when it came to back-of-the-house operations. The escalating economic turmoil posed a further threat to our top-line sales and profit margins as already cautious consumers would no doubt cut back further on discretionary spending. And that meant, among other things, fewer trips to Starbucks. The financial crisis and the punditry, which painted Starbucks as a poster child for excess, were having a real psychological effect on our customers, making some people feel that by carrying around a cup of Starbucks coffee, they were not appearing frugal enough.

To make up for lost sales, we would have to strip hundreds of millions of dollars of permanent costs out of the business. In September 2008, cutting the fat out of Starbucks’ operations took on a new urgency.

“The wheels have come off the bus,” read the e-mail.

It was a Saturday morning, two weeks before the September 15 financial collapse, and Jim McDermet, Starbucks’ senior vice president for the northeast Atlantic division, was e-mailing Peter Gibbons about a spate of recent problems with store deliveries. Peter was just weeks into his new job as head of Starbucks’ supply chain organization and already recognized that SCO—the 1,300-partner business unit responsible for procuring, roasting, packaging, warehousing, and transporting Starbucks coffee, beverage ingredients, baked goods, merchandise, and other supplies to stores—was a bureaucratic monster.

Wrote Jim, “Across the division—and I would daresay the country—we are causing our district managers, store managers, and store partners real pain.”

In Manhattan, upwards of 100 stores a day had been running out of food and other basics, like toppings for oatmeal, the popular breakfast item we'd added to the menu as part of the health and wellness
platform. In store after store, delivery after delivery failed to show up on time or at all. Some stores even ran out of cups! Resourceful store managers and baristas were scrambling to make up for the shortfalls, which distracted them from customers. While the New York City problem was partly due to problems that our suppliers were experiencing, the performance was still unacceptable. It also was not an anomaly. In pockets throughout the Northeast, stores’ sales and morale were suffering from a logistics breakdown.

Starbucks’ supply chain operations had always been uniquely challenging. Every week, around the world, we made 83,000 deliveries of perishable and nonperishable items from our four coffee warehouses, five regional coffee-roasting plants, 50 distribution centers, and multiple suppliers. Every year in the United States and Canada, 608 million pastries were delivered to our company-owned stores. So were 103 million gallons of milk and 242 million pounds of coffee. Most of our stores received at least one delivery every single day. And depending on changes in weather conditions, orders varied. A humid day in Chicago meant stores could run out of nonfat milk by midday. A rainy week equaled inventory overstock.

If a store receives only
some
of the merchandise it orders, customer requests go unfulfilled and the store and company lose not only sales, but also customer goodwill. That's exactly what was happening. In 2008 the chance of a store getting everything it asked for on time and intact was about 35 percent, and it was highly likely that every day, thousands of stores were out of something. Tougher to measure were customer and partner disappointment. Every time a barista had to tell a customer, “Sorry, we're out of vanilla syrup” or “We didn't receive our banana shipment so I can't make your Vivanno,” the fragile trust between Starbucks and our partners and between Starbucks and our customers fractured.

As part of the company's transformation, SCO was under intense pressure from the US business to improve service to stores and, simultaneously, under pressure from our cfo to drive down soaring costs.

The company had not been completely oblivious to SCO's problems, and prior to Peter's leadership there had been a reorganization—but it was widely thought to have only complicated matters and further confused our people and suppliers. As Jim McDermet had stated, our continued lack of discipline in this area was becoming painfully obvious.

At 5 a.m. on Wednesday, September 3, 2008, four days after Jim's SOS e-mail to Peter, a longtime partner and district manager in St. Louis, Tina Serrano, sent an e-mail to the distribution manager of her region about the shortage of bottled water in her stores.

I have heard of about a dozen or so stores that were zeroed out of Ethos. Some stores have been out for close to a week. Can you help? We have a major fair coming to town this weekend and no water.