Onward (58 page)

Starbucks’ stock was below $10 and the economy grim the day I took a call from a manager at one of Starbucks’ institutional shareholders, an organization whose leaders I had known for quite some time.

“Howard, we've owned this stock for a long while. We know you're under tremendous pressure, and we feel very strongly that this is the time to cut the health-care benefit.” He went on. “You've got all the cover and the license in the world. Everyone will understand you had no choice.”

I knew instantly that the call would be short. Of course we had a choice.

The degree of health-care coverage that had become a hallmark of Starbucks was, however, an expense that was rising significantly, to the point that it felt like a runaway train. In 2009, providing health coverage for our partners would account for almost $250 million of costs, up almost 50 percent per partner compared to 2000.

This was not the first time I'd been pressured to eliminate or significantly reduce our partners’ health-care coverage. Doing so would have an immediate effect on profitability, but at much too high a cost. The very foundation of Starbucks, our true competitive advantage, is our culture and guiding principles. That reservoir of trust that we have established with our people had already been drained to some degree. This would sap it dry. While the company would have to ask our people to share in the rising expenses of health care, eliminating it was unthinkable.

At the same time, I also knew that I needed to do more for our partners around the world. I'd spent the majority of my time during the past year and a half focusing on our customers and stabilizing US operations; the time was coming to turn our attention further inward and reinvent the partner experience by innovating compensation, benefit, and incentive approaches in ways that mattered to our people. Olden would soon leave his temporary post as head of Starbucks’ partner relations, and I needed to fill that tremendously important role with someone who would bring deep experience as well as an unequivocal understanding of our unique priorities.

How leaders embody the values they espouse sets a tone, an expectation, that guides their employees’ behaviors. As ceo I am responsible for large-scale decisions about giving our partners stock in the company, for instance, and maintaining health-care coverage. But I am only one man. It is up to each partner to bring Starbucks’ values to life in ways beyond what even I can imagine, such as partnering with Heifer International, and in the summer of 2009 I received several e-mails that similarly touched me for different reasons.

One from Suzy Wolford, a district manager in California, demonstrated how our partners were actively integrating our values into running their stores.

Howard,

Yesterday we held (RED) Friday in our stores, an idea we got from our neighbors to the south. Our whole bean sales were not where we
wanted them to be and we thought this would be a fun way to engage the partners, boost our sales and donate to a very worthwhile cause. We allowed our partners to wear red: red t-shirts, red aprons AND decorate their stores in red. The focus for the day was to sell anything from the (RED) platform but primarily (RED) whole bean.

The store managers loved the idea and decorated their stores with red balloons, red streamers, red tablecloths, even red carpet runners for the customers as they entered! (RED) facts were posted throughout the stores. Partners engaged each customer in conversations around (RED) whole bean and (PRODUCT) RED in general. There was an energy and electricity in the stores that I have not felt in my six years with Starbucks. Many customers lingered longer than usual just to soak up the atmosphere. The engagement, passion and energy was AMAZING and inspiring.

What was the result? The stores sold 1,666 lbs. of whole bean coffee in ONE DAY! I honestly could not be more proud to be a Starbucks partner than I am at this moment. (Quite frankly I was speechless this morning when I saw the results.) The pride and passion each of our store partners and customers demonstrated yesterday was inspiring and you can be assured that the Spirit of Starbucks is alive and well in San Diego!!

This and other stories brought on the same feelings of accomplishment that I experienced as our stock price and financial performance improved. They demonstrated to me that Starbucks, despite being in the fight of its life, had not lost its conscience or its soul as we worked to reestablish our financial health. Achieving this balance had long been my definition of success.

Sitting in the familiar New York City offices of Kekst and Company—where almost two years earlier, I'd talked about Starbucks’ downfall—I waited to begin what I felt would be the most important earnings announcement the company had made since going public.

Starbucks’ profits were growing again.

Our performance in the third quarter of fiscal 2009 had defied everyone's expectations, marking our first earnings growth since the first quarter of 2008. The company earned $152 million, compared to losing almost $7 million a year earlier. In terms of earnings per share, we posted a 20-cent profit, up significantly from the penny loss we had reported the prior year. Wall Street had not seen the spike coming, and while we would not say so on the call, Starbucks’ performance had beaten analysts’ consensus forecast by five cents.

As the story of our transformation continued to unfold, this quarter was a definitive sign that it was gaining more traction. Our work, of course, would never end, but the company had turned a corner and the news would surprise our critics, please investors, and be a psychological turning point for many of our partners who were working so hard.

Personally, for the first time in a long time, I felt as if we were winning. Not that we had won, because there is never a finish line, but that despite the odds, the brand and our partners were prevailing.

Publicly, however, I needed to balance my enthusiasm and pride with caution.

The earnings call began at 5 p.m. sharp eastern time.

Over the past 16 months, Starbucks has faced both the headwinds of the global economy, just as all businesses have, and our own unique set of challenges. Today, I am pleased to report results for the third quarter that point to positive momentum from the comprehensive set of actions we've taken to transform the business.

Now at the outset, let me just say that a lot of hard work still lies ahead. One quarter does not make a trend, but I speak with you today with a sense of confidence based on results, results that give us tangible evidence that our transformation initiatives are beginning to be reflected in our financial and operating performance.

Overall, sales were still down from a year earlier, to $2.4 billion from $2.6 billion, but comp declines had been steadily improving since December 2008, when they hit a low of negative 11. In short, we were trending back toward positive comp territory. Most importantly, our fixed costs had drastically decreased—we were spending less money to operate the business, especially in the United States—which meant
that in the months to come, as the company's sales continued their incremental rise due to a collection of consumer-facing initiatives, bottom-line earnings would continue to grow.

In the United States, the business unit we had had to fix first and foremost, comps across the country were improving month by month, and our operating margin, now at 13.4 percent, had jumped from 8.8 percent the previous year due to the permanent operational improvements. As for the competition that people had predicted would fuel our demise, it was having the opposite effect.

As you know, extraordinary advertising dollars have been spent by fast-food companies trying to attract coffee consumers. Many commentators and industry watchers have been concerned that this marketing spend would have a negative impact on Starbucks.

To the contrary, it appears that the various marketing campaigns and all the media coverage about coffee has created unprecedented awareness for the coffee category overall and has actually had a positive result on Starbucks’ business.

It helped that Starbucks had stopped playing defense. In May 2009, we had launched our own multichannel marketing campaign with BBDO—full-page newspaper ads, billboards, and an exclusive deal with CNBC's
Morning Joe
news program. Combined with the ongoing dialogue we were having with three million fans on Facebook—which made Starbucks a top brand on the social networking site—the company was driving brand awareness, loyalty, and traffic, finally telling our story directly to consumers.

My presentation on the conference call was much more than a quarterly review, it was an 18-month synopsis of the choices and initiatives that had, collectively, brought us to this moment. Dramatic cost reductions and process improvements. Better beverages due to espresso training, the Mastrena, Pike Place Roast, Clover, and, soon, VIA. Value offerings and loyalty programs. Improved customer service. Tastier, healthier food. Strategic social networking. Spontaneous marketing events. Traditional advertising. Lean thinking and fresh, relevant store designs.

I also attributed our financial performance to actions whose benefits were hard, if not impossible, to quantify—activities or intangibles that Wall Street and cynics easily discounted but that I believed were
intrinsic to the reason Starbucks had been able to do so much heavy lifting over the past year and a half: the Transformation Agenda. Immersive creative retreats. The new mission statement. Open forums and memos. New Orleans. Shared Planet initiatives. And, most critical, the care, talent, and commitment that tens of thousands of store managers and baristas had brought to their work and to their customers every single day to create the Starbucks Experience.

Just as no one thing had led to the company's spiral, no one thing was leading to its resurgence. Even failures such as Sorbetto had taught us, had taught me, valuable lessons that would aid us going forward. My leadership continued to evolve, and perhaps more than ever in my career, I was effectively balancing entrepreneurial vision with patience of execution, paying the same degree of attention to the back end of the business that I was hardwired to pay to the front end. By no means was I doing it alone: Starbucks was also on the verge of having the strongest leadership team in its history.

This quarter's performance was momentous not in and of itself, but in what it suggested for Starbucks’ future: that we had a future.

Before handing the call to Troy, I concluded my comments:

I am really pleased to report the transformation of Starbucks Coffee Company is well under way. The Transformation Agenda we laid out 16 months ago has helped us focus on the most important success factors for our company, while also enabling us to continue nurturing and building our brand. Yet as I told our board of directors last week, while we are quite pleased with our performance and results this quarter and encouraged by the improving store traffic and average ticket trends we are seeing, we know we have more work to do to build on recent momentum and accelerate our progress. While we remain cautious about the global economic recovery, our plan is built to ensure that Starbucks is well positioned to benefit as economies improve. In the meantime, we will remain laser-focused on what Starbucks Coffee Company is and always has been about—coffee excellence, our customers, our partners, our values, and now an even greater rigor around operational improvement.

In the question-and-answer portion of the call, the analysts’ questions were predictably diligent as they tried to interpret the implications of line items in our quarterly release. While I by no means expected
Wall Street to enthusiastically praise the company for its progress to date, this call was the first in what seemed like years in which I heard the word “congratulations” from several members of the financial community.

Analyst notes put out after the call were tempered. They were “reassured” by our sales and “impressed” by our stabilization of the business, acknowledging that our ability to manage against competitive and economic pressures was “better than expected.” Overall, the Street gave Starbucks credit for improved earnings, but remained cautious about our future growth.

Investors, as measured by the stock price, cheered. By the end of the week, on Friday, July 24, our share price closed just above $17, a jump of 17 percent from the price prior to the earnings announcement.

A shadow over the day, however, was the still-stinging pain of layoffs and store closures that we'd incurred along the journey, undoubtedly the lowest points in Starbucks’ history. Our current partners’ sacrifices and contributions had been great, and I wanted to acknowledge them with more than just words of thanks. On the Monday after earnings, the company announced a decision that I considered a personal victory.