Onward (9 page)

I still remember what it was like when we started building the company. Every day we were fighting for survival, doing whatever we had to do. We rolled up our sleeves and left our egos at the door. Every small gesture mattered, and so much of what Starbucks achieved was because of partners and the culture they fostered.

We believed that celebrating coffee and creating connections mattered. And we believed we were capable of doing it, and that it was worth doing, on a grand scale. Confidence propelled us, and we went after audacious goals with enthusiasm. We did not take our success for granted.

Until some of us did.

If not checked, success has a way of covering up small failures, and when many of us at Starbucks became swept up in the company's success, it had unintended effects. We ignored, or maybe we just failed to notice, shortcomings.

We were so intent upon building more stores fast to meet each quarter's projected sales growth that, too often, we picked bad locations or didn't adequately train newly hired baristas. Sometimes we transferred a good store manager to oversee a new store, but filled the old post by promoting a barista before he or she was properly trained. This was the kind of operational rigor we let slip and then didn't attend to the subtle but negative cumulative effects, such as declining beverage quality, because every metric we were looking at said everything was fine. For years we were able to open new locations while sales continued to increase at the stores we already had.

As the years passed, enthusiasm morphed into a sense of entitlement, at least from my perspective. Confidence became arrogance and, at some point, confusion as some of our people stepped back and began to scratch their heads, wondering what Starbucks stood for. Music? Movies? Comps? And while our people worked hard to meet our goals, it was not always with the joy or innovation or pride that had once defined us.

I can recall popping in on meetings in mid-2007, sitting in the back of the room, a fly on the wall, and being struck by the lack of decisiveness and creativity around the table. It was incredibly tough for me not to jump in; I did not want to undermine Jim, but it also saddened me because I knew we were better than that. Back in the early days, just before our initial public stock offering in 1992, Orin, Howard Behar—a former leader at Starbucks who had been instrumental in helping to build the company—and I liked to say that a partner's job at Starbucks was to “deliver on the unexpected” for customers. Now, many partners’ energies seemed to be focused on trying to deliver the expected, mostly for Wall Street.

This is why, I think, so many companies fail. Not because of challenges in the marketplace, but because of challenges on the inside.

That September in Boston, seven months after the memo leaked, I shared with the board what I was hearing from partners as well as what I continued to observe. In a private executive session the board and I openly discussed the concerns we had about what was going on in the business. For the first time I indicated that, if things got worse, if things continued to deteriorate, I would be willing to come back as chief executive officer. I also confided in Orin. When I told Orin what I was considering, he reassured me that returning as ceo was the right decision. I knew that if he thought otherwise, he would have said so.

It had never been my intention to return as ceo. But I have always said that people are responsible for what they see and hear. I could not be a bystander as Starbucks slipped toward mediocrity, especially since I had played a role in and bore some of the responsibility for our troubles.

Fiscal 2007 was not a terrible year for the company. But our internal problems, the toughening economic environment, and the rise of new competitors all hinted at a rougher time ahead—for our bottom line and our brand.

On November 15, Starbucks reported annual earnings for the 12-month period that had ended September 30. Starbucks had $9.4 billion in revenue, up 21 percent, and almost $700 million in net earnings, also an increase from the previous year. We hit the earnings per share target that we had laid out for the Street, and for the 16
^th
straight year we had 5 percent or better comps. Under any scenario that would have been fantastic, especially in the tenuous economic environment. But Starbucks had such a long history of high performance that the bits of increasingly disappointing news we delivered that quarter—slowing store traffic, the cannibalization of old stores’ customers by nearby new stores, and a contracting profit margin—worried Wall Street and drew more scrutiny.

The day we announced earnings, a
Wall Street Journal
headline rang out: “At Starbucks, Too Many, Too Quick?” “The growth in Starbucks same-store sales revenue and number of transactions in the U.S. has slowed,” it read. The “‘underlying fear is that Starbucks is
finally seeing the signs of saturation in the US,’ says John Glass, an analyst. . . . Some analysts say the chain has fallen behind on creating enticing new beverages and its breakfast sandwiches have created little excitement.”

Meanwhile, every morning, just as I'd done almost every day for 20 years, I would wake up and, after making my coffee, go to my computer to look at the company's daily same-store sales data, the year-over-year changes in sales at stores open for at least 12 months. For most of my career, revenues, transactions, and comps had been nothing less than validations of Starbucks’ health and momentum. But as November 2007 rolled on, I continued to shake my head at the screen, disappointed, as the comps dropped to levels we had not seen in years.

Eventually the board felt, and I agreed, that a change was really needed. Something had been lost at Starbucks, an ability to effectively execute at all levels: in our support center, at regional offices, and in the stores. The patient needed more than a face-lift. But the patient did not need a new heart. Starbucks was not that far gone. Our coffee beans’ quality had not been compromised. In fact—and this was a frustrating irony—we were sourcing, buying, and roasting the highest-quality coffee in our history. In addition, the heart of our culture—its purpose and mission, our values—was still beating, albeit faintly.

But there were problems. The question was, how were we going to fix them?

Being a ceo during a turnaround situation was not something I had experience doing. My entire career had been about building something that had not existed, and, more often than not, having the wind at the company's back as we executed against our original vision. Now Starbucks needed another vision, and I had to come back with one. I had to come back leading. From day one, my return as ceo would have to resonate with our partners and shareholders as more than just a point of inflection. Starbucks had lost its point of view, and I needed to declare one, as well as a clear perspective about how we were going to change.

But whom could I talk to? Until we formally announced the change in leadership to the company and shareholders after the holiday season, it had to remain confidential. At the same time, I had to plan. I needed people I could confide in. I needed objectivity and tactical
guidance to ensure we did more than just announce that I was back as ceo, but rather that I was back with confidence and vision.

Myron “Mike” Ullman was—and still is—Starbucks’ lead director and the chairman and chief executive officer of JCPenney. Mike is not only one of the most respected retail executives in America, having also led R.H. Macy and Company and luxury goods manufacturer LVMH Moët Hennessy–Louis Vuitton, but also one of the kindest people I have ever met. This rare combination of qualities serves Starbucks well. During this period, Mike proved a supportive confidant and counsel for whom I was grateful. He knew I could not speak to people inside Starbucks about the upcoming transition, and he strongly recommended I work with an outside resource, a firm in New York City that he had worked with for many years.

In Manhattan I walked alone into a Midtown office building on Madison Avenue and took the elevator to the 19
^th
floor, where Kekst and Company's offices were located. I sat in a conference room across from a tall, thin man with glasses whom I had never met. His name was Jim Fingeroth. When it comes to surrounding myself with people who can add value to the company, I look for experience and skill as well as people with like-minded values. I've always had a sixth sense about those who will be a good character fit, and as I began to explain the culture and values of Starbucks to Jim, I could see that this was someone who was going to understand and embrace them, as opposed to fighting them as someone else might. If Jim could not help me make changes in a manner compatible with the company's culture, and do so with a degree of sensitivity and humanity, then we would fracture our partners’ trust.

I immediately felt comfortable with Jim. He was personable and smart, yet understated. As a principal of Kekst and Company, he had been with the firm for most of its almost 40 years, guiding large public companies and financial firms through crises, mergers, and abrupt shifts in leadership. Jim and his colleagues were often brought in by outside advisors, and they worked quietly with a board of directors or senior management, usually behind the scenes. During our conversation, he did not reveal any clients’ confidences. I noted his discretion. There was a reason I had never heard of the firm. Being under-the-radar is part of its value.

Jim also had worked with and studied entrepreneurs, and he understood that the odds were against me. It is very unusual for a founder
to be able to manage his or her company through all phases of its evolution, especially in a turnaround situation. He told me he had winced when he read about my leaked memo back in February 2007, and had been following the company's trials in the months since. I appreciated his honesty. At one point in the conversation, Jim introduced me to two of his colleagues, Molly Morse and Jeremy Fielding. I felt that Jim and his team were the right people to help me. Plus, he had been so strongly recommended by Mike that any trepidation I had about confiding in an outsider disappeared. I opened up, and we discussed in some detail the past few years, my mounting frustration, as well as my fears. Jim listened intently and asked important questions.

I had a lot of questions for them, too. What did I need to do in the weeks ahead to hit the ground running come January? How and when should we announce the change in leadership to our senior leaders? How should we announce it publicly and talk about it with shareholders? I knew there would be mixed reactions to my return. Some people would celebrate it, while others would question whether I was the right person for the job. I asked Jim how we could minimize the inevitable disruption and angst, but at the same time let people know that things at Starbucks were going to change. And what was the best way to communicate the many changes I was already thinking about?

One of my biggest concerns was how and when to inform Jim Donald. I dreaded the prospect of telling Jim. He is a good person, and I did not question his love for Starbucks. Upending his life was one of the most unsettling things I would have to do. In the coming weeks, Jim Fingeroth, Molly, and Jeremy would help me tackle these and other issues.

When I returned to Seattle, I shipped the Kekst and Company team a box full of background information about Starbucks. They immersed themselves in our history, watching DVDs of past speeches, reading transcripts of annual meetings, reviewing past memos, annual reports, and press releases. They also read my first book.