Pour Your Heart Into It (33 page)

While we all agonized, Orin’s calm manner and training in financial markets helped maintain our equilibrium. “It’s futile to try to outguess the market,” he advised. “Let’s look at it this way. Assume there are two equally likely risks: On the one hand, the coffee price might go higher; on the other, it might go lower. Which is a more acceptable risk?” We debated and finally agreed that it would be better to go long, buying extra inventory at current prices. If the price were to fall, Orin reasoned, we’d be stuck with high-priced contracts, but we could manage through it. If it were to rise to $4, we would definitely fail to meet our financial expectations. So we insured ourselves against a further increase. We also examined the option of hedging our long position against a price decrease, but the cost was prohibitive.

As it happened, we purchased that batch of Colombian coffee at what turned out to be nearly the peak. That summer we also had to buy other types of coffee, in smaller quantities, to fill in specific inventories that were low. It took two years to work through all the high-priced coffee in our warehouse.

After July, green coffee prices came down. What we hadn’t understood at the time was the degree to which speculative trading had driven up prices. When the speculators dropped out of the market, the price retracted quickly relative to how it had behaved in earlier years. Within a few months, we saw a price more reflective of supply and demand, close to $1.10 by year’s end.

Because we bought coffee in July 1995, we were left with a high-priced inventory that lasted so long that we had to raise prices slightly again the following year. That decision was hard to explain to our customers, who didn’t realize we had protected them against the full impact of the increase after the frosts. But given what we knew, we made our decision the right way.

Despite the burden we had taken on, there was never any finger-pointing or attempts to place the blame for the ill-timed purchase. Given the tremendous fear and confusion and concerns that were affecting us all, it was important that we keep our balance through absolute harmony and trust in one another.

To me, what’s even more remarkable about our decisions during those tense months of June and July is that we never once wavered in our dedication to providing the highest quality coffee. The easiest thing for us to have done, without question, would have been to tell Dave Olsen and Mary Williams, our coffee buyers, “Okay, the time has come. We want you to start buying lower-quality coffee. We have to keep costs under control and protect our profit margins.” That conversation never took place; no one even considered it as an alternative. We could also have tried the tactic other companies seemed to be using: blending high-grade coffee with cheaper beans and raising the price anyway. Many customers would not have noticed the difference. We would have saved a ton of money, but we would have had a different kind of crisis on our hands.

. . .
AND
L
ONG
-T
ERM
B
ENEFITS

Once prices started to fall, the immediate crisis was over. But a messy aftermath now awaited us. We did not charge the customer for the full financial burden, so how could we meet our earnings targets?

Orin came up with a game plan, insisting we could find the answer in our backroom. We could make up for the increased green-coffee cost by becoming more efficient and taking advantage of economies of scale. He called it the “profit improvement plan.”

I was skeptical at first. Starbucks had never before turned to the backroom for cost savings and efficiencies. When you’re growing at 50 percent a year, you can’t cut back on the support side. You need the flexibility of those systems. Many of our hardest-working, most committed partners were working in less visible jobs in accounting, legal, finance and planning, production, and management information systems. They were already feeling the strains of rapid growth; it seemed unfair to ask them to do more with less. But we had no alternative.

Putting his plan into action is where Orin really began to demonstrate his leadership skills. He hired an expert to direct the effort, formed committees, and began holding regular meetings with every department. He transformed the crisis into an opportunity to begin to manage the company in a more systematic, professional way. We discovered that there were a lot of synergies we weren’t taking advantage of, chances to renegotiate contracts, to lower other costs, to plan better, to work smarter, to use our resources more wisely. We probably would have gotten around to making these improvements sooner or later, but this emergency forced us to recognize, earlier than we might have, the need for a tighter ship.

We knew that many of the savings would have to come from our warehouses and roasting plants. Ted Garcia, who joined us from Pillsbury to take over supply-chain operations in April 1995, had already begun to raise our roasting, packaging, and distribution operations to a world-class level. He led an effort to install state-ofthe-art, computer-integrated manufacturing systems that improved our efficiency and lowered cost-per-pound by 8 to 10 percent a year for three years. At the same time, our manufacturing was becoming more complex, as we began to need many new package sizes as well as more ground coffee for United Airlines and other large customers. Ted’s group also cut transportation costs and paper-cup costs significantly by renegotiating contracts. He set a five-year goal to continue lowering costs through the year 2000, without compromising quality.

Although not anywhere near as visible or dramatic as jumping into the ice cream or music business, what Orin and his team accomplished that year was firmly in Starbucks’ tradition of defying the odds.

The high-priced coffee inventories didn’t start hitting the bottom line until a year later, in the fall of 1995. Quarter after quarter, Wall Street analysts doubted that we’d make our numbers. Some quarters it was touch and go. But by the end of fiscal 1996, we had sold almost all of the high-priced coffee, and earnings for fiscal 1996 hit the mark. We signed on some large-volume customers during the year, but the main reason was the slow, methodical process of trimming costs, rooting out inefficiencies, and improving processes.

I’ve always been struck by the irony that a business is more likely to attract attention when it loses money, or lays people off, or fails spectacularly. Pundits can wisely analyze what went wrong and what should have been done. But pundits are not as proficient at analyzing success. What does it take to achieve 50 percent annual growth in both sales and profits for six years in a row? What enabled Starbucks to do that was a combination of discipline and innovation, process and creativity, caution and boldness that few companies have mastered.

When Starbucks made its numbers after two years of working through a crisis of such magnitude, I was elated. So was Orin. But no one asked us: How on earth did you accomplish that?

It may sound trite, but I believe that managing through the coffee-price crisis made Starbucks a better company. It made us aware of our vulnerabilities and it forced us to develop skills we hadn’t possessed.

Starbucks reached maturity that summer. Before 1994, everything we touched turned to gold. Every time we tried something daring, it succeeded. When this crisis hit us, without warning, it forged our managers, a group that included many new senior executives recruited from other companies, into a well-bonded team. It demonstrated Orin’s courage under fire and forced me to learn a new dimension of management.

Great companies need both a visionary leader and a skilled executive: one for the top line, the other for the bottom line. As
Fortune
’s Ronald Henkoff wrote in November 1996, “The businesses that thrive over the long haul are likely to be those that understand that cost cutting and revenue growing aren’t mutually exclusive. Eternal vigilance to both the top and bottom lines is the new ticket to prosperity.”

It humbled me to realize how vulnerable we could be to outside forces that could instantly and dramatically change the course of the company. It taught me that we had to be in a constant state of preparation and vigilance. You can’t manage just for the known; you have to manage for the unknown as well. Starbucks today is more prepared for the unknown crisis around the corner because it faced this one down.

When coffee prices again doubled in early 1997, we had a clearer idea of what it takes to weather such a storm. That time we knew how to calculate the costs, and we understood the need to take action while the news events were still fresh in the minds of our customers. Again, our increase covered only the incremental costs, not the replacement costs, of the higher-priced coffee.

The more profound lesson of the 1994 crisis hit me months after the event. What if we had opted for the easy solution and cut corners on our coffee?

We could save millions of dollars every year if we bought even slightly cheaper coffee. Starbucks spends more money per pound of coffee than almost any company in the world, even though probably fewer than 10 percent of our customers can tell the difference.

If you can raise profits by shaving costs on your main product and 90 percent of your customers wouldn’t even notice, why not just do it?

Because
we
can tell the difference. Inside Starbucks, we know what great coffee tastes like. Authenticity is what we stand for. It’s part of who we are. If we compromise who we are to achieve higher profits, what have we achieved? Eventually all our customers would figure out that we had sacrificed our quality, and they would no longer have a reason to walk that extra block for Starbucks.

But long before that happened, all of us inside Starbucks would have realized it, too. What, then, would keep us coming into work every day? Higher profits, at the cost of poorer quality? The best people would leave. Morale would fall. The mistake would eventually catch up with us. And the chase would be over.

Every business has a memory. The memory of sacrificing quality for profit would have been fixed in the minds of Starbucks people forever. It would have been an impossible price to pay.

CHAPTER 18
The Best Way to Build a Brand Is One Person At a Time

What comes from the heart,
goes to the heart.

—S
AMUEL
T
AYLOR
C
OLERIDGE,
TABLE
T
ALK

In early 1988, during Starbucks’ first winter in Chicago, I remember standing in an elevator and seeing customers carrying our cups, the distinctive green logo hidden behind their fingers. The brand name Starbucks meant nothing to them.

Six years later, when we opened our first store in Manhattan, a line formed immediately for espresso drinks; by 8:30
A.M.
, it snaked out the door. Why did so many New Yorkers choose to come to Starbucks that day?

Across North America, as we entered city after city, we attracted near-capacity crowds. In Atlanta, in Houston, in Toronto—each time we entered a new region, no matter how many miles from the nearest Starbucks location, people lined up on Day One. It wouldn’t have made sense to advertise in our new markets; we couldn’t have handled any more traffic than we got.

Our brand had achieved visibility and favor across the United States and Canada, but would it appeal in Japan? In August 1996, I flew halfway around the world to find out. Starbucks International was about to open its first store in Tokyo, on a visible corner location in the high-fashion Ginza District. Once again, we spent no money on advertising. What could the name
Starbucks
possibly mean to the Japanese? Tokyo has a coffee shop on almost every corner, not to mention a competitor with more than 500 stores. The odds against success were formidable.

On opening day, I was wilting in the 95-degree weather and almost 100 percent humidity. I had no idea Tokyo could be so hot. Yet from the minute the store opened until it closed, customers lined up forty to fifty people deep for a taste of Starbucks coffee. Men in dark business suits, women with elegant silk scarves, students with backpacks, all stood patiently in the unforgiving heat. Some of them ordered a blended Frappuccino, just a year after we invented the drink. We had been warned that, culturally, the Japanese refuse to carry to-go food or beverages on the street. Yet many customers were walking out the door proudly carrying their Starbucks cups—with the logo showing.

I stood there watching with Howard Behar, architect of our international expansion. He turned to me with tears in his eyes. The Starbucks brand had the same power in Tokyo that it had in New York and Seattle. It had taken on a life of its own.

S
TRONG
B
RANDS
C
REATE A