Pour Your Heart Into It (45 page)

One of my most gnawing fears is what I call
incrementalization
. What may look right for each specialist’s slice of the business could be a disaster for the company as a whole.

It was eggnog latte that drove the point home to me during that holiday season. That’s a drink that Dave and I had introduced back at Il Giornale in 1986. It has since become a great seasonal favorite for Starbucks customers.

In 1994, someone in the food and beverage group found a great way to save money and time. Rather than going to all the trouble of opening carton after carton of eggnog to make these drinks, went the reasoning, why not use a premixed, eggnog-flavored syrup? It could be dispensed by pressing a button on a lever, holding the caffè latte underneath. It was simple and elegant. We tested the new version of the drink at our Portland stores during the 1994 holiday season, and it was well-received. But when we went to roll it out nationally for Christmas 1995, somehow the syrup did not taste the same, and no one caught the error. Because of the size and scale of the company, I was never informed of the change.

So in the middle of this lousy Christmas season, I was reading customer comment cards, as I always do, and I began to notice many of them making the same complaint: “Your eggnog tastes bad” and “What happened to the fresh eggnog?”

I strode into a food and beverage meeting and said: “What is going on with the eggnog latte?” The members of the department looked at one another sheepishly. On paper, the syrup made a lot of sense, and Portland customers hadn’t complained during the test. But when eggnog latte sales started falling sharply, they realized what a blunder it was. Here was an example of the business being sliced so narrow that no one was paying attention to the overall effect.

We learned our lesson. The following Christmas, we brought back the real dairy version of eggnog latte.

A good chief executive keeps the broader picture in mind when everyone else is focusing on the details. But management also should strongly urge department heads to consult one another and examine the wider implications of policy changes. A decision to cut costs or raise efficiency will add value only if it is consistent with the overall long-term goals the company is trying to achieve.

G
ETTING ABOVE THE
N
OISE

IN AN
O
VER-RETAILED
N
ATION

Whatever mistakes we may have made internally, the major reason for our weak Christmas sales was external. As December went on, we began to hear alarming reports from other retailers. Gymboree, a great company, had negative 19 percent growth at comparable stores for the month of December. Computer City’s comps were off 8 percent. Mervyn’s fell 1.4 percent. For all U.S. retailers, same-store sales for December fell 4.1 percent, according to Telecheck Services.

By comparison, our troubles looked minor league. We ended the month with positive same-store sales growth of 1 percent.

Clearly the problem was bigger than Starbucks.

The United States has become an over-retailed nation in which too many stores are chasing too few customer dollars. Consumers simply face too many choices in the marketplace to be able to wisely decide how to spend their disposable income.

By the time Starbucks entered the national arena in the early 1990s, over-retailing had become a serious problem. Every year we find it harder to get our message out. We don’t have a huge national advertising budget as large companies do. People are busier and less inclined to shop around and try out new places.

Yet over-retailing creates tremendous opportunity for Starbucks. Unlike packaged food brands, we are able to connect with people, one at a time, through our stores. And because we strive to consistently deliver a quality product and a quality experience, when other retailers are falling into mediocrity, we stand out.

But surprising and delighting our customers gets harder every year. We’ve led our customers to expect a high standard of service. Like every good retailer, we continually have to differentiate ourselves by offering products or experiences they can’t get elsewhere. We have to work to provide more depth, more variety and richness in store design. Rather than driving down the highway exactly between the dotted lines, we may have to bounce off the guard rails a few times.

Customers are always looking for something fresh and interesting, especially at Christmastime. That demand necessitates continuous self-renewal and reinvention from retailers across America, and for us specifically. We have to keep on trying to create new categories and new products that will capture customers’ imaginations.

Every retailer dreams of a blockbuster product that will fly off the shelves. That’s what the
Blue Note Blend
CD was for us in March 1995, and Frappuccino in the summers of 1995 and 1996. But you can’t expect to develop that kind of a hit every four weeks.

That’s why, even in the face of heart-rending Christmas sales numbers, I kept pushing our R & D and marketing teams to continue their efforts for new product development. We need those farsighted projects to retain customers’ interest and loyalty.

Even though we could identify obvious external trends that explained our disappointing sales, it would have been wrong to just sit back and say, “Everybody’s having a bad year. It’s not our fault.” We have to keep looking for a way to rise above the noise in an over-retailed nation.

T
HE
B
EST
CEO
S
A
RE
B
OTH

F
ARSIGHTED AND
N
EARSIGHTED

In the end, we didn’t figure it out that year. In early January, when we announced our same-store sales numbers, the stock price sank. Later that month, we calculated that we had missed our profit-growth target by only one percentage point, thanks to Orin’s backroom improvements. Starbucks was still very profitable, but earnings were not growing as quickly as we had predicted.

Still, Wall Street analysts were merciless. A few blamed me and my product innovations for distracting the company from its core business. History, one of them said, shows that the biggest danger for retail and restaurant operators is a loss of focus. “When this occurs, any brand equity the company has built up begins to dilute,” he said. “We would prefer to see more attention paid to store-level execution.”

That burned me up. It’s precisely this short-term orientation that annoys many CEOs about Wall Street. A company whose management is not planning for the distant future can never grow beyond the latest faddish concept.

Even inside Starbucks during those months, some people groused that I was putting too much pressure on them, demanding work on longer-term projects when our core businesses needed urgent repair. I heard resentment in some voices. While they were mopping up the post-Christmas mess, I was playing with my new toys: ice cream, bottled Frappuccino, a big new contract with United Airlines.

Was my eye off the ball?

No. My eyes were focused on the long-term future. I was looking around the corner, to see what would hit us next. Procter & Gamble had just bought one of the largest suppliers of whole-bean coffee to the supermarkets, Millstone Coffee of Everett, Washington. Were the majors coming after us? Should we reconsider our early decision not to sell our coffee in supermarkets? What products could we create that would be proprietary, that would give us an unassailable niche in an ever-more competitive marketplace? How could we leverage the Starbucks brand, keeping its elegance and style but reaching more customers? We needed to pursue a long-term vision of building the Starbucks brand by creating new products. To be ready by the year 2000, we had to start experimenting immediately.

With improvements in manufacturing, retail operations, and planning, Starbucks also got better at handling the short-term future. During Christmas 1996 we avoided many of the problems that beset us in the previous year. Once again, the overall retail climate was weak, and weather was bad, especially in the Pacific Northwest. Our same-store sales growth, at 2 percent, was not as good as we would have liked. But our cost containment efforts had worked well, and earnings came in right at Wall Street’s consensus estimate. As managers, we knew what to expect, and the stock market did not overreact.

We did everything we could to ensure strong sales during the holiday season in 1996. We did our homework. We executed according to a well-crafted plan, and, with far more accurate forecasts, packaged almost exactly the right amount of coffee to meet demand. What’s more, I was more sanguine and could put it in context. I didn’t expect a last-minute Christmas miracle, and I could focus on the outlook for the new year. With a new vice president for merchandising, Peter Gibbons, hired from Disney, and a larger staff in Don Valencia’s labs, we had new products in the pipeline for summer.

That second year, we were all calmer. I realized it wouldn’t be the end of the world if we weren’t able to knock the cover off the ball for Christmas. Why? Because we all knew the value that we were creating, over the long term, for the brand and for the company. Christmas sales do not determine the fate of Starbucks.

Wall Street, too, understood, and the stock began to rise in January, reflecting the positive outlook for 1997.

Like the captain of that aircraft carrier, I set my eyes on the horizon and steamed ahead. This time I didn’t even miss the old speedboat.

CHAPTER 24
Lead with Your Heart

Leadership is discovering the company’s
destiny and having the courage to follow it. . . .
Companies that endure have a noble purpose.

—J
OE
J
AWORSKI,
O
RGANIZATIONAL
L
EARNING
C
ENTER,
M
IT

A V
ISION FOR THE
L
ONG
T
ERM

On the bookshelf in my office, I have a small crystal ball. It was given to me by the local chapter of the Young Presidents Organization, as a symbol of their Merlin award.

According to legend, Merlin was born in the future and lived backward in time, moving toward the past. He must have often felt out of step with his contemporaries, filled as he was with unconventional notions of what might be. I’m no sage, but sometimes I think I know how he must have felt. My vision for the future, my aspirations of what kind of company Starbucks should be, are so easily misunderstood by people both inside and outside the company.

A Santa Fe, New Mexico, management consultant, Charles E. Smith, has compared visionary executives to the famous wizard. “Exceptional leaders,” he wrote in 1991, “cultivate the Merlin-like habit of acting in the present moment as ambassadors of a radically different future, in order to imbue their organizations with a breakthrough vision of what it is possible to achieve.”

Back in the early 1980s, and even more so today, I had a pretty clear idea of what Starbucks could become. I knew the look I wanted, the feeling the stores would convey, the pace of growth, and the connection with our people.

Today, when I look ahead, I see a future extending far longer than the twenty-five years Starbucks has lived so far. In annual strategic planning sessions, our senior management team has been refining that vision to make sure it is both audacious and achievable. We’ve been clarifying our values and trying to articulate our long-term goals. Even though many of our executives are relatively new, I’m amazed at how similar our beliefs and goals are.

The company we envision is a great, enduring one, still zealous about its mission of bringing great coffee to everyone everywhere. Its stores will provide a rewarding experience and enrich people’s lives in communities around the world, one cup at a time. But we want our boldness and defiance of conventional wisdom to take it in new directions, too, leveraging the strength of the brand, inventing new products that surprise and delight, selling through many channels of distribution, possibly moving beyond coffee to other items that touch people’s daily lives.

The opportunities are exciting. In most countries, average adult consumption of coffee is two cups a day, yet the quality of that coffee is, for the most part, pretty bad. Starbucks is well on its way to doubling the number of its stores in North America by the year 2000, and I’m convinced that we could eventually have more stores in Asia than we will have in North America. Within a few years, we expect our joint venture with Pepsi, by selling bottled Frappuccino and other products, to produce revenues in excess of $1 billion, a sum larger than Starbucks’ total annual sales today.