A great interview with the founder of Starbucks...
<<Howard Schultz, founder and chairman of Starbucks Corp. (www.starbucks.com), tells of a startling moment in a one-on-one basketball game with his ninth-grader son. Schultz is perhaps six feet two inches tall and has played recreational basketball for years, but his son already is a strapping six feet four inches, weighs 190 pounds, and has quite a bit more time to work on his game than his father, so the two suspected that the balance of power might be shifting. Sure enough, the son started pulling ahead. "So," Schultz says, "I decided I had to play dirty." After a couple of minutes, the son grabbed the ball, and said, "Dad, if you don’t stop that, I’m going to have to kick your ass." With a broad grin, Schultz says he and his son stared at each other in surprise and realized that their relationship had changed forever.
Schultz, himself, has changed how all of us think about coffee. What was once a commodity, coming in large tin cans of ground beans with a name such as Maxwell House on the side, is now a "venti skim latte" in a Starbucks store full of aromas that evoke an Italian coffee bar. In an interview with Context Editor-in-Chief Paul Carroll, Schultz says plenty more fundamental changes are brewing. He says, in particular, that he thinks customers no longer trust companies the way they once did. As a result, it is far harder to launch a consumer brand or product than ever. He says consumer advertising is nearly worthless.
Schultz also believes technology may change his business. Schultz is far from a techie. He is a moderate user of e-mail; he prefers getting out to talk to his employees and customers in face-to-face meetings. Schultz even gave up carrying a cellphone, because he found it to be intrusive. He could be excused for being leery of technology, given that an e-commerce initiative flopped. Yet Schultz thinks a plan to put high-speed wireless networks in his stores will make them more inviting for customers, give him a way to learn more about their likes and dislikes, and make his logistics more efficient.
Change is never easy. When complimented on looking so fit and asked how he stays in shape, Schultz quickly responds, "Stress," before allowing his basketball and modest eating habits contribute. But Schultz is optimistic—and he tends to be right.
CONTEXT: What has changed for companies that are trying to build a following for their brands?
HOWARD SCHULTZ: The customer is more cynical and more distrusting of corporate America than ever before. That is why I believe building a brand today is more complex. Because people do have more choices, a brand must be a bridge of trust to the consumer.
The last few years of dot-com advertising have really alienated consumers. It is now very difficult to launch a product through consumer advertising, because customers don’t really pay attention as they did in the past, nor do they believe the message.
I look at the money spent on advertising, and it surprises me that people still believe they are getting returns on their investments. Managing a brand is a lifetime of work. Brands are fragile. You have to recognize the success of Starbucks, or any company or brand, is not an entitlement. It has to be earned every day. Consumers have so many choices, not just with coffee, but with every aspect of their lives. As a result, there is mostly parity in the marketplace among products and services competing for consumers’ loyalty.
The ability that we have had at Starbucks to make human contact with our customers, through our people, is one of the reasons we have been so successful.
Still, we have to do everything we possibly can to get our customers to come back. That has everything to do with the experience that they have in our stores. Among other things, we hope that customers recognize how much we respect them and appreciate their business.
CONTEXT: Can you point to some companies that have done an especially bad job of dealing with customers?
SCHULTZ: Too often, companies view customers as transactions, not people.
I’ll tell you a story about something that happened to me a few months ago in Japan, to show how powerful the experience can be when customers are treated right. I was having dinner with our Japanese partners at a high-end sushi restaurant in Tokyo. We learned that the 70-year-old man preparing the fish behind the counter was the proprietor of the restaurant. He did it with such care and sensitivity and fastidiousness. After we finished our dinner, I wanted to thank him, but we couldn’t find him. It turned out that he was waiting out on the street on a cold night, holding the door to my car open. He didn’t just finish the meal by bringing us a cup of coffee, as most places do. He finished the meal by putting me in my car and thanking me for coming to his restaurant.
The next morning I did a live interview on the equivalent of Tokyo’s Good Morning America or Today Show. The first thing I did was say I didn’t want to talk about Starbucks; I wanted to tell the story of what happened to me at that restaurant. Businesses live or die based on word of mouth, and I just wanted to say the name of that restaurant.
That is what happens when there is an emotional connection—when someone says he appreciates you as a customer and a human being.
That is what we try to do every day at Starbucks. Do we do it with everyone? No. But that is the intent. We try to enhance people’s days and make them feel good about being at Starbucks. That, for me, captures what business should be about.
CONTEXT: How do you instill that sense of caring in your people?
SCHULTZ: Every chief executive says people are the most important asset. We live that idea every day by giving people a stake in the outcome and treating them with respect and dignity. The success of Starbucks would not be that significant if we did not provide equity in the form of stock options and offer comprehensive health care to both our full-time and our part-time partners [employees]. We started doing that more than 10 years ago, and it has resulted in a very low attrition rate, the lowest in our industry. It also changed the landscape forever in terms of improving the values and culture of our company.
To build trust and confidence among our people, it is also important that they recognize that this is a company with a conscience. We encourage people to be involved in their local communities. We also do things such as pay more than the asking price for coffee beans. That way we can get the money back into the hands of the people who grow it, often in poor countries. We don’t do these things when the cameras are on. We do them all the time.
CONTEXT: For an interview last year, David Pottruck, the co-chief executive of the brokerage house Charles Schwab & Co. (www.schwab.com), said he relied on the power of stories to build the culture there. Do you use stories, too?
SCHULTZ: Absolutely. Just two or three days ago, a customer left her wallet with $500 in it on a counter in one of our stores. She couldn’t fathom where she lost it until one of our employees tracked her down. The contents of the wallet were untouched.
This year, one of our store managers in California won $80 million in the California state lottery. She came to work the next day at 4 a.m. And she shared the lottery with all the people in her store.
In Southern California, a manager took it upon herself to invite hearing-impaired people into her store. She hired a hearing-impaired person to make sure they could place their orders and to generally make them feel welcome. She started building a business in this small segment of the population, because they didn’t feel respected anywhere else.
We don’t deliberately spread these sorts of stories. We don’t think it works to do show and tell. But stories spread organically.
CONTEXT: Is there any sort of mechanism for helping store managers learn what worked and what didn’t work elsewhere?
SCHULTZ: There is a tremendous amount of sharing in the company. The whole business and culture have been based on trying to leave your ego at the door and do something great for the company and one another. Any good idea gets tremendous visibility.
We have had for 10 years what we call open forums. Other senior executives and I go out to the regions and stand in front of our partners and talk about the goals for the company. Most importantly, we give people an open mike. We give our people, with no retribution whatsoever, the chance to speak their minds about any issue, good or bad.
What has been imprinted in this culture is very open and honest communication. By now, it happens naturally.
CONTEXT: Where do the good ideas come from?
SCHULTZ: The idea for our blended coffee drink, Frappuccino, came from the field. That turned out to be one of the most significant product launches we have had. But ideas come from everywhere. There is no shortage of creative people at Starbucks.
For us, the issue is how to figure out which ones we should go after. We are at a size right now where we can do only a few things really well a year. We have to pick ones that can create a big swing in revenue and profit and that will delight customers.
I think great companies need to achieve the fragile balance of reaching their fiscal goals and enhancing shareholder value as well as creating value for employees and demonstrating their commitment to the communities they serve.
CONTEXT: There was a time when you wouldn’t offer low-fat or nonfat milk in your coffee drinks. You changed your mind on that, but you are holding firm on your decision not to sell flavored coffees. How do you decide whether ideas fit with your brand?
SCHULTZ: I think there is an intuitive sense. Still, the most significant decisions are reached by consensus—after heated, creative debate—among the management team.
The nonfat milk issue is a good example. I didn’t think it was a good idea way back because I thought it would dilute the flavor of the coffee. But many of our customers were insistent. We tested nonfat milk, and I was wrong.
I was wrong about Frappuccino, too. I thought it was too soft a drink, but I was outnumbered. As it turns out, Frappuccino really rounded out our products and brought in a younger customer. It now brings in well over $100 million in annual revenue.
Sometimes, you have to let go. You have to balance out the history and the tradition of the company with what is important for the future.
CONTEXT: How do you deal with different customs and cultures? How much do you have to adapt for a Starbucks in Italy compared with a Starbucks in Japan?
SCHULTZ: The good news is that every Starbucks around the world, wherever it might be, is the mirror image of our first store in Seattle. We have been very fortunate that the experience we have created domestically is as relevant overseas as it is here.
It goes back to the human issue. It turns out that we all want the same thing. We want a respite in our lives. We want to connect with our friends and family in a setting that is comfortable. Most people around the world drink at least two cups of coffee a day, so Starbucks has become an oasis. Internally, we call it "the third place," between home and the office.
Before we opened in Tokyo, blue-chip consulting firms told us it would be a disaster if we didn’t allow smoking. We also were warned that no one in Japan would ever walk in the street with a cup of Starbucks because if you hold food in the street you lose face. Now, you can’t walk through the streets in Tokyo and not see Starbucks cups all over the place. The no-smoking policy brought all the young women into the stores—and you know who followed.
CONTEXT: What role, if any, does the Internet play in your thinking?
SCHULTZ: As you know, we are putting together a unique and comprehensive alliance to create a wireless network for our stores. We have been working on this for quite some time with Microsoft Corp. (www.microsoft.com) and Compaq Computer Corp. (www.compaq.com). The network, which will be based on 802.11b technology, could be very significant for us and for our customers.
If you go into a Starbucks today, you will see people on their cellphones, personal digital assistants, and laptop computers. They want to be connected. So we are going to give them high-speed, wireless access to the Internet. The capability will allow customers to access the network from anywhere within a Starbucks store. The wireless capability will be a powerful tool to enhance the Starbucks experience for 15 million customers a week. We think that the network will drive a lot of traffic into our stores. We also will be able to create merchandising opportunities both on the Web and perhaps in our stores.
CONTEXT: What are some of those merchandising opportunities?
SCHULTZ: One interesting idea is to potentially have Compaq’s products available in our stores. We could make unique features available via the Compaq iPAQ, such as streaming video. ["Streaming" means that the video is downloaded fast enough to be played in real time, rather than having to be downloaded ahead of time.] Starbucks has a big music business. So being able to download music over the network in Starbucks stores would be an interesting opportunity.
We are all pretty excited. I think this venture speaks to the power of partnerships and really allows us to do something that hasn’t been done before. We have the traffic and the kind of customer who is going to be very interested in wireless Internet access.
CONTEXT: And 802.11b networks are so cheap that I would bet it costs you just $1,000 to $2,000 a store. Is that a fair estimate?
SCHULTZ: This information has not been disclosed. The other companies involved in the partnership are installing the network. We are providing the opportunity.
CONTEXT: One issue you have is that, while a lot of people go to your stores, you don’t know who they are or how often they come. I assume you can start to collect that sort of information via these networks.
SCHULTZ: Sure. That is one of the intrinsic benefits that is of real value to us. Any consumer-based business wants to understand who its customers are, what they buy, and what they might want. We are no different.
This holiday season we will be introducing the Starbucks Card, a "stored value" card, which will offer customers a fast, convenient way to pay for Starbucks products. In addition, if customers want to register their cards, they can receive additional benefits. This program will enable us to better understand who our customers are, what they have done, and what they want from us. We will create a dialogue with our customers that we haven’t had in the past. That is of incredible value.
CONTEXT: How about internally: Do you see wireless helping you to manage the logistics of your business, perhaps by tracking shipments or communicating with drivers?
SCHULTZ: Installing these high-speed networks in our stores will immensely improve our store operations. In addition, managing the supply chain has become a much more critical discipline within Starbucks than it was even five years ago. First, because of the increasing number of stores. Second, because of the international development of our business. We have to improve how we manage the complexity of what we do every day—for instance, the shipments to our stores, which are generally in congested areas.
CONTEXT: You, like many folks, tried a lot of things with the Internet early on that didn’t turn out quite so well. What have you learned from those experiences?
SCHULTZ: I take personal responsibility for all of that.
Our investments in the Internet came at a time when we significantly underestimated the size of Starbucks’s opportunity for expansion. I don’t think we ever dreamed that the market for our stores was as large as it is. We are at 4,200 stores right now, and we believe that opening more than 20,000 stores is well within our reach. Two years ago, I don’t think we knew the market was that large.
When we started going into secondary and tertiary markets, we saw that the economics were really the same as in our primary markets, so that expanded the opportunity. But, prior to having that visibility, we thought we needed another leg to the stool. So we tried to create a lifestyle brand on the Web.
With hindsight, we wouldn’t have made any of those investments. But it was a great lesson, and I would say that great companies have to have the courage to keep pushing for self-renewal and reinvention.
Had we not gone into the Web as deeply as we did, I don’t know if we would have understood how large the opportunity was going to be with wireless. I don’t think we would have had the relationships that we developed, which are significant in what we are trying to do now.
This may sound strange, but sometimes you have to celebrate not only your successes, but also your failures.>>
(from the August/September 2001 issue of Context Magazine)
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Best Regards,
Scott |
