The Right Blend


31 March 2009 Howard Schultz


The global success of Starbucks has seen it become a modern cultural icon, influencing how coffee is grown, bought and sold. Faced with flagging profits and a tighter market, Jamie Oliver meets its founder and recently reappointed CEO Howard Schultz to discuss the company’s origins and how it is facing the challenges of the economic climate.


The story of Howard Schultz and his development of the US coffee chain Starbucks is almost a textbook example of how adversity and a lack of faith at nearly every turn can be overcome by determination.

Schultz grew up in a housing project in Brooklyn, New York, and attended Northern Michigan University on a football scholarship. Graduating with a degree in communications, he joined Xerox for a short stint before becoming a general manager at a business that supplied non-electric coffee machines to Starbucks Coffee Company. In 1982, he joined the company in Seattle as its director of marketing but had ideas and plans for the business that its founders did not share.

Schultz left the company to set up a rival coffee house chain, Il Giornale. In 1987, the original owners of Starbucks sold the company to Schultz, leading him to rebrand Il Giornale as Starbucks Corporation.

Schultz had a vision: to grow Starbucks into a national chain of coffee houses, a so-called ‘third place’ between work and home. Not everyone shared his vision. "I had trouble raising private equity money," Schultz admits.

"We’ve become a cultural presence around the world and it’s all positive. We’re in 48 countries and relevant in places I could never have imagined, such as China, the Middle East, Japan and Singapore."

"It was very difficult. In fact I had to downsize the number of outlets I hoped to open from 100 to 75, but I couldn’t afford to have the prospectuses reprinted so I crossed out the 100 by hand and wrote in 75. It simply hadn’t been done and here I was trying to convince people to invest in this plan for a national chain of coffee houses, a plan that proposed to offer all staff health insurance and a stake in the business. I was turned down by 224 people. I’ve got a dossier to prove it."

The fact that Schultz refused to give up even after so many people turned him down is testament to his character. "We believed," Schultz says. "We were passionate and we almost willed it to happen. There was nothing out there that was similar to what we wanted to offer. We had no money for advertising so relied on word-of-mouth to spread the message. Our people and our customers became our ambassadors."

It worked. Within five years the chain, with 165 outlets, was listed on NASDAQ. Today, it operates more than 16,000 outlets globally and had fourth quarter revenues in 2008 of around $2.5bn. However, while the growth of the business has been nothing short of phenomenal, conditions in the global economy are taking their toll.

Two years ago the company’s share price fetched $38.41, while today its worth just under $9. The profit for the last three months of 2008 fell to $5.4m, compared with $158.5m for the same period the year before.

In its annual regulatory filing with the Securities and Exchange Commission, the company said it expects to suffer from a "very difficult environment" throughout 2009. Starbucks warned in the filing: "As a retailer dependent upon consumer discretionary spending, the company faces an extremely challenging fiscal 2009 because Starbucks customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and sharply falling home prices."

In fact, Schultz resumed his role as president and CEO of the company in 2008, replacing Jim Donald, after an eight-year hiatus as chairman. Faced with difficult economic times and claiming the business has over-extended itself, Schultz is confronting a much more difficult trading environment than he had previously experienced, with higher prices for raw materials and increased competition from cheaper-option fast food chains such as McDonald’s and Dunkin’ Donuts. It is a challenge he seems ready to meet. "It will be a difficult year ahead," he says.

"It’s not the first time we’ve faced difficulties. I remember 1986 being a very tough year. My wife was pregnant with our first child and I wasn’t taking a salary. It was tough to cover the payroll and hard to pay vendors. One day my wife’s father came to see me in Seattle. We sat on a park bench and recommended I give up this ‘hobby’ and to get a proper job." Schultz wisely ignored his father-in-law's advice.

Global brand

Schultz says that "hiring ahead of the curve" has helped his business grow in that he recruits people with skills he doesn’t possess. "I also think giving people a stake in the business has helped us get where we are today," he adds.

He says he is more mindful than ever of his responsibilities to a wide range of constituents, especially shareholders, and that his day-to-day role is about communication. "For me, as CEO, it’s about being as visible as possible to employees and all parts of the business. I need to communicate more than ever. I travel a great deal. I need to be present and available to people. I need to be authentic, honest and open. People need to be told the truth about what we’re doing. This is no time for spin."

He bats away accusations of anti-competitive behaviour. "I’m happy with the way we have expanded," he says. "It’s fun. We’ve become a cultural presence around the world and it’s all positive. We’re in 48 countries and relevant in places I could never have imagined, such as China, the Middle East, Japan and Singapore. We’ve just opened our first store in Bulgaria. What we’ve created is not American. It has a universal appeal. People drink coffee around the world, it's a crucial thing."

Schultz is direct when it comes to accusations of being in some way guilty of exploiting coffee farmers. "We have created an industry, jobs, and a whole supply chain that didn’t exist," he says. "Thousands of people have benefited from this company and we do more for coffee growers than the rest of the industry put together. We offer healthcare to workers and ownership to staff both in the US and abroad. We use our size as a positive thing."

He says that when things are tough, he talks to lifelong friends and people close to him. "I talk to my family, but ultimately, it’s down to me. I have to listen to my own voice."

Schultz believes all business leaders need to be open with staff but it is not all one-way traffic. "I try to ensure that all employees share the vision of this company," he says. "They each have a role and each has responsibilities. Every person is accountable."