You can get a sense of what's important to someone by the stories he tells. At Starbucks (SBUX), a company diminished in ways both tangible and ineffable, Howard Schultz is telling a story about milk. Starbucks uses a lot of the stuff. As part of Schultz's efforts to improve the quality of the millions of lattes and cappuccinos Starbucks serves, he forbade what had become the common practice of resteaming milk. That meant the baristas were pouring millions of dollars of leftover milk down the drain. As store managers for the first time began thinking about how to operate more efficiently, an idea emerged. It was simple, obvious, and made everyone wonder why no one had thought of it before: They could put etched lines in the steaming pitchers so that the baristas would know exactly how much milk to use for each size drink. Before, they just guessed. "The celebration of that line in the halls of Starbucks has become a metaphor," says Schultz. "How many other lines can we find? We've found a lot because no one was ever looking. The people who have found those lines have become part of the folklore."
Can you think of many other executives who would turn something so prosaic into folklore? Or who would have left something so basic to chance? But we're talking about Howard Schultz, and about Starbucks, which for most of its existence was fast-growing and free-flowing, a place where the experience was everything. A place where the boss led by instinct, where authenticity was what counted. Schultz liked to say that Starbucks had taken the road less traveled.
That vision, perhaps inevitably, has collided with the exigencies of the real world. The $4 latte has become an unaffordable luxury, and Starbucks is competing with McDonald's (MCD) and Dunkin' Donuts, two chains more interested in selling lots of coffee than in being a part of people's lives. Even so, Schultz, for a time, seemed strangely unconcerned that the ground was shifting. When he reclaimed the responsibilities of chief executive in January 2008, he announced that Starbucks had lost its way: It had become the kind of soulless corporation he detested. He promised to take the company back to its roots, to make Starbucks loved again.
The Great Recession has since forced Schultz to do something even more drastic. He has had to acknowledge, however grudgingly, that the company needed to change almost everything about how it operates. Starbucks had to become more ordinary. The first orders of business: Cut costs by at least $500 million, shutter 800 stores in the U.S., lay off more than 4,000 employees. And also: Conduct more customer research, offer discounts, advertise. All very common, unremarkable ways of doing business. All new and uncomfortable to Schultz. "He was always so tantalized by out-of-the-box thinking," says John Moore, a former Starbucks marketing executive. "But sometimes it's the box that needs to be fixed."
Spend enough time with Schultz, and one thing becomes clear. Despite the recent reversals and reckonings, he still wants it all. Starbucks must be powerful and benevolent, respected and passionate, ubiquitous and imaginative. There is no point telling him that no big corporation, certainly not one with some 16,000 stores in 50 countries, has ever found such a balance. He simply doesn't buy it. Yet he concedes the strain of trying to stay true to his shareholders and his original vision. "I've had to change my own mentality and thinking," he says. "It's always a fragile balance between creativity and discipline, but it's much more acute than it was in the past." As he leads Starbucks into its next era, Schultz's biggest struggle may be with himself.
THE SOUL OF THE COFFEE HOUSEHoward Schultz, who is 56, has lived and breathed Starbucks for more than two decades. He is a salesman, a marketer, a merchant, and he always thought he could tell Starbucks' story best. Even during the eight years when he wasn't actively running Starbucks, everyone—from the executive team to the baristas—felt his presence. When he reassumed the position of CEO 19 months ago, the staff at the Seattle headquarters knew they were in for something. "We were all shell-shocked that first week," says Troy Alstead, the chief financial officer. Schultz had never really left, but somehow he was very much back. "We need his passion and drive and challenging nature," says Alstead.
Schultz has always relied on instinct. And his instincts have been pretty good. From the beginning, when he bought Starbucks' six stores from its quirky founders in 1987, he knew what the company could be. He wanted to sell an experience, and so he created a gathering place with its own language and culture. He knew the baristas would be everything to the company, so he treated them well, offering stock options and health insurance even to part-time employees (and everyone was called a partner). He talked about the soul of the coffee house, doing good in the world, controlling your own destiny. He tried plenty of things that failed, and he made many compromises that he would later regret. But he always measured success on his own terms.
Let other companies base their strategies on customer surveys. That wasn't the Schultz way. "We did it, but he hated it," says Howard Behar, who as a senior executive at Starbucks for more than a decade had a close but contentious relationship with Schultz. Another former executive recalls what happened to anyone with the temerity to suggest doing more research. "Everybody would cringe and say: 'You're new, aren't you?' Howard would say: 'We're not P&G.' " If Schultz wanted to learn something about his customers, he would visit a store. Schultz says he still visits 25 locations a week.
There were a bunch of other things he didn't believe in—things most executives do without questioning. For most of his tenure, Schultz hasn't cared much about costs. He didn't think he had to because Starbucks was opening thousands of stores a year, and speed was always more important than efficiency. Advertising? That was what other companies did. After all, millions of people were walking around holding Starbucks cups. "Our advertising money went to the best real estate on the corners," says Arthur Rubinfeld, who was in charge of Starbucks store development in the 1990s and recently returned after a six-year absence to lead the work on new-store designs.
For a long time the Cult of Schultz worked brilliantly, and no one complained. Certainly not the shareholders who watched the stock's value increase by nearly 5,800% from the initial public offering in 1992 to its peak in 2006. By 2007, Starbucks was a $10 billion company serving 50 million customers a week. For 15 years, sales in stores that had been open for more than a year surged at least 5%. "No one in the history of retail had ever done that before," says Schultz. Even now, as Starbucks seems more and more like every other retailer, Schultz doesn't seem quite like any other chief executive. He's still an iconoclast.
Eventually, though, came the reversal—then the reappraisal. "We got swept up," Schultz says. "We stopped asking: How can we do better? We had a sense of entitlement. And I'm here to tell you that's over." All companies find themselves retrenching at some point. But it's hard to overstate just how much Schultz has been forced to retreat from the practices of the past. "We've gone through a huge change," says Alstead, who has worked for Starbucks since 1992. "And somewhere in the mix [were] stages of grief."
A new breed of manager has emerged at Starbucks, people whose skills would have been far less valued back in the day. Consider Peter D. Gibbons, Schultz's handpicked supply-chain guru. Gibbons didn't have a problem telling Schultz & Co. that Starbucks was really bad at even the most basic operations. Such as delivering supplies to the stores. "Now we're excited about the supply chain," says Alstead. Cliff Burrows, who oversees the U.S. stores, has been told to simplify operations (and save money). Translation: Among other things, getting baristas to use a standard six-step process to brew coffee rather than do whatever they feel like. Schultz even hired a chief information officer in the person of Stephen Gillett, who previously worked at Yahoo! (YHOO) His job is to make sure real-time data flows to headquarters, where it can be sliced and diced into meaningful analysis. Lastly, there is Michelle Gass. She helped make the Frappuccino a hit in the mid-1990s and has been given a budget—Schultz won't say how much—to, that's right, advertise.
You can just hear the business traditionalists applauding: Finally, Howard has gotten religion. Certainly, most of what he's doing makes sense. Starbucks arguably would have been in better shape today if it had more data. "When the numbers went south, we couldn't even make an educated guess about why," says a former executive. "We had no way to get details about sales, no way to capture customer opinion, no good way to get information from the baristas."
Burrows's efficiency drive in the stores, which includes teaching baristas to set up the pastry case in 25 or so minutes rather than 45, has saved Starbucks $60 million in the past three months. And Gillett's store sales data helped Schultz see an important difference between the morning (when coffee is a necessity) and the afternoon (when it is an indulgence). "We never had that level of segmentation before," Schultz says. "It's a new tool in terms of being able to move the business in different ways." The numbers prompted Starbucks to offer any grande cold drink for $2 after 2 p.m. to customers who had already made a purchase that day: The company calls it the treat receipt.
Gass, named the chief of marketing and new product development last year, convinced Schultz that advertising is essential in the current climate. "The consumer is shifting to more conscientious consumption," she says, "and for us that's really good, that's what we always set out to be—the company that does the right thing, that buys its coffee responsibly, that takes care of its partners. The objective is to remind people why they fell in love with Starbucks to begin with."
STILL CONFLICTEDIn 19 months, Schultz has turned Starbucks upside down and, in doing so, set in motion a possible recovery. Already there are signs that the company is doing better. During the last quarter same-store sales declined, but less sharply.
The man, however, still seems conflicted. Maybe it's understandable. Getting baristas to use a standard process to make coffee seems a lot like McDonald's counter staff cranking out Egg McMuffins. And listen to Schultz on customer research. "I despise research," he says. "I think it's a crutch. But people much smarter than me pushed me in this direction, and I've gone along." Hardly the words of a convert. Now, when he walks around Starbucks' Seattle headquarters, Schultz sees life-size cardboard cutouts representing four customer archetypes.
Yes, Schultz approved Starbucks' first all-out advertising campaign. You may have seen the ads in the newspaper: They are meant to look like they are printed on a burlap coffee bag and tell you in no uncertain terms what the company stands for. Schultz seems to appreciate them, in a perfunctory way. Just before the campaign launched in May, Starbucks posted a video on YouTube (GOOG) of Schultz discussing the ads with baristas in a Seattle store. For a man routinely described as charismatic and inspiring, he seems surprisingly uncomfortable. See for yourself: It's still up.
Schultz's autobiography, written more than a decade ago, is called Pour Your Heart Into It. He comes across, then and now, as a classic entrepreneur: optimistic, relentless, mercurial, and eager to prove people wrong. And when he says, "I love being the underdog," as he did several times in our conversations, he's not talking about then, he's talking about now. Except now he is the chairman, CEO, and president of a company that made more than $300 million in profit last year, that is the most followed company on Facebook, and one of the most recognized brands in the world. Would anybody really call him, or Starbucks, the underdog?
Schultz's curious assertion seems to suggest that the role he inhabits now, as a conventional executive making predictable decisions, may be a little harder for him to play than he lets on. There are other signs. He recalled for me a story he had just told a group of Starbucks marketing executives. Schultz went to visit Molly Moon's, a new ice cream shop in Seattle that everyone was talking about. It was a summer Sunday, and about 100 people were in line. When Schultz finally got in, he looked around carefully. He figured the owners hadn't spent more than $50,000 on the place; the signs were poor, the furniture secondhand. But there was energy and passion, and the ice cream was fantastic. "You want to be there," he says. "To me that store reinforces all the things I believe in. It's not marketing, research, consultants, it's just the experience."
A month later, during a conversation in late July, he returns to the same idea. Word was out that Starbucks was opening a concept store in Seattle, and Schultz was as excited as I had seen him. Earlier in the year he'd asked a select group of employees a question: If you were going to open a store to compete with Starbucks, how would you do it? Then Schultz gave them a small budget, told them they were on their own, and left. In early June they emerged to present a design they called 15th Ave. Coffee & Tea. On the door it would say: "Inspired by Starbucks." (Schultz insisted the store have a different name because it offers beer and wine.) It would sell Starbucks coffee, but the company logo and graphics would be gone. So would the automated espresso machines that some Starbucks stores still use and Schultz has always hated. The food would be baked locally. There would be coffee and tea tastings in the mornings. In the evenings, music and poetry readings. "We all said we'd invest in that company," recalls Schultz. "I said: 'Go open it.' "
He visited the store for the first time just days before it opened on July 24. "I was blown away by the creativity," he says. "I asked the lead designer: 'Where did you get this coffee scale?' She got it from the flea market. When is the last time somebody went to the flea market to get something for a Starbucks store? It reminds me of the early days, when we were fighting for survival, for respect. To me this hearkens back to when we were at our best." He says there are plans to open two other concept stores in Seattle. Beyond that, he can't say. "But my hope is that we can expand it," he adds. It's as if Schultz can't help himself: Starbucks is growing up, and he needs to start over again with something small.
Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkInstant Caffeine FixIn February, Starbucks introduced a product that sent a jolt through its customers, investors—and critics: instant coffee. VIA Ready Brew is intended to be drunk on the go, hot or cold, and is sold in single-serve packages. Starbucks is testing it in Seattle, Chicago, and London, and will launch it nationally in the U.S. this fall. "People talk about Starbucks having reached saturation in the U.S. and abroad," Schultz told the Financial Times. "But when we look at the size of the prize, this is the most significant opportunity that we can look at in terms of growth."To read "Starbucks Hopes for an Instant Success With Via," go to http://bx.businessweek.com/starbucks/reference