I woke up and smelt the coffee

Howard Schultz decided to return to Starbucks to restore its falling fortunes

By Anthea Gerrie, July 7, 2011
Full of beans: Howard Schultz is pleased to be back at the Starbucks' helm

Full of beans: Howard Schultz is pleased to be back at the Starbucks' helm

Is Howard Schultz a madman or a genius? A "poor boy from Brooklyn", he spent 13 years building up Starbucks from a handful of branches to a global empire before deciding to step back. And after he had borrowed millions to buy it.

Then, nearly eight years later, when it all started to go wrong for the coffee company, which was in serious free-fall, he chose to return to the helm. Fortunately for Mr Schultz and the millions of coffee drinkers the firm supplies daily, he has been able to restore the company to record health.

Mr Schultz, 57, stepped down as chief executive officer of Starbucks in 2000. He says: "As December 2007 drew to a close I knew that Starbucks would not make its projected earnings. I was not only coming back as CEO but also to hold the mantle after the company's worst three-month performance in its history as a public company. I felt I had to take responsibility for some bad decisions when I saw things start to go seriously wrong.

"We were engaging with the wrong things - growth that had spiraled out of control and our Wall Street share price - instead of the business of serving coffee and engaging our customers."

When figures which had soared for 15 years - "since 1992 we had been on a magic carpet ride, where everything we touched seemed to turn to gold" - started to go the other way, Mr Schultz was not given much chance of success by many of his own senior management team when he returned to the front line. "They didn't believe in each other, in the mission to transform the company, or that I was the right person to come back." Within months, nine of 11 senior managers were gone.

There are more competitors than ever waiting to take food off our table

In the autumn of 2010 Starbucks posted its best performance in its near 40-year history -- more than $10 billion in revenue (over £6 billion), with 60 million visitors a week in 16,000 stores in 54 countries.

But there is no celebration or complacency about the restored sales from Mr Schultz. "We can never forget that coffee is a discretionary purchase and that there are more competitors than ever before waiting to take food off our table." And then he knows a thing or two about coffee. A "five-cups-a-day man", he grew up on a New York housing estate, starting out in the business world as a Xerox salesman before joining Swedish kitchenware company, Hammarplast. One of Hammarplast's clients for upmarket coffee-makers was a small Seattle firm, Starbucks. It had a handful of outlets selling coffee beans and teas.

Impressed by the company's coffee, Mr Schultz was persuaded, with his wife Sheri, to "shlep" to Seattle, to meet the founders. He joined Starbucks as marketing manager in 1982. The following year he had an epiphany when visiting Milan, believing that the "great theatre" of serving espresso and frothy milk to the masses should be the way forward for the company. The owners didn't agree so Mr Schultz bowed out and started his own rival espresso chain, Il Giornale.

So why did he bother to buy his old employers out 16 months later, borrowing $3.8 million to do so? "It seemed like destiny to buy the company I had so much respect for," he explains. "And I loved the name so I let the Il Giornale name go. Because the owners had built such a reputation for high quality coffee it made sense to rebrand as Starbucks."

The company grew over the next two decades but when, at the end of 2000, sales started to slump and competition increased, Mr Schultz was forced to slash staff. "I knew one of our problems was under-performing stores, but the 600 we closed in 2008 was three times more than I had originally envisaged. I got the list of all the partners who would lose their jobs and there were many names I knew among the thousands. It was a wrenching experience letting them go, one I hope never to repeat."

Philanthropy has been at the heart of Mr Schultz's Starbucks, from thestock options and health insurance he awarded part-time employees - a first in the US - to the fair-trade programmes. There is also a strong tradition of community service. "When I decided to bring 10,000 store managers to New Orleans at a cost of $32 million, we gave 50,000 hours of work rebuilding the homes of the Hurricane Katrina victims in the Ninth Ward (neighbourhood) before we had even our conference."

He has been considered rash by some for his openness, apologising to staff for allowing the business to be compromised by poor decisions. He runs a Twitterfeed at the Seattle headquarters so everyone can see any negative comments being posted about the company and admits that he loves Starbucks "almost as much as my wife and family.

"It's true that I get up at 4.30am to work out in my home gym and that I feel I can't devote less than 24/7 to giving 100 per cent to the enterprise. I've often been out of balance, but that's been complemented by Sheri's commitment from the start that we were in this together."

Mr Schultz acknowledges the firm has to stay ahead of the game as it is no longer on top in markets such as Britain, where it has lost out to Costa.

Starbucks has launched rare, limited edition coffees to tempt connoisseurs, and adopted the "pour-over" method seen in trendy independent coffee-houses. But how long he will be able to keep these innovations affordable is anybody's guess given the current pricing challenge: "Coffee beans are at a 34-year-high even though there's no supply issue: it's about the hedge funds and others manipulating the market," says Mr Schultz.

But one thing is for sure; the American businessman has no plans to give up anytime soon. "I'm still that poor boy from Brooklyn with dreams and aspirations," he insists. "And I'm driven by love and the desire to innovate."

Onward: How Starbucks Fought for its Life without Losing its Soul by Howard Schultz (Wiley)

Last updated: 1:05pm, July 7 2011