Howard Schultz: A Profile in Failure
The greatest people in history have been failures. Certainly, we remember these individuals as successes--success stories--and we treat those stories as legends and those individuals as gods. But each of them failed epically and repeatedly, more so than the combined successes of all of humanity.
Failure should not be overlooked in anyone, especially not those we admire. It is through failure that these individuals were able to learn, grow and ultimately succeed. We know this about ourselves but even as we learn to accept our own failures, sometimes we don’t recognize that the most successful people in the world have had an abundance of failure.
Our heroes need to be held to the same standard as the ancient Greek gods: awesome but not infallible. Failure is a humbling exercise, both for the observer and the observed. But learning is a humbling process. Once we realize that our heroes are just like us, we can examine how failure drives success. So I’ve started collecting stories about the failures of successful people, as a reminder that if you’re making mistakes and learning from them, you’re actually on the path to success.
Howard Schultz, Chairman and CEO of Starbucks Corporation, is the classic American entrepreneur. He grew up in a working class Brooklyn neighborhood and was the first in his family to attend college. Now he’s worth over $2.2 billion and the company he created from scratch is one of the top 100 brands in America, valued at over $60 billion. With a growth curve that is every business owner’s dream, Schultz expanded his company from a single coffee shop in Seattle in 1986 to over 20,000 across the world. But the early runaway success of Starbucks almost led to its complete destruction in 2007. Schultz’s story is a journey from success to failure and back again.
After graduating from Northern Michigan University with a communications degree, Schultz held various positions in sales and marketing, eventually working his way up to Director of Marketing at a company called Starbucks Coffee Company, which sold whole coffee beans and tea leaves. After a trip to Milan, Schultz tried to persuade the ownership to open cafés within the stores to sell hot beverages, but they declined. So Schultz raised $400,000 to open his own coffee shop which he named Il Giornale. A couple years later, in 1988, the owners of Starbucks made a deal to sell Schultz their retail stores and brand name for $3.8 million. Schultz quickly turned the Starbucks stores into coffee cafes and rebranded Il Giornale to Starbucks.
Starbuck’s rate of expansion was astounding: by 1992, Schultz had opened 140 stores and the company was valued at $271 million when it went public later that year. In 2000, Schultz stepped down from his position as CEO and became Chairman of the board, to disengage from the day-to-day operations and focus instead on growth, particularly international growth. In that capacity, Schultz was highly successful at building more and more stores: by 2007 there were 13,000 Starbucks across the globe, and new stores were opening at a rate of about two every day. Shareholders expected—and received—tremendous year over year growth, every single year.
But trouble was brewing for Starbucks in 2007. Some of the reasons were external and outside of Schultz’s control: the economy was headed for a recession, and a cup of Starbucks coffee became a daily luxury that fewer could afford. The shift in consumer behavior wasn’t due solely to tightening finances—there was a concurrent cultural shift in which consumers became more concerned with supporting local businesses and companies who demonstrated ethical and environmentally friendly practices rather than international corporations. Starbucks had always been a leader in employee benefits and ethically sourced coffee, but as it grew, Starbucks stopped doing a good job of telling that story. As a result, Starbucks became a symbol of the type of company consumers would do well to avoid—a huge greedy company who put mom and pop coffee shops out of business and robbed customers of their hard-earned cash by selling overpriced coffee.
But the majority of Starbuck’s problems stemmed from its own success. First and foremost, Schultz delegated the most important tasks associated with running the business to someone else. Often, it is wise to hire an independent CEO to run your company as it scales. That worked for Google and Twitter for example. But sometimes, when a company’s core tenets are about customer experience, the founder must lead that charge. The great counterpart to Schultz is Steve Jobs and his on and off tenure at Apple, which coincided with Apple’s on and off performance.
Schultz had spent so much energy on growth that he failed to oversee and maintain many of the core elements that made Starbucks successful in the first place. To save money, Starbucks started shipping coffee grounds instead of whole beans, jeopardizing freshness. To save time, baristas started steaming milk in large batches and re-steaming it if it got cold between orders rather than preparing it one cup at a time. New espresso machines made coffee faster but they were too tall, prohibiting baristas from interacting with customers. Breakfast sandwiches provided a good profit margin but made the stores smell like burnt cheese instead of coffee. As a result, despite having premium ingredients, Starbucks coffee lost out in blind taste tests to none other than McDonald’s. The experience, even relative to McDonald’s, was changing customer perception.
Not only was the coffee sub-par, but the stores had begun offering more and more diverse non-coffee related products. They added CDs, then books, then DVDs to their store kiosks. It turned out that movie studios would actually pay Starbucks to promote their new releases, so Starbucks got involved in the movie business. Schultz stated it bluntly: “the business deals looked great on our profit and loss statements. It would be a while before I recognized that Starbucks’ amplified foray into entertainment, while it had its upside, was another sign of hubris born of a sense of invincibility.” The last straw was when Schultz entered a store to see a pile of stuffed animals on display. When he questioned the manager he was told simply that the animals had a big gross margin.
As Schultz explains it, “Starbucks had begun to fail itself.” The stock had dropped by 42 percent and many of the stores were failing, some due to cannibalization by neighboring Starbucks stores. Its growth was reducing the Starbucks experience. Schultz recognized and acknowledged his part in creating the problem. One night in February he sat down with pen and paper and began composing a letter with his concerns and a solution to get back to the core of the business. He had his secretary type it up and e-mail it to the Starbucks board and management, with the subject “The Commoditization of the Starbucks Experience.”
The e-mail was leaked to the public, creating a firestorm of media attention. The press confirmed what consumers and investors had suspected: Starbucks had become a soulless corporation motivated by the bottom line rather than providing a quality product and experience. As is typical, Schultz’s plans to turn the company around received much less press attention than his articulation of where and how it had gone wrong.
It was in this climate that Schultz decided to return to his old job as CEO. In January 2008 he took back the reins and began the journey to save the hemorrhaging company. This required a 180-degree change in priorities. Schultz realized that “success is not sustainable if it’s defined by how big you become.” He further explained that “large numbers that once captivated me—40,000 stores!—are not what matter. The only number that matters is “one.” One cup. One customer. One partner. One experience at a time. We had to get back to what mattered most.”
To that end, Schultz started with fixing the coffee problems. On a Tuesday in February 2008 he closed 7,100 stores for the day to retrain baristas in how to pour a perfect espresso. The company lost $6 million that day and the press had a field day, seeing the closures as foreboding of worse to come. But Schultz knew how important it was that the coffee was prepared perfectly.
Where managers previously focused on sales growth, Schultz realigned them to focus on customer experience. Sales growth had become store managers’ most important metric of success, but “they were a dangerous enemy in the battle to transform the company,” recalled Schultz. “It is difficult to overstate the seductive power that comps had come to have over the organization, quite literally becoming the reason to exist and overshadowing everything else.” Rarely in a company the size of Starbucks would a CEO have the gumption to tell managers to ignore sales and profitability but Schultz knew what mattered most. Naturally, investors and the media complained that less transparency was the last thing the company needed—same store sales had previously been publicly disclosed—but Schultz didn’t budge.
Schultz’s primary mission was to improve the customer experience. In addition to refocusing his teams toward the customer, he also engaged the customer directly using social media and the internet. Starbucks launched new Facebook and Twitter profiles and started a site called MyStarbucksIdea.com which allowed users to submit and vote on ideas. The best ideas were then submitted to senior managers, and many were implemented.
The company finally received some positive press in 2008 when it held its 10,000-person leadership conference in New Orleans, which was still reeling in Hurricane Katrina’s aftermath. His team brought much needed revenue to the city and also volunteered a combined 50,000 hours to the rebuilding efforts. Schultz felt there was no better place to demonstrate that Starbucks was also rebuilding and would come out stronger on the other side.
The turnaround effort wasn’t easy. Schultz closed 600 locations in the United States alone, letting go of most of its staff, and had to lay off additional non-store personnel. Operating costs were slashed; Schultz made $580 million worth of permanent cuts. Even so, earnings continued to decrease throughout 2008 and 2009 as Schultz reinvested earnings into the customer experience. It wasn’t until the third quarter of 2009 that Starbucks recorded growth in earnings and signs of a real recovery, taking most pundits by surprise. Perhaps most importantly though was the change in how customers reacted to the “new” Starbucks. Customer surveys showed engagement and loyalty, Starbucks earned the Zagat rating for best tasting coffee, and its social media efforts were on fire, with its Facebook page becoming one of the most popular corporate pages in history by the end of 2009. The new Starbucks had come back to the future.
Schultz is no stranger to failure and has always had a healthy respect for it throughout his career. In the 1990s he helped launch a carbonated coffee drink called Mazagran. It was a spectacular failure, and Schultz to this day keeps a bottle of it on his desk to remind him to “celebrate, learn from, and do not hide from mistakes.” Ironically, it was the success and rapid growth of Starbucks that almost led to its downfall, resulting in an equally important lesson: “If not checked, success has a way of covering up small failures, and when many of us at Starbucks became swept up in the company’s success, it had unintended effects. We ignored, or maybe we just failed to notice, shortcomings.” Just as he had done with Mazagran (which failed but eventually led to the creation of the Frappuccino), Schulz internalized his failures, and used those lessons learned to become better, stronger, and ultimately even more successful.
Be sure to check out the other articles in the failure series:
Great article - highlighting serious management issues, problems and corrective actions. Excellent reminders!!
Vice President Sales & Marketing presso GRUPPO GIMOKA S.R.L.
8yI read it and I read it again
Great stories to hear when failures are the drivers to success even in our heroes. And to keep the reminders so we stay clear of denial.
Owner
8yThis is great!