Onward (28 page)

I sat transfixed at the head of the conference table as Arthur Rubinfeld and Mike Malanga, our senior vice president for US store development and one of the company's most seasoned retail real estate veterans, recommended to Starbucks’ board of directors that the company close about 200 company-operated US stores.

“Are you sure that's enough?” a member of the board asked.

Arthur and Mike looked at each other and at me. We already knew that this number was huge for a retail organization that had never shuttered more than a handful of stores in its entire existence. In addition to taking an estimated $50 million write-off for that fiscal year, the move was destined to affect every department and would cause individual pain, rile the financial markets, boost our competitors, and make noise online.

Prior to the board meeting, Arthur and Mike had come to me with the same recommendation. It was as serious a conversation as I'd ever had at Starbucks, emotional for all of us. Other retailers were suffering from sales slumps as consumer confidence hit a 16-year low, but none had announced such drastic steps—at least not yet. What's more, we'd already pulled the plug on 348 planned store openings, a very tough decision in its own right. But this felt different. More than a correction, closing so many stores felt like a defeat, even if it was the right thing to ensure the company's health. I wanted to understand how Starbucks, as a company, had arrived at this point.

“If what you're proposing is true,” I'd said as we sat behind my office's closed door, “explain the filters to me so that I understand what is driving the decision.”

Arthur and Mike walked me through the analysis, which they had done in conjunction with our operations and finance departments, first telling me what I already knew:

Starbucks’ ability to build and operate profitable stores had succeeded for years because we had adhered to a simple yet ambitious economic model: a sales-to-investment ratio of two to one. During a Starbucks store's first year in business, it needed to bring in $2 for every $1 invested to build it. If the company spent $400,000 to lease and design a store, for example, we expected and almost always got at least
$800,000 in revenue during the first 12 months of operation. Historically, the average Starbucks store in the United States had brought in about $1 million annually. These so-called unit, or store, economics were widely known to be best in class because few, if any, retailers could achieve what Starbucks had accomplished year after year.

But in 2008, Arthur and Mike informed me, Starbucks was, for the first time in its history, missing that ratio at hundreds of stores. There were longer stretches of time during the day when a store did not have enough sales to justify the labor costs. We knew some of the reasons why from our research. People were not coming in for their afternoon treats. Others were not spending as much. In some cases, one store's sales were being cannibalized by another Starbucks, or maybe the store was in a lousy location. Adding insult to injury, many of our underperforming stores had been opened in the last two years, revealing a lack of discipline in real estate decisions that was, in my opinion, an example of the hubris that had taken hold.

I took another deep breath. From where I sat as ceo, the pieces of our rapid decline were coming together in my mind. Growth had been a carcinogen. When it became our primary operating principle, it diverted attention from revenue and cost-saving opportunities, and we did not effectively manage expenses such as rising construction costs and additional monies spent on new equipment, such as warming ovens. Then, as consumers cut their spending, we faced a lethal combination—rising costs and sinking sales—which meant that Starbucks’ economic model was no longer viable.

These factors, together with the others that were bearing down on the company and every single store, caught us in a perfect storm of external pressures and self-induced imperfections that left us fighting for our life on so many fronts.

The scope of our situation washed over me like a sudden storm.

Back in the boardroom, Mike Ullman spoke up after hearing Arthur and Mike's plan. “Are you sure you looked at the number of store closures as aggressively as possible?” Jamie Shennan agreed with the sentiment.

The room fell quiet. Mike Ullman had not made this suggestion lightly. Now was the time to make the most drastic changes to the business. If Starbucks Coffee Company had to close stores, if we had
to lay off hundreds of partners, if we had to take a multimillion-dollar write-off and suffer the hits to partner morale and the brand's reputation in the marketplace, we did not want to do it twice.

The board asked us to go back and take another, harder look at the number of stores that we should close to help support the overall business, and someone posed a hypothetical question: “If people who were not as emotionally attached to the stores ran the company, people who were not as concerned about how their actions would affect others, only the bottom line, how many stores would
they
close?”

I understood the reasoning, but it would be impossible for me or Arthur or Mike to take emotion out of the equation. These were not just doors we would be closing. We would be disrupting lives, on both sides of the counter.

For all the flak about Starbucks’ ubiquity, almost every store maintained a devoted following inside and out. A soul. With each closing, we would be erasing a fingerprint, and that was a reality I could not possibly ignore.

Building a great, enduring company requires thoughtfulness and, at times, the courage to make very difficult decisions. For Starbucks, July 2008 was a moment when I had to make choices that I never, in my 26 years at the company, had imagined I would be faced with.

Six hundred.

That was how many US stores we ultimately decided to close, three times more than had first been suggested to the board. All told, it represented 8 percent of our US company-owned and -operated retail portfolio. Most distressing: approximately 12,000 positions, or 7 percent of our global workforce, would be eliminated.

The evening before we publicly announced the news, on June 30, I considered the repercussions of other Starbucks events—the leaked memo, my return as ceo, closing 7,100 stores for Espresso Training, the six initiatives we announced at the annual meeting. All paled in comparison to the potential fallout, gossip, and, most significantly, the individual upheaval that 600 permanent store closings and the consequent layoffs would induce.

Again and again I looked over the list of stores slated to shut: In Wichita, Kansas, a drive-thru that had been open barely one month. In Federal Way, Washington, a store that had served customers for 18 years. We would close 57 stores in Texas. Thirty-nine in New York. Twenty-seven in Minnesota. Arkansas would lose eight, Mississippi and Nebraska seven each, and North Dakota four. Two-hundred and thirty-four drive-thrus. Seventy-two stores in malls. Fourteen percent of the stores to be shuttered were in California and 10 percent in Florida—not coincidentally, both regions were hubs of the subprime housing bubble and bust. Almost every major city would lose at least one Starbucks. Seven stores were located in our own backyard.

The choice about which stores to shutter was financially based. If we calculated that it would never provide acceptable returns even once we improved operations and the economy got back on track—which we knew it would, one day—then we most likely chose to close it.

In addition, Starbucks would take $340 million in expected pretax charges, including $200 million in asset write-offs and another $130 million associated with terminating the stores’ leases. These were all necessary costs to fix the US business.

One particular statistic, however, raised my ire: 70 percent of all stores slated for closure had been opened in the past three years, during the aggressive growth period when we opened 2,300 locations. It was staggering. We were closing almost 20 percent of our newest stores!
We thought all we had to do was show up to be successful,
I thought to myself. As I stared at the list of 600, a lesson resonated: Success is not sustainable if it's defined by how big you become. 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.

I shook my head before trying to get an hour or two of sleep. I was not proud of our past behavior, but I deeply wanted to be proud of how all of us, as a company, acted from this point forward.

Starbucks Increases Number of U.S. Company-Operated Store Closures as Part of Transformation Strategy

Approximately 600 Underperforming Stores Will Be Closed; Company Takes Significant Step Toward Improving Long-Term Profitable Growth

At exactly 1:05 p.m. PST on Tuesday, July 1, five minutes after the stock markets closed on the East Coast, our press release hit the wires.

By 1:15 p.m., the phones in our media affairs and investor relations offices were ringing, but Starbucks was in the mandated quiet period of the fiscal quarter for another month. I was not allowed to conduct follow-up interviews with journalists or analysts, nor could anyone from the company comment other than to clarify our official statement or refer people to the Form 8-K we had filed with the Securities and Exchange Commission.

Our unavoidable silence provided a lot of room for interpretation, and the risks were huge. How could we maintain the integrity of our brand and the culture of humanity I espoused when we were disrupting so many people's lives? We were committed to transferring as many displaced partners as possible into new roles. This was paramount to our plan and something the leadership team and I had insisted upon. And we took solace in the fact that as many as 70 percent of those field and store partners could likely remain with the company. Second, we would give at least 30 days’ notice to our people whose positions would be lost once a store closed, an unheard-of runway for mass layoffs, especially in retail. We also made employee assistance professionals available to address people's more personal issues.

At 1:17 p.m., my memo to Starbucks’ partners was e-mailed companywide. I had striven for honesty, trusting our people to honor the realities of the situation Starbucks was in.

Throughout the history of the company, we have always aspired to put our people first. This makes our decision to close stores more difficult. . . .At the same time, we recognize that we must make decisions that will
strengthen the US store portfolio and enable us to enter fiscal 2009 focused on enhancing operating efficiency, improved customer satisfaction and ensuring long-term shareholder value for our partners and customers.

By far, this is the most angst-ridden decision we have made in my more than 25 years with Starbucks, but we realize that part of transforming a company is our ability to look forward, while pursuing innovation and reflecting, in many cases with 20/20 hindsight, on the decisions we made in the past, both good and bad.