Onward (31 page)

But we had yet to price the product, and Cliff was disturbed by the options he was hearing and what they meant for returns. A proposal to sell a 10-ounce Sorbetto, slightly larger than a tall cup of coffee, for $1.95 would drop the profit margin down to 16 percent. If priced at $2.25, the margin was 24 percent, nowhere near the 70 percent margin I'd elatedly embraced on our trip back from Italy.

The margin, it turned out, had been whittled down by higher than anticipated costs of goods and unforeseen complications. Although we planned to manufacture the base ingredient in the United States, for now we were buying and airfreighting it across the Atlantic at great expense, and the weakening value of the dollar against the euro was jacking up the already high costs. What's more, because of the consistency of the beverage, the company had to purchase hundreds of new machines to mix just the dairy-based Sorbetto drink, an investment we could not have predicted back in Italy.

It was too late to turn back, and hundreds of California stores were decked out in promotional pink decor. Brightly colored oversized “splat” spots had been stuck on store windows and floors. A 10-ounce Sorbetto, in a custom-designed container, was sold for $2.95 (we'd found our margin), and in the first few weeks it delivered a respectable sales pop, selling as many as 40 units a day per store.

Very quickly, however, problems emerged.

First, a tremendous amount of Sorbetto was being poured out instead of being served to customers.

Second, the new machines we'd procured to mix the yogurt-based Sorbetto required up to one and a half hours to clean at the end of each day, doubling our projected labor and sapping barista enthusiasm for the product. Our store partners liked Sorbetto's taste, but not the disciplined cleanup, even after we got it down to 45 minutes. And as we'd learned with Pike Place Roast, barista buy-in is essential to a new product's success in stores.

And third, Sorbetto contained a lot of sugar, making it a sweet treat that did not satisfy consumers’ cravings for nutritious products or complement our emerging emphasis on health and wellness.

As summer rolled on, Sorbetto's lower-than-expected numbers
rolled in, and we had to accept that it was not generating enough incremental sales to compensate for its complexity and the high cost of goods.

Disappointed, and feeling somewhat responsible, I agreed with Cliff that we should abandon it.

At another time and in another environment, or perhaps if we had launched Sorbetto on a smaller scale, we might have been able to tweak the product. It was, after all, delicious in its own right. Instead, we opted to cut our losses because bigger issues required our attention, and we allowed Sorbetto to fade away.

What happened?
I asked myself. Had my thirst for innovation blinded me? Starbucks had once been so good at creating products that right out of the gate transformed consumer behavior. Sorbetto's potential had played into that line of thinking.

I'd brashly embraced Sorbetto as a silver bullet.

But there is no such thing.

Not growing our store count. Not new coffee blends. Not loyalty or value programs. Not healthier foods and drinks.

Yes, opportunities to transform Starbucks for profitable, sustainable growth existed everywhere, but no single move, no product, no promotion, and no individual would save the company. Our success would only be won by many. Transforming Starbucks was a complex puzzle we were trying to piece together, where everything we did contributed to the whole. We just had to focus on the right, relevant things for our partners, for our customers, for our shareholders, and for our brand.

“I am sorry.”

I spoke more slowly than usual to more than 1,000 Starbucks partners gathered in front of me. “And I apologize if anyone in this room feels that we have fractured the culture and values of the company with what has happened over the last few weeks, and specifically yesterday.”

The ninth floor of the support center was packed with partners standing shoulder to shoulder. The crowd overflowed onto the exposed staircase and eighth floor common area, where people sat on the floor or stood, arms crossed, gazing up at the podium from where I spoke.

“It was a decision that we had to make,” I explained. “And we made it with compassion.”

The day before, on Tuesday, July 29, Starbucks Coffee Company had eliminated 1,000 nonstore positions, asking 550 people from throughout the organization to leave. One hundred and eighty of those people were in the greater Seattle area, the majority at the support center.

As much as possible we tried to conduct each separation meeting face-to-face, and throughout the day managers in every department, together with our partner resources professionals, held some of the toughest conversations of their careers, gently informing fellow partners and friends that they would no longer be working for Starbucks. Separated partners had a few hours to return to their desks, collect their things, download whatever information they needed from their computers, and say good-bye. If they chose to, they could come back over the weekend to collect their items instead. We let our people manage their own exits, without hovering security guards, and provided outplacement assistance, an off-site place to go to learn about their benefit options and how to move forward, a new e-mail account, as well as access to our employee assistance program. Severance packages and benefits were given to all who separated from the company, and they were fair, based on the person's position and length of employment. But still.

I'd held private conversations in my office with several partners who were leaving, and afterward I walked around the building. People were in tears, hugging coworkers good-bye.

“This is not personal,” we'd told our displaced partners.

But of course being laid off
is
personal, for everyone. It was personal for the people who made the decisions and those who delivered the news. It was personal for the people who had spent years helping build our brand and for those who had only recently joined the company. It was personal for the hundreds of families who would undoubtedly be affected. For parents with mortgages, bills, and kids’ birthdays coming up; for couples buying a house or just buying groceries; for men and women supporting themselves, paying off loans, assisting
extended family members, and saving for retirement. And it was personal for people who had counted on Starbucks for health insurance or child care, or whose dreams were fueled by their 401(k) accounts and company stock.

I cannot put myself in their shoes. I can only tell you that I am sitting with this enormous responsibility to try and navigate through the most difficult economic conditions that Starbucks has ever faced, an economic situation that has deteriorated every month since January when I returned.

Across the United States, wages were flat, consumer debt remained high, the cost of gas was climbing, and job losses were mounting. In June 2008, US unemployment had climbed to 5.5 percent, the highest it had been since October 2004. Starbucks was hardly the only organization restructuring, but all this was little comfort as people packed belongings and handed in ID cards before waiting at the bank of elevators for the last time. Few things in life are more personal than arriving home in the middle of a workday to contemplate an uncertain future.

The layoffs were also devastating for the partners who remained behind and stood before me today. I was not nervous as I spoke, but mindful of trying to honor a very tough and sad situation while being realistic about the company's pressing challenges. Our people needed confidence to move on. We had to turn this page.

This is a defining moment like no other for Starbucks Coffee Company, and moments like this are quite difficult and emotional so let me specifically address yesterday. I never anticipated, nor was I emotionally prepared for, the decisions that led to asking passionate, talented, deserving partners to leave our company. . . . I know people are angry and grieving and I know people are mad. But I had to make the difficult choice [and consider] the long-term sustainability of the company. Our revenue and profits have got to be linked to a lower cost structure or else we are going to find ourselves in a much worse situation. We have less customers in our stores this month than we did last month, and less last month than the month before. We are not seeing new customers come into the stores.

The question is, How are we going to respond?

In addition to the many initiatives under way to create customer demand and reverse the negative flow of traffic, we had to get the company's costs under control. Closing stores and fixing inefficiencies in the field was a start, but we needed to cut deeper.

Unlike the phalanx of global financial institutions that considered themselves too
big
to fail, Starbucks has never been an irresponsible spender. But perhaps because we viewed our company as too
good
to fail, we did not work or operate the business as wisely as we should have. Rarely did we make the effort or take the time to step back and question whether we made the most of our resources.

The situation in Seattle was akin to what Cliff was witnessing in stores. Our leaders and teams were always incredibly busy, putting in long hours under increasing stress, but their workloads—like empty cups waiting to be filled—kept stacking up. In our stores, rather than reconsider
how
our baristas poured coffee or made drinks, we often added people to absorb the load or in some cases tolerated less-than-perfect beverages. Similarly, in our offices—to keep pace with new store openings—we staffed up for short-term relief. More specifically, with each new store opening, our supply chain organization (SCO) was under intense pressure to deliver materials and equipment. Because SCO was moving so fast, it did not have time to figure out the most cost-effective, timely ways to work with suppliers or deliver goods. SCO was not at fault, and it was not alone. Most of our business units were striving to meet their objectives with the best of intentions. But not always with the best of practices.

During Jim Donald's two years as ceo, he did recognize Starbucks’ lack of cost-management muscle and urged the company to, as he put it, “develop a new skill set” and tighten spending. But significant cuts never fully materialized, in part because there existed no acute need to run a tighter ship. Until now. The company's rapidly receding sales—comps in July were just shy of negative 7 percent—revealed a rocky foundation of operational inefficiencies, thinning our margins as never before. The leadership team and I agreed that Starbucks had no choice but to decisively pull tens of millions of dollars of permanent costs out of the business. And that meant reducing our workforce.

In a tense daylong meeting earlier that month, the leadership team, despite some resistance, had made the difficult decision that each business unit would reduce a percentage of its costs. No one prescribed to
anyone else who or how many people should be let go. To absorb the pain, I think I convinced myself that we were saving the company by sacrificing a very small percentage of people to preserve the large percentage who would stay. If I were going to enhance the long-term value of the company, I had to make this difficult choice. Ultimately, it rested with me.

In the days that followed, our business unit leaders collaborated behind closed doors and—it was no secret to their staffs—went through the process of assessing who could stay and who would go. When I was handed lists of individuals who would be laid off, I looked at every name, never allowing a number on a page to replace a human being. I wanted to know the name and position of every person being asked to leave. I wanted to know who they were and how many years they'd been with the company. In many cases, a partner had been a solid performer with a strong track record, but we simply could no longer afford him or her. In certain instances I stepped in to make sure no politicizing or hidden agendas affected a decision, asking questions about why this person was being asked to leave or asked to stay.