Onward (42 page)

After I'd announced the end of the breakfast sandwich on the earnings call back in January 2008, we had immediately pulled the sandwiches out of stores’ display cases, although customers could still order them by request. And, as predicted, we saw an immediate decline in sales at stores that had carried the product, but we also saw impassioned customer comments posted at
MyStarbucksIdea.com
and got them at our customer call center. A website even sprang up:
Savethebreakfastsandwich.com
.

With my full knowledge but admittedly tempered enthusiasm, the food team continued to study the sandwich to address my complaints as well as customers’ pleas, and they discovered that improving the quality of the ingredients—leaner bacon, higher-quality ham and cheese—helped reduce the aroma. They also learned that the tang of the English muffin was partly to blame for the sharp smell, so we adjusted the recipe with our baked goods supplier and also offered more bread options, such as ciabatta. Finally, by moving the cheese to the top of the sandwich and lowering the baking temperature to about 300°F, the cheese was less likely to burn. The result was, I had to admit, a breakfast offering that was worthy of our coffee.

With my blessing, the breakfast sandwiches had returned to the stores in June 2008 and in the last six months had done extremely well. What's more, improving the sandwiches had actually helped us move our entire food program forward. We had updated nearly all of our recipes, paring down the number of ingredients and eliminating artificial flavors, artificial dyes, trans fats, and high fructose corn syrup.

In retrospect, I realize that the ferocity of my reaction to the breakfast sandwich was likely heightened by my frustration with other shortcomings at the company. More emblematic than problematic, the sandwich turned out to be among the least of Starbucks’ ills. But like so many other things we had dealt with in the past year, we had turned the sandwiches around and learned from the experience how to improve the business.

Michelle wrapped up her presentation and introduced Terry, who spoke about a critical yet nuanced marketing strategy: delivering value in a manner consistent with our brand.

In fall 2008 the retail world was on sale.

Every street I walked down had “Sale” signs displayed in windows, from Madison Avenue's high-end boutiques to Marks and Spencer's London department store. I recall seeing one sign declaring that customers could get as much as 80 percent off. There was so much pressure for every retailer and restaurant to discount prices. The unique challenge for Starbucks, however, was how to honor consumers’ needs for lower prices and reward our core customers’ loyalty without putting Starbucks on sale. Deep discounting is a slippery slope that can be impossible to climb back up. It would also play into McDonald's game, and that was not how I wanted to compete. Starbucks would compete as we always did. On quality and service.

Still, we had to do something for our core customers. As Costco's Jim Sinegal had advised us earlier in the year, we could not let them slip away. Giving them value at almost any cost would be much less expensive than trying to win them back.

The good news was that, by the time of the analyst conference, we were beginning to figure out how.

Three months prior, I and several other people, including Terry Davenport, had flown back to Seattle together from a meeting in Los Angeles. During the two-hour flight, we began brainstorming about how to breathe life into what was sure to be one of our worst holiday seasons on record. For inspiration we considered our Rewards Card, our loyalty program that had been chugging along nicely since its June 2008 relaunch. What could we do with a card to provide even more value than the rewards program? We played with some numbers and eventually came up with the idea for a $25 Gold Card that would give cardholders 10 percent off on anything they bought at Starbucks for one year. Excited, we called the Rewards Card team from the plane to discuss benefits and pitfalls, and by the time we landed in Seattle I had given the Starbucks Gold Card the go-ahead, assuming no major problems cropped up.

Our goal was to sell 25,000 cards in the first week. We surpassed that amount in the first
weekend
.

Starbucks’ card programs—the Starbucks Card, single-product promotional cards, the Rewards and Gold Cards—were emerging as the company's winning way to deliver meaningful value. Cards are easier to use and have higher redemption rates than coupons. They
enhance the brand, becoming part of the Starbucks Experience via the actual customer-barista transaction and, because the card lives in wallets, part of people's lives.

The cards were also bringing us closer to customers. To receive rewards, a person registers it online by providing his or her e-mail address. As a result, Starbucks was building a rich database that we could use to better understand our customers’ behaviors and reward them accordingly. The database also allowed us to reach out to customers in meaningful, cost-effective ways, like we did with the election campaign. And when Vivanno launched that summer, for example, we invited cardholders to come in and try a free drink. The 16 percent response rate was exceptional for an e-mail campaign.

“For a brand that does not spend a lot on traditional mass marketing,” Terry summed up for the analysts, “the database is going to be one of the hidden assets.” He was right. The card program was a truly sustainable, competitive advantage for us in the marketplace and, given the state of discretionary spending, perhaps the most relevant marketing tool that we discussed that morning.

We were rallying, individually and as a team. From my seat in the audience I sensed, despite a palpable cynicism, that our main message to Wall Street was for the most part getting through: Starbucks was focused on its foundation as well as innovation and would emerge from the crisis in a position of strength. With each presentation, my anxiety dissipated. We were staying the course. And as I quietly checked my iPhone throughout the morning, the market seemed to agree—our stock price never dipped below $8 that day.

The conference was allowing our team to take a step back from the operational details that had consumed us for the past few months and ponder what we had achieved and what lay ahead. As Cliff briefly outlined during his presentation, Starbucks also had multiple revenue opportunities beyond our company-operated US stores:

 

• The consumer packaged goods business,
  mainly the whole and ground beans we sold in grocery stores
  
 

 

• Almost 4,000 licensed stores
  
 

 

• Twenty-five-million-plus cups of Starbucks coffee served per week
  in hotels, restaurants, and other venues that fall under our food-service business
  
 

 

• The at-home and single-serve coffee markets
  
 

 

• Seattle's Best Coffee,
  a brand Starbucks had acquired in 2003 and whose potential had yet to be tapped
  
 

The largest potential for growth, however, was in Starbucks Coffee International, the unit that includes all Starbucks business outside the United States. It was by far the company's most exciting and largest prospect. Since opening the company's third store in Vancouver, British Columbia, our Canadian business had been a consistently strong performer, albeit too often unsung as it sat in the shadow of the United States. Outside North America, we had 5,000 stores in 48 countries, and from day one of opening our first overseas store in Tokyo in 1996, the third-place experience, that sense of community Starbucks stores offer, was embraced. The Starbucks brand was recognized worldwide.

Our international business—actually, I dislike the term “international,” and “global” for that matter, because it implies that we are not a united organization—had been profitable, but not to the extent it could have been. The business model had grown complicated, becoming the equivalent of overseeing dozens of different businesses not only in different geographic regions, but also with unique financial structures and partnerships and operating under local laws and regulations. The successes we did have were in large part due to the high quality of our local business partners; in most countries, we partner with a company that operates our stores, and many are private, family-owned entities that share our values. For years we had vetted these partners very carefully under the thoughtful guidance of Jinlong Wang, who originally helped open Starbucks abroad and whom I credit with establishing Starbucks’ premium position in the Asian market, and Herman Uscategui, whose congeniality came through in each of the seven languages he spoke.

Yet despite its successes, Starbucks Coffee International had much room for improvement. Unfortunately, getting our arms around each
market was not something I could focus on until the floundering US business was stable. But once it was, the size of the prize waiting outside North America, especially in China, was huge.

International.

Innovation beyond our retail footprint.

Unleashing languishing business units.

All of these areas would garner more of my attention in 2009. For now, we had to fix the foundation. Again, stay the course.

During the question-and-answer session, the analysts doggedly tried to get a handle on what to expect. When one analyst pointedly asked me to elaborate on Starbucks’ new growth model, I tempered my response. “This is not a time, I think, for us to make lofty statements about growth and number of stores. This is a time to have a much different lens on the business. And it's about, as we've said all morning, maximizing productivity and profitability at the store level. But,” I could not resist adding, “I do believe that Starbucks will return to being a growth company.” This was something I had believed throughout the transformation.

Ultimately, my worst fears were not realized that day. Overall, the conference went very well because the team had stepped up, exceeding even their own expectations and presenting a tremendous amount of information with authenticity and, again, conviction. Whatever the market's reaction, we came off the court that December day feeling as if we had won.

And comments from attendees were generally positive. For the most part, investors and analysts felt we had addressed the business's most relevant issues. Analyst notes following the event were cautious, but applauded our cost-saving initiatives and seemed to appreciate the balance Starbucks had to strike between maintaining our premium position and offering value. And despite pockets of criticism that the company was not taking competition seriously enough or advertising enough or slowing new-store growth enough, Starbucks’ share price ticked up to a daily high of $9.41 and closed at $8.61, slightly higher than it began the week.

Still, the stock was a dismal 61 percent lower than it had been a year before, when it was at $22.34.

It was time for me to close the conference, and I stepped back on stage.

We are not satisfied with where shareholder value has gone. A great deal, as you heard here today, is due to the significant downturn in the economy, but we're also responsible for some of the decisions that we made in the past. But I believe very strongly that when we meet again, two years from today, we'll be talking about how the stock had improved compared to where it is today. Those people who took advantage of the opportunity will have significant returns.