The Starbucks Story (8 page)

Starbucks has been committed to that standard of behavior since 1987, and talks about its values from the first minute of its training programs. What emerges is not a cult religion, but a philosophy of tolerance. The fear people have and the cynicism they show about brands is that they aim to create a Moonie-like uniformity. What emerges from Starbucks is quite different because an essential element of its values has always been to respect individuality
and
diversity.

But Starbucks needs to do more than just give its employees respect: it needs to demonstrate that respect through its actions. From the early days of his stewardship of the company, Howard Schultz gave his attention to tangible ways that he could reward employees. The seemingly cosmetic change from calling people “employees” to calling them “partners” is one aspect of that.

Two features of its partner contract set Starbucks apart from other companies, particularly those in the food and drink industry. Both date back to the early days after Howard Schultz’s acquisition. The first is the provision of healthcare as part of a partner’s benefit package. Starbucks has always opted to pay a salary that is better than the industry norm and to offer additional benefits for full-time
and
part-time employees. There is a little bit of altruism in this, but a lot more common sense. Starbucks and its brand depend on the quality of its people. It has always aimed to attract and retain intelligent, enthusiastic, motivated people, but recognizes that to do so it needs to offer employment benefits that will feed their intelligence, enthusiasm and motivation. Not only that, but everyone has to be included, because exclusion from benefits will breed resentment and envy.

Howard Schultz was drawing on his family experiences. His father’s illness and injury, coupled with his inability to pay for adequate healthcare, had led to hardship and deprivation for the whole family. The decision to give health-care coverage to partners, including those who worked only 20 hours a week, was made by a sceptical board. But the decision was made effectively by an impassioned Howard Schultz. He argued for the healthcare plan on the grounds that it was simply the right thing to do. All employees needed to be valued. It would build loyalty, reduce turnover, and cut the costs of recruitment and training. Most of all, it would be fair and it would prove that the company really believed in respect and dignity.

This decision made Starbucks something of a rarity in corporate America. Such generosity was not commonplace in the late 1980s. This was the era when Wall Street power players were idolized, when lunch was for wimps, and when companies made a point of treating workforces as disposable resources, not valuable assets. But the plan was agreed, and Starbucks became the only US company to offer such benefits to part-time workers.

Since the US had minimal free public health provision, the impact of the scheme was greater than it would have been elsewhere. It was more expensive for the company and more valuable for the partners, so the psychological impact on them was deeper. People outside the company noticed, too; a few years later, Howard Schultz was invited to the White House to tell President Clinton all about it.

Some board members had resisted the health scheme, arguing for a profit-sharing scheme instead. Howard Schultz was interested, but knew that, at least for the early years, there would be no profits. The offer would have been a dishonest one, so he decided on a different way of giving partners a stake in the company. The solution he came up with became the second distinctive feature of the Starbucks partner contract.

Howard wanted partners to share in the growth of the company by having stock options, or Bean Stock as it was called. This would make employees genuine partners, with vested interests in the success of the business. Each partner – 700 of them in 1991 when the Bean Stock scheme was initiated – was given stock options worth 12 percent of annual base pay. The following year it went up to 14 percent of salary. Year by year, as Starbucks’ stock price has increased, the scheme’s value to the individual has grown incrementally. As a result, the company has some wealthy and long-serving partners.

Again there had been questioning of the scheme at board level. Most board members were there because they had invested large amounts of their own money in Starbucks. Naturally they were concerned that their share of the company was shrinking. From one angle shareholders’ value was diluted; from a different angle, it was expanded. Howard Schultz was an expansionist, arguing that if they had faith in doing what was right for the brand, benefits would accrue in terms of loyalty and trust, leading to growth and profits. For him, people were unarguably the key to the brand’s success.

Nothing could have sent stronger signals to the partners. Here was the proof that they were valued highly. Both decisions – to provide healthcare and to offer Bean Stock – were based on the belief that people in the front line have to feel good if they are to represent the brand well. But what then was the brand that they were representing? What was it trying to achieve? What were its beliefs and values? These questions had never been answered in any consistent way or committed to paper. In 1990, Starbucks decided that it needed to do so, and that it needed to involve as many of its people as possible in the process.

The executive team drafted a mission statement. The idea was to define a set of principles that would then be used to guide every decision taken at Starbucks. The six principles are important in their order, putting people first and profits last, but making clear that all the principles are interrelated. The statement was then incorporated into a deeper strategy planning process that involved more than 50 people in the company and was facilitated by a consulting firm.

What is interesting is that the six principles are altruistic (albeit with an edge), but fairly generic to any business. You could, for example, lift “Develop enthusiastically satisfied customers all of the time” and drop it into the principles of many other brands. It would sit there inoffensively. What gives the Starbucks principles more teeth is that these are meant (and used) to measure whether the right decisions are being taken for the brand.

What perhaps further sets them apart is that behind each principle is an awareness of a particular audience whose needs have to be satisfied. First, Starbucks’ own people: the partners who must be treated well because the business and the brand depend on their motivation. Second, the liberal, thinking constituency that Starbucks traces back to European coffee houses. Third, the real coffee lovers, the core loyalists who were behind the original founding and development of the company from 1971. Fourth, there are customers with a range of needs and interests, and Starbucks needs to understand and cater for them while remaining true to itself and its core product. Fifth, there are local and global interest groups, communities touched by Starbucks’ presence and activities. And last, there are the financial audiences, the market analysts and investors, but also, importantly, the partners again because they too have a personal stake in the wealth of the company.

Mission statements can be a problem. All companies and brands feel the need to have one. But often they become a dead weight around the business as the mere fact of having agreed a form of words becomes more important than what the words mean. We have all read mission statements that are vacuous because they have been created by people who agree only on the most superficial principles. Starbucks’ mission statement still has something of “motherhood and apple pie” about it, yet it is clear that the statement is treated seriously by everyone in the company. Part of this, no doubt, comes from the decision, taken in that 1990 strategic planning process, to give the mission statement real meaning by setting up a mission review team.

The aim of this team is to encourage comments and questioning by partners in the stores. In effect, partners are asked to question management decisions that they feel are not in line with the principles of the mission statement. Clearly, then, this is not the kind of mission statement that has been produced to hang in a frame behind the reception desk to impress visitors. Indeed, it is a challenge to managers at every level. But if management sets and expects high standards, it has to be seen to live by them. So any partner can comment (anonymously if preferred), and the relevant managers have to respond to their suggestions or criticisms within two weeks. The comments are reviewed by senior directors monthly and aired in quarterly open forums. As a result, communications are open, the mission statement is alive, and many valuable suggestions have been put into practice to improve the business.

All this meant that the soul of the company was healthy. Much had been done to strengthen it: in effect, to lay strong foundations for the development of the brand. In the meantime, there was still a business to run, a business that lived or died by its ability to make and sell one cup of coffee at a time to individual customers. This business was developing into a machine, a fast-running one. It did not deliver profits for at least three years but investors retained their faith and their investment, persuaded that this was all part of the plan.

It was clear, though, that the original management team needed to be strengthened. It lacked the size and experience to deliver the growth that was now planned. Howard Schultz and Dave Olsen, in particular, had established the business on firm ground, but they now needed seasoned professionals. In 1989 and 1990, two people joined at a senior level who were to be crucial to the development of Starbucks. Howard Behar was put in charge of retail operations, and Orin Smith was made chief financial officer. Both men were recruited from outside the world of coffee.

Until 1991, when it entered California, Starbucks had been a regional company almost entirely based in the north-west of America. It was by now a sizeable operation, with 150 stores. It had a Chicago store that had been one of its most difficult challenges. At this point, a number of fundamental decisions were taken that benefited from a level of investment that was proportionately greater than the size of the company demanded. The investment that was made in Starbucks’ systems and organization seemed lavish at the time, and no doubt accounted for the losses in the first three years of operations, but it made growth much easier in the long term. As the investment started to pay off, new members joined the board bringing with them fresh funds. Most were wealthy individuals from venture capital firms who were attracted by the potential financial reward and by the power they saw in the developing Starbucks brand.

Howard Behar was not a financier. He was a retail manager who had learned how to develop from one outlet to many, mainly in the furniture business. His role was to direct the accelerating growth of Starbucks’ shops beyond its Seattle heartland. This meant, at least in his interpretation of the job, working closely with the partners to understand and meet customers’ needs. He was quite different from the other Howard. Howard Schultz is a visionary, soon bored with processes and implementation, always looking for the next big idea. Howard Behar is pragmatic and wants to get things done, but that makes him impatient with people and situations that are not working properly. When he joined Starbucks in 1989, the Chicago store was in its third loss-making year. He knew what to do, hiring new staff, sharpening up the systems, adjusting the prices, focusing on the customers.

More than anything else, it was his focus on customer service that made a difference. His arrival in Starbucks marked a virtual cultural revolution. Chairman Mao–like, he challenged everything and everyone, especially Howard Schultz. Confrontation had never been Starbucks’ style, but Howard Behar confronted. Obsession with coffee quality had always been endemic to the exclusion of everything else. Why? he asked. What if a customer does not agree with your judgment of what constitutes the best coffee? What if the customer wants coffee with skimmed milk?

As he was to prove, some customers did indeed want coffee with skimmed milk. His philosophy was “Say yes to customers,” and he made it a mantra with partners. It has led to the wilder concoctions that customers ask for in a language that is unique to Starbucks: “A double tall skinny hazelnut decaf latte.” Whatever; it’s the customer’s drink. Starbucks will provide the best possible version of that drink. Howard Behar insisted, “We’re not filling bellies, we’re filling souls.” Be less obsessed with absolute product purity if that means a narrow range of customer choice. But be as obsessed as you can be with giving the customer the drink that will meet her desires. Think more about people, less about product.

That was, and still is in many ways, heretical in Starbucks. My first day in Seattle was spent not with managers but with coffee-makers, and they were determined to educate me about coffee through cuppings, blendings, roastings, tastings. The product remains central. Howard Behar ensured, though, that people mattered just as much: both partners and customers.