www.hbr.org THE HBR INTERVIEW Starbucks CEO Howard Schultz on the challenges of “We Had to Own the leading a turnaround at the company he made a Mistakes” household name. An Interview with Howard Schultz • Reprint R1007K Starbucks CEO Howard Schultz on the challenges of leading a turnaround at the company he made a household name. THE HBR INTERVIEW “We Had to Own the Mistakes” An Interview with Howard Schultz By the time Howard Schultz stepped down as The decisions we had to make were very diffi- chief executive of Starbucks, in 2000, the coffee cult, but first there had to be a time when we chain was one of the world’s most recognizable stood up in front of the entire company as lead- brands—and on a steady trajectory of growth. ers and made almost a confession—that the Eight years later Starbucks was suffering from a leadership had failed the 180,000 Starbucks rough economy and its own strategic missteps, people and their families. And even though I and Schultz felt compelled to return to the CEO wasn’t the CEO, I had been around as chair- seat. His previous tenure had seen promising man; I should have known more. I am responsi- growth, but now he faced a challenging mission: ble. We had to admit to ourselves and to the to lead a turnaround of the company he had people of this company that we owned the mis- built. In this condensed and edited interview, takes that were made. Once we did, it was a Schultz discusses what it’s like to retake the reins powerful turning point. It’s like when you have in the middle of a crisis. a secret and get it out: The burden is off your shoulders. HBR: We thought we knew the Howard Schultz story. You had a vision, built a suc- To what extent did the financial crisis add to cessful company, and moved on. But then the management crisis? Starbucks ran into trouble, and two years For some reason we seemed to become the ago you had to return as CEO. How hard has poster child for excess. It’s easy to laugh about it it been to get things right? now, but people said that buying a latte at Star- Schultz: The past two years have been transfor- bucks wasn’t smart. McDonald’s put up bill- mational for the company and, candidly, for me boards saying that four dollars for a coffee is personally. When I returned, in January 2008, dumb. Gas went as high as five dollars in some things were actually worse than I’d thought. places, coupled with the financial crisis—and OPYRIGHT © 2010 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. OPYRIGHT © 2010 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. C harvard business review • july–august 2010 page 1 “We Had to Own the Mistakes”•••THE HBR INTERVIEW all of a sudden we saw a seismic change in con- look what was coming. Big-time people began sumer behavior. Weekends have always been to notice that this coffee business is a good busi- our busiest times, but people changed their ness and highly profitable. McDonald’s and driving habits. There were times during the day Dunkin’ Donuts were on the very low end. Let’s when we didn’t have enough sales per hour to characterize them as willing to do anything to justify the labor. And this for a company that capture or intercept customers—free coffee, had always hit not singles or doubles but home coupons, say anything, do anything. We respect runs. We didn’t really know how to respond, be- them as companies, but we didn’t respect their cause it’s not something you’re taught, and practices. At the higher end were the indepen- we’d never had any such experience. I spent a dents who went to school on Starbucks. And lot of time reaching out to people much there was this feeling of “Let’s support the local smarter than me, who were managing big retail companies.” So Starbucks was being squeezed businesses and consumer brands, and I was to the middle, and that is an undesirable place stunned that every time I called someone, they for us to be. wanted to know more from me than I could get from them, because they were in the same posi- And by this time, bloggers were making life tion. No one had any answers. tough for you. Social media suddenly started defining Star- Also, you were suddenly facing serious bucks. We were an easy target. Bloggers were competition. putting holes in the equity of the brand, and it We had never had much competition. Every- was affecting consumer confidence, our peo- thing we did more or less worked. And that pro- ple, everything. I woke up one day and went to duced a level of hubris that caused us to over- my desk, and I had 75 to 100 e-mails and phone A Stark Challenge: What Schultz Is Trying to Fix When Howard Schultz stepped down as CEO, in 2000, revenue and operating income were soaring. When he stepped up again, in 2008, the share price had dropped by almost 50%, and he faced what would become a comparable decline in operating income. REVENUE OPERATING INCOME Schultz steps Jim Donald Starbucks stock Schultz returns Stock down as CEO. becomes as CEO. more than president customer traffic doubles in and CEO. drops for the price. first time. VIA instant coffee is launched. Starbucks jobs are cut. harvard business review • july–august 2010 page 2 “We Had to Own the Mistakes”•••THE HBR INTERVIEW calls about an issue I had never heard of. There son for being that somehow became linked to was a sensational story in the Sun, in London, PE, the stock price, and a group of people who that Starbucks was wasting water through felt they were invincible. Starbucks isn’t the something called the “dipper well.” My phone first company that has happened to, and thank- rang, and it was a reporter asking me to com- fully we caught it in time. ment on the dipper well. “I have no idea what you’re talking about,” I said. The reporter said, Do you feel there’s a clash between trying to “Mr. Schultz, I suggest you Google Starbucks be a premium destination with a premium- real fast.” The Sun claimed that we were pour- priced product and being a public company? ing “millions of litres of precious water down I don’t think so. Hundreds of public companies the drain” as a result of the method we used to have a premium position in their categories. I sanitize equipment. The report was wildly ex- think the tension is about can you be big and aggerated, and we had been working for sev- stay “small”? Can you maintain intimacy with eral years to find a better solution, but we sud- your customers and your people? We under- denly became the target of conservation stand our business very well, and we under- groups. We had a real problem. The lesson was stand our customers. And to a person, we un- that the world had changed. Something that derstand that we are only as good as yesterday had happened in London had created a world- and we have to come to work every day and try wide story that positioned Starbucks with to exceed the expectations of our people and venom and disrespect. And we didn’t know customers. how to respond. The issues of social media, digital media, and getting smart about the Yet every company that begins small and rules of engagement emerged as a tremen- “authentic” eventually finds it hard to re- “You have to have a dous weakness for the company. Ultimately tain that image as it expands. How can you our reputation didn’t suffer, but we spent combat that? 100% belief in your core countless hours defending ourselves when in You have to have a 100% belief in your core rea- reason for being. fact we have a very strong track record in envi- son for being. There was tremendous pressure ronmental stewardship. in the first three or four months after my return Franchising the system to dramatically change the strategy and the What was the low point after your return? business model of the company. The market- would have fractured the The challenge was how to preserve and en- place was saying, “Starbucks needs to undo all culture of the company.” hance the integrity of the only assets we have as these company-owned stores and franchise the a company: our values, our culture and guiding system.” That would have given us a war chest principles, and the reservoir of trust with our of cash and significantly increased return on people. There was unbelievable pressure from capital. It’s a good argument economically. It’s a multiple constituents. I’ve saved every analyst’s good argument for shareholder value. But it report and major story, and what was said would have fractured the culture of the com- about us and about me. My favorite was “Never pany. You can’t get out of this by trying to navi- give an 800-pound gorilla caffeine.” There was gate with a different road map, one that isn’t a death march of comments like “Starbucks’s true to yourself. You have to be authentic, you days are numbered,” “It’s no longer relevant,” have to be true, and you have to believe in your “McDonald’s will definitely kill Starbucks,” and heart that this is going to work.