Innovation Blog

Starbucks’ Turnaround: Howard Schultz Reveals All, Reinvents the Business

By Shlomo Maital

 Howard Schultz returns!

   Howard Schultz, who will turn 58 on July 19, is the legendary founder of Starbucks.  After driving his startup to reinvent the concept of coffee (not just coffee, but ‘a third place’, outside home and work) and to achieve rapid growth, he turned over the reins of management to Jim Donald in 2005  – and had to return in 2008 when Starbucks stumbled.  In 1987 Starbucks had 11 stores and 100 workers; at its peak it had 17,009 stores in 50 countries. 

     In a revealing interview in McKinsey Quarterly (2011, no. 2, p. 34), based in part on his new book Onward: How Starbucks Fought for Its Life without Losing Its Soul, Schultz tells all.  Here are some excerpts about lessons learned:

   1.  Stop ‘comps’.  Comps are comparisons of same-store sales, period-to-period, data demanded by Wall St. analysts, to reflect true growth of revenue without including the newly opened stores.  Schultz found Starbucks store managers were driving up revenues any way they could, because they were measured and in some cases compensated, for their ‘comps’.  Schultz halted use of ‘comps’ soon after returning in 2008.  “We made decisions driving incremental revenue, not the brand equity”, he explains.  Meaning: we sought money, not value and meaning.  Lesson: Be careful what you measure! Is your ‘measure’ eliciting the desired behavior? 

2.  Build a new business design.   Schultz is now trying to build a Starbucks brand sold in supermarkets and other retail outlets, while maintaining Starbucks’ own 17,000 stores.  “Integrate ubiquitous channels of distribution with the retail footprint”.  This is hard. Why should Wal-Mart sell Starbucks brands when Starbucks itself competes with it?  This is based in part on the Starbucks card, which does 1 in all 5 Starbucks store transactions, and a reward system between the wholesale and retail channels. 

3.  Think Local, Act Local.  China has 140 cities with over one million people!  Starbucks is focusing on China.  To do so, it will have to be very very local – black sesame muffins, rather than blueberry muffins, for instance.  Far more new products will have to be invented locally, and not in Seattle headquarters.   Starbucks has stumbled on its local message. Its 9 stores in Israel were closed in 2003, because local Israeli café chains were simply far superior.   “We want to put our feet in the shoes of our customers,” Schultz says.  Astonishing how great companies forget this simple lesson, again and again and again, and plunge into chaos.

4. Talent is the real constraint. What keeps Starbucks from growing? Not finance (it has $2 b. in cash) but management talent.  And this shortage will worsen, as baby-boomer managers retire.  Schultz wants to hire world-class people.  He should also focus on how he will build such talent internally.  Hired top talent tends to be mobile, leaping from firm to firm.

5.   Discipline and creativity.  Schultz seeks “real quantitative metrics to study the investments that we’re making across the board…–  return on investment in stores, in advertising, new-product introductions, entry cost to new markets”.   In other words: Make the lion of discipline lie down with the lamb of creativity.  Schultz is keenly aware that such metrics – “comps” – ruined Starbucks’ value focus.  The same issue of McKinsey Quarterly has a short piece about HR – how to use HR analytics as the basis of training programs.  Measurement is not just technical, it is strategic – and often, badly managed.

     Every global company grapples with this discipline/creativity paradox.  Will Starbucks succeed?  Stay tuned.