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Grounds For Success

Coffee talk with Starbucks CEO Howard Schultz.
May 1, 1998
URL: http://www.entrepreneur.com/article/15582

Everyone knows Starbucks, the ubiquitous retail chain that sells coffee beverages, beans and accessories, but few know Howard Schultz, the self-effacing chairman, CEO and mastermind behind Starbucks' astonishing growth.

A child of Brooklyn's Bayview Projects, Schultz earned a bachelor's degree in communications, worked as a salesman for Xerox, and eventually became vice president of U.S. operations for a Swedish housewares manufacturer. It was there that he noticed a four-store retailer in Seattle was ordering a large number of his company's drip coffee makers. He decided to find out why, and he scheduled a sales trip to Starbucks Coffee, Tea and Spice in 1981. Schultz was so impressed with the then-10-year-old company's dedication to providing customers with quality imported coffee beans, he signed on as director of Starbucks' retail operations and marketing the following year.

In 1983, while attending a housewares convention in Milan, Italy, Schultz noticed the coffee-bar phenomenon. Serving exotic beverages such as espresso, there were 1,500 of them in Milan alone--all of them packed. Certain that coffee bars would do well in the United States, he convinced Starbucks to open one the following year, then left the company to start Il Giornale, his own chain of coffee bars, in 1985. Two years later, he raised enough venture capital to buy out Starbucks' two founding partners and merged the firm with his own, renaming the new company Starbucks Corp. The combined operation had 100 employees and 17 locations in the Seattle area.

Today, Starbucks has more than 1,500 outlets staffed by more than 25,000 employees; 1997 revenues exceeded $1 billion. Schultz recently explained his business philosophy in Pour Your Heart Into It (Hyperion), written with Dori Jones Yang. He has not forgotten his entrepreneurial roots and firmly believes they are the key to his company's achievements. Here he shares his thinking about how to be a successful entrepreneur.

Entrepreneur:Last year, your attrition rate was 57 percent, compared with an average of more than 250 percent for retail stores and restaurants nationwide. Back in 1992, your store employees voted to decertify their union. You must be doing things differently.

Howard Schultz: Our mission statement about treating people with respect and dignity is not just words but a creed we live by every day. You can't expect your employees to exceed the expectations of your customers if you don't exceed the employees' expectations of management. That's the contract.

We give our employees--we call them partners--24 hours of training, which includes not just the nuts and bolts of what we do but also [explains] how we treat our people. Many of them come from companies where they were not treated well, and they are understandably very cynical. They don't trust management. We rebuild that trust by providing an environment that shows them we value their input, where they won't be reprimanded for constructive criticism, and where they are rewarded for initiative. Some of our best ideas have percolated up from the bottom.

Entrepreneur:You also provide better tangible rewards than most companies in the retail and service industries.

Schultz: It's ironic that retailers and restaurants live or die on customer service, yet their employees have some of the lowest pay and worst benefits of any industry. That's one reason so many retail experiences are mediocre for the public. We pay our partners well at every level, compared to similar positions at other companies. In 1988, we did something no one else had done, which was to offer our part-time employees comprehensive health care; in 1991, we offered all employees stock options. These benefits have paid for themselves in increased productivity and commitment to the business on the part of our partners.

Entrepreneur:You say you had a hard time being completely honest with employees in the beginning. Why?

Schultz: We wanted to be careful about hurting morale, but we learned how to combine respect with open communication. At first, we were also concerned about whether we should share information about some of the problems management was facing. That changed a few years ago when there was a severe frost in Brazil that damaged the coffee crop. I got up and made a speech that was very uncharacteristic of me, telling everyone what we knew. Not everyone appreciated it; some wanted a leader with unbridled confidence. But there are times when it's important to tell the whole truth.

Entrepreneur:You are opening a store a day and hiring 500 people a month. What qualities do you look for?

Schultz: This is a time when there is a shortage of labor and few people want to work behind a retail counter, so hiring is a real challenge. We want passion for our business--workers who can interpret and execute our mission, who want to build a career, not just take a temporary job. Hiring people is an art, not a science, and resumes can't tell you whether someone will fit into a company's culture. When you realize you've made a mistake, you need to cut your losses and move on.

Entrepreneur:How important is diversity in the work force?

Schultz: We've demonstrated that it provides a competitive advantage, and that's true for any company of any size. We've tried to build a company that is diverse in gender, race and age. The worst thing you can do is surround yourself with people like you, which is the comfortable thing to do.

Entrepreneur:How can an entrepreneur make a successful transition from the small, original business to one that needs professional managers?

Schultz: The ability to recognize limitations in yourself is what determines whether you have a great idea that can become a great business. You can't keep your finger on the pulse of all the issues you'll face; no one person can do everything. Entrepreneurs are bold thinkers, but they're usually not detail-oriented. You need the self-esteem to hire people who are smarter than you and give them the autonomy to manage their own areas. Surround yourself with great people and get out of the way; don't try to micromanage things as you did early on.

Management has to leave its ego at the door as the company grows. You have to hire people who have experience at the level that is your goal. And you have to get these people and put disciplines in place well before you need them, because you can't play catch-up when you're growing very fast.

Also, you don't want "yes men." We look for people who aren't afraid of creative conflict and debate over things that matter but who also respect the culture of the company.

Entrepreneur:How do you keep the entrepreneurial soul of a firm intact when you have to run it with a bureaucracy and a system?

Schultz: This is the most challenging issue--how to stay intimate when you get big. You have to make sure close relationships are maintained among employees and with customers, no matter how many other initiatives there are. You can't let relationships get buried while you focus on sales, profits, competition, your investors and so forth. That's why we spend so much money on communication and travel: to be sure we stay in touch.

Be very careful not to allow the values of the company to be compromised by an ambition to grow. Every decision and opportunity has to be put into that context: What will it look like in the long term? Growth can be a seductive evil if it isn't built on the right foundation. There are a lot of similarities between rearing a family, where the parents imprint values on their children, and starting a new business, where the founder sets the ground rules very early. If you do it right and maintain those values, growth will be managed so you don't lose the soul of the company.

Entrepreneur:As a company grows, it becomes more complicated, and individuals within it tend to become focused on their responsibility and less aware of how they impact others in the firm. How can you avoid compartmentalization?

Schultz: That's the primary role of the entrepreneur. I can't do a better job than our CFO or our head of retailing--they have more expertise and experience. But I do believe I have an advantage in the history of building this business and in my connection with the people. This helps me make sure everyone remembers the guiding principles and the big picture and doesn't get bogged down in the minutiae of decision-making. Open communication between departments and among all levels of the company is important so people don't get too narrowly focused or forget how their decisions interact with those of others.

Entrepreneur:When your company was smaller, you had control of product quality and everyone serving anything with your name on it. Now you're in partnerships with Dreyer's selling coffee ice cream; Pepsi-Cola marketing Frappuccino; Barnes & Noble; United Airlines; and others. How can you maintain your standards when you form partnerships?

Schultz: One reason we've been able to exert an unusual amount of control over our products is because we never franchised. When we began to license and form strategic partnerships and joint ventures, we spent a lot of time with the other [companies'] management to see how they operate in good times and bad, and whether we shared a similar view of the world. You are judged by the company you keep.

There were a lot of unexpected bumps in the road, and sometimes we had to change our original concept of how to do things, but we always adhered to our central values and learned a lot from these bigger firms.

Entrepreneur:You went into this low-margin commodity business at a time when coffee-drinking was declining, but you decided to change that. Why did you think you could change public tastes rather than adhere to the usual business credo of giving customers what they want right now?

Schultz: Customers don't always know what they want. The decline in coffee-drinking was due to the fact that most of the coffee people bought was stale and they weren't enjoying it. Once they tasted ours and experienced what we call "the third place"--a gathering place between home and work where they were treated with respect--they found we were filling a need they didn't know they had.

Customers today are more open than ever to new ideas. It's an incredible time to start a new business or introduce a new product because people are eager to try new things.

Entrepreneur:How do you ensure adequate feedback from customers?

Schultz: We're very fortunate to have customers who are passionate enough about what we do that they let us know very quickly when they're dissatisfied. We have customer comment cards in the store, we get thousands of phone calls to our customer relations department each year, and we train our partners to give feedback about what they hear.

Entrepreneur:In your book, you claim you didn't think about the competition when you were growing the business. Is this realistic for most firms?

Schultz: I meant we didn't want to concentrate on what others were doing and be reactive because then we would have been designing our stores against the competition instead of for the customers. The first step in building a business is to try to develop an enterprise customers will embrace and be excited about, to target a market and try to crack the code for success without worrying too much about what others are doing.

Entrepreneur:You did very little advertising early on. What alternatives have you found successful?

Schultz: We still don't do much conventional advertising because we find there is just too much competition for consumers' attention in TV, radio and print media. This is especially true for a small enterprise. My advice would be to pick one or two charities or events that reach the community you serve, where you can make a difference that will be appreciated. This will inspire people inside and outside the company and reinforce the company's values and image.

Entrepreneur:Early on, you started with mail order. Any advice about marketing that way?

Schultz: The main thing is to get experts involved at the start because there are all kinds of hidden costs. Don't try to figure it out on your own. If it's done well, mail order can be an effective way to build a brand name. We use it to seed new markets: We look at where our mail order customers are when we're deciding where to open stores next.

Entrepreneur:You started out raising venture capital and then, in 1992, went public. How difficult was each experience?

Schultz: I was turned down by 217 of the 242 investors I initially talked to. You have to have a tremendous belief in what you're doing and just persevere. The three venture capital firms we ended up with in 1989 are still on the board today and have been an invaluable resource. You have to build a board where there are shared values and trust so you aren't always at odds. I encourage board members to be honest with me, and I give them assignments that enhance their contributions.

As for going public, you get immediate access to capital and liquidity, but you have to be ready for intense public scrutiny and financial discipline. Management has to be aware that it's better to underpromise and overdeliver each quarter because Wall Street can be shortsighted and unforgiving.

Entrepreneur:How do you balance the demands of your career with your personal life?

Schultz: I've gotten much better about this, and I'm very disciplined about the things I won't do, like travel on weekends. I try to be home for dinner with my family most nights. I've learned a balanced personal life makes for a more productive business life. Feeling great about your family life adds value to the company.

Entrepreneur:From your vantage point now, what qualities does it take to be a successful entrepreneur?

Schultz: You have to have a great tolerance for pain! You have to work so hard and have so much enthusiasm for one thing that most other things in your life have to be sacrificed.

You need to be willing to surround yourself with people more talented than you are in certain areas. You need a degree of fear of failure to keep you going. And, while everyone wants leaders who demonstrate courage, passion and boldness, you should not be afraid to show vulnerability now and then.


Scott S. Smith is a freelance journalist living in Los Angeles.

Contact Sources

Starbucks Corp., 2401 Utah Ave. S., Seattle, WA 98134, (206) 447-1575