Starbucks' chief caffeinista faces penny-pinching customers, a plunging stock price, and competition from Dunkin' Donuts and McDonald's. Can Howard Schultz keep his company from getting creamed?
Project Ferrari is what it's called around the Starbucks Center in Seattle. For the past several months, behind locked doors on the sealed-off seventh floor of corporate headquarters, they've worked on it. Few people have ever seen the stuff, and almost no one has tasted it. And suddenly here it is, swirls of yellow, red, white, and purple in parfait cups, bathing in grapefruit or blueberry juice, or espresso. Two of Howard Schultz's "partners"-that's what Starbucks calls its roughly 200,000 employees-approach the door to his office, carrying the cups on silver trays. "Come on in!" Schultz shouts at them cheerfully.
The substance does not yet have a name, at least in English; the fellow who came up with "Starbucks" 37 years ago is on the case. Early this year, shortly after Schultz had resumed the post of C.E.O. at the company he'd built from a small chain of coffeehouses into an international colossus, he received word that a magical new drink had been discovered in a small Italian town. He promptly dispatched a trusted aide-one of several who had rejoined him since his return-to see if it matched the hype. "You've got to get over here," the man promptly reported back. "I think we have the next Frappuccino!"
Italy has been good to Schultz. As most Starbucks baristas know, it was in Milan, barely 25 years ago, that he had his famous epiphany, the one that convinced him that he should bring the Italian espresso bar to what sometimes seems like every crossroads in America. In the company's more recent past, it might have taken a year or two before anything came of such a suggestion. At today's Starbucks, though, no one is waiting around: Within 48 hours, Schultz and seven associates were en route to Italy aboard a corporate jet, and within a few weeks, the deal had been struck. The no-name half-drink half-dessert will be in Starbucks stores in California this summer and all over the place by next year. "Thank you, guys!" Schultz shouts as the two depart. Pour Your Heart Into It, he called his 1997 corporate autobiography. And pour his heart into it is precisely what Schultz now does.
"You got a real treat!" he tells me. "You'll love this. Take this one first. Try that one!" He stops and samples some. "Oh, it's so good," he whispers. "Tell me this isn't, like, over-the-top! Is that fantastic? We haven't released the name. Or what's in it. But it's unique." He turned to a different cup. "This is what the Italians call affogato, which is espresso on top of this." He tastes it. "Completely different flavor. But fantastic." He tastes some more. "Oh, God! It's so unique and fantastic. This is what we have to keep doing. We have to keep pushing the envelope around innovation. This has juice in it. Isn't it fantastic? Taste the fruit one! This is so refreshing! It's refreshing and indulgent at the same time!" (And, he points out, it's low-cal.) Sure, he concedes, the coffee purists-the same cynics who are forever declaring that Starbucks has lost its soul-will sneer. "But we're in the business for our customers. And they're going to love this!"
"Howard Schultz enthused" may be redundant. But it is also something to see, and these days he's more than enthused; he's reinvigorated. "I'm energized, and believe it or not, I'm excited by this," he says. The this here is not the (my best guess) frozen yogurt with ground ice and various flavorings that we've just consumed, but the sudden, shocking end to the long and gilded age of Starbucks, which in the past year and a half has seen earnings drop, the number of customers diminish, the stock lose more than half its value, and activist investor Nelson Peltz take a stake. "In a very perverse way," he says, "if someone said to you, 'You hoped this would happen?'?No, absolutely not. But there's a piece of me that is embracing this underdog thing where people are counting us out, because they're going to be wrong. I promise you that. They're going to be wrong."
"We're not this young, beloved, entrepreneurial enterprise anymore," he concedes. "We have to do business in a different way. And now we're being tested, for the first time." That goes not just for Starbucks but for Schultz himself. He too has had an incredible run, which has taken him from making cold calls for Xerox to having Mick Jagger over to his house for dinner. ("Very nice guy, and really interested in business.") These days, lots of people are waiting for Schultz to fall, or at least be unmasked. These days, he's taking his coffee not mit schlag but mit schadenfreude. Online and in the press, as well as among coffee mavens, Seattle sports fans, environmentalists, nutritionists, fair-trade advocates, and even some of his own baristas, he is under attack.
Or maybe he is simply being held to his own lofty rhetoric. The question now is whether Schultz can be loved on Wall Street and everywhere else at once, whether he can remain what he has always aspired, and thinks himself, to be: a mogul, sure, but also a mensch.
Only last year, Schultz told talk-show host Charlie Rose that Starbucks was "fairly recession-proof." The economy had dipped before, but Starbucks had always managed to be what Schultz likes to call an affordable luxury. But this time the economy is in a tailspin; the housing market has collapsed; the price of the two fluids most vital to Starbucks' health-petroleum and milk-has skyrocketed. Fewer people are walking into the same Starbucks stores than last year. Never before had that happened, even when Starbucks was opening new stores virtually on top of old ones.
In January, Schultz, who'd ostensibly handed off day-to-day control of the company in 2000 to go off and think grand thoughts, had resumed the reins, replacing Jim Donald, who had been C.E.O. since 2005. The day after he returned, the stock shot up more than 8 percent. But it was a short-lived jolt, a corporate doppio espresso. In late May, the price hovered at about $18 a share; 20 months before, it had been nearly $40. A flurry of initiatives-what Schultz has dubbed, with characteristic grandiosity, his "transformational agenda"-hasn't yet helped.
Starbucks is closing 100 underperforming stores and cutting way back-at least by its own exponential standards-on expansion in the U.S.? There's a super-duper new Swiss-made espresso machine, one promising mass-produced perfection. (It is also lower-slung, allowing baristas to make all-important eye contact with customers.) There's the Clover, an ingenious and expensive-$11,000 a pop-machine for French-pressing coffee by the cup. (So dazzled was Schultz by it that he bought the company.) And there's Pike Place Roast, a new blend designed to strengthen Starbucks in the world of drip coffee, where McDonald's and Dunkin' Donuts are nipping at its heels. The blend's name-honoring the location of what has come to be known as Starbucks' flagship store-is a nod to the company's roots, and so is the packaging; it features Starbucks' originally zaftig, busty mermaid, which had been bowdlerized many years ago to placate American bluenoses.
This February, in a great theatrical stroke, Schultz closed more than 7,000 stores for three hours to allow 135,000 baristas to relearn-or learn-how to make decent espresso. (Three hours apparently sufficed; much of the process at Starbucks is automated anyway.) Schultz insists, though, that the gesture, which cost the company an estimated $10 million in labor costs and lost revenue, was no gimmick. It did seem to confirm what aficionados have long known: Starbucks' espresso often isn't very good, and it has gotten worse. But the stunt garnered priceless publicity, including a Stephen Colbert depiction of Starbucks withdrawal that outdid anything Ray Milland endured in The Lost Weekend. When the clip was shown at the company's annual meeting in March, it brought down the house. "People want to know why we don't advertise," Schultz joked afterward.
Starbucks, Schultz says, will look forward "with laser, laser intensity" by looking back to where it all began: the coffee. The company's Great Satan is the poor breakfast sandwich, which, while it earns handsome profits, embodies Starbucks' deviation from its core business, besides stinking up the joint and obliterating the heavenly aroma of freshly ground beans. Schultz has ordered it banished.
Another distraction was Starbucks' music business, the one that plants all those CDs en route to the cash register. With breathtaking speed and even a bit of masochism, Schultz scuttled most of the division in May. "Howard is just really focused entirely-manically-on getting the business back on track, and he will do anything or eliminate anyone to help him do that," says one victim of the music purge.
"He's literally trying a do-over," one Starbucks executive tells me. "He wants to go back to the point where everyone was happy and everyone loved us and then make a left turn instead of a right."
Despite all the turmoil, Schultz is in a fine mood the day I see him, even before enjoying the mysterious Italian confection. He's optimistic. Whatever Starbucks is going through now, he suggests, is really but a blip. Skeptics say that for reasons of ego or habit, he's foolishly addicted to growth, but he doesn't buy that criticism. Though he's no longer tossing around numbers, it takes little prodding for him to hint that Starbucks' expansion has only temporarily been retarded. I ask him whether he ever fears that Starbucks' moment might have passed. "That does not enter my mind whatsoever," he replies.
He's resolute. Starbucks is already selling new energy drinks and plans to introduce new health-and-wellness beverages. There's another hush-hush concoction-"a game-changer in the coffee space, something in a cup," he says-that he only hints at. There will be new, more varied store designs and improved, less McDonald's-like drive-throughs. Then there's the pastry, heaps of which they couldn't even give away at the annual meeting. I'd heard that, not long ago, two women sitting in a Seattle Starbucks were griping about how horrible the breakfast items were, when a tall, well-dressed man sitting near them-Schultz himself, or so it was said-chimed in that he agreed. All true, Schultz says. "I have been embarrassed by the food," he goes on. "The food is going to be completely reinvented by fall. With a stake in the ground. Done."
He's also defiant. A survey last year in Consumer Reports concluding that McDonald's drip coffee actually tasted better than Starbucks coffee was, he says, "a joke." He's tried the coffee at McDonald's and Dunkin' Donuts-outside Seattle, wearing a hat for camouflage-and it's "swill." Many of the independent coffeehouses the purists so love are "charlatans," who cut their top beans with cheaper varieties and then mislabel them.
Schultz's office is on the eighth floor of the Starbucks Center, a gigantic former Sears warehouse with a mermaid at the top, in industrial South Seattle. Outside, to the left of the sprawling rail yards, is the port through which comes a large part of Starbucks' coffee; 352 million pounds of it were imported in fiscal year 2007, which ended on September 30. This is not the only incredible statistic. There are, for example, nearly 16,000 Starbucks stores, in 44 countries. (In the next few years, Starbucks will continue its growth overseas-particularly in places like China.) Nearly 50 million people enter those stores weekly. Last year, they generated almost $10 billion in revenue.
On display in Schultz's office is a signed glove used by Seattle Mariners outfielder Ichiro Suzuki, whom Schultz and his wife, Sheri, hosted for his first Thanksgiving dinner. Truth be told, Schultz would probably rather have Mickey Mantle's mitt; as a kid in Brooklyn, he wrote Mantle's number in Magic Marker on all his clothes, even his underwear. He'd been tempted to bid against Billy Crystal not long ago when the glove came up for auction, and with what Forbes has said is a net worth of around $1 billion, Schultz probably would have won. He says he finds his very appearance on Forbes' list of the 400 richest Americans-No. 354 in 2006-"somewhat embarrassing." Last year, there were so many billionaires that he didn't make the list, so that particular embarrassment remedied itself.
Among the photographs nearby is one of Mark McGwire wearing a Starbucks hat while throwing out the first ball of a game in the 1998 World Series. That was the year McGwire broke baseball's single-season home-run record, and whatever else he was taking, he apparently credits Starbucks coffee for his success. (Through McGwire, Schultz met the manager of the St. Louis Cardinals, Tony La Russa, who has since become a great friend; he calls Schultz's autobiography one of the most inspiring things he's ever read. The Cardinals now serve Starbucks coffee in their clubhouse.) Like McGwire, Schultz is not here to talk about the past, or at least the very recent past. He has only kind words for Jim Donald and takes the blame, almost too eagerly, for Starbucks' travails. "Even though I was not the C.E.O., I was around," he says. "I wasn't here every day, but I was here enough." Donald, his wounds reportedly salved by a nearly $1.3 million severance package, has kept mum.
Schultz's life has changed drastically since he came back. Mornings, he works out early, and he takes regular bike rides with his wife. He's lost more than 10 pounds and 10 percent of his body fat in the past year. He's at headquarters by 6 or 6:30 in the morning and typically stays there until 7 p.m.? After dinner at home, he continues working or talks to Starbucks people overseas. Schultz stays away from his office on Saturdays, but he's there on Sundays. On weekends, he reads emails from employees, who have his address. There have been 9,000 messages since January, and he says he's read them all. "My wife thinks I'm nuts," he says. He rarely socializes and has dropped other commitments, like serving on the boards of eBay and DreamWorks Animation SKG.
He's traveled extensively, including through those parts of South Florida and Southern California where Starbucks has been hardest hit by the economic downturn. "You drive around and see home after home after home that is empty," he says. "Our stores are in the backyards of these communities." He's talked to executives at Coach and Nike to see how other elite brands have weathered bad times. He's also spoken to fellow founding fathers, like Michael Dell and Steve Jobs, about the perils and opportunities of second acts. And he still manages to check out 25 or so stores a week.
Nowhere in Starbucks headquarters, including on the three computer screens behind Schultz's desk, is there any sign of the company's anemic stock price. It was a false indicator when high, Schultz says, and it's equally false now. As concerned as he is about Wall Street and his stockholders, he says, at least on a day-to-day basis, the price of coffee worries him more.
You know you've arrived when your childhood heroes admire you. As a young man, Schultz once slept outside Madison Square Garden to buy tickets to watch Bill Bradley and the New York Knicks in the N.B.A. playoffs; now the same Bradley plays for Starbucks, sitting on its board. "One of the most genuine human beings I've ever met in my life," Bradley says of Schultz. "He's an inspirational, tough-minded leader. And you can underline inspirational.?" Schultz's reemergence, he says, is "like having Michael Jordan return to the Bulls."
Seven weeks before our time together, a very different Howard Schultz was on display at the annual stockholders meeting. These have traditionally been festive affairs: part jamboree, part rock concert. People lined up early to get one of the 3,000 seats in McCaw Hall, near the Space Needle in downtown Seattle. Some bought Starbucks stock just to come, though historically, of course, there have been other inducements to buy: At its height in 2006, SBUX, which trades on the Nasdaq, provided a total return for shareholders of 5,814 percent over its 1992 offering price.
Around 10 a.m., the sweet sound of George Harrison singing "Here Comes the Sun" filled the hall. Then the tall and lanky Schultz strode suddenly, purposefully onstage. Dressed in a somber dark-blue suit-it was, he felt, a day for humility and sensitivity; pinstripes would not do-and clasping his hands, he looked a bit funereal. He smiled, tentatively at first, and appeared taken aback by the applause, which was loud, loving, and prolonged. "Wow!" he finally said. When he smiled more broadly and spread out his arms, the ovation only intensified. "Wow!" he exclaimed again. "I really didn't know what to expect!" Maybe, but he knew they loved him, especially now. For all his little-darling shareholders, it had been a long and lonely winter. But now here came the sun-and everyone was thinking, It's all right.
The odd thing was that this particular sun had never gone away. Around Starbucks, everyone knew that Schultz had remained the man in charge. Whenever Starbucks people designed new stores or introduced a new coffee or pondered whether to cover the nipples on the original Starbucks maiden with her hair, he was around, casting deciding votes. For that matter, he'd never stopped presiding over this very meeting. You can't very well have a Second Coming without a First Going. But that's how it was viewed when he "came back" on January 7-"This is the day the coffee gods have made," gushed Feministabarista on StarbucksGossip.com, a website for Starbucks workers, customers, groupies, and critics-and that was what everyone was pretending now.
Sitting in the front row, Schultz's wife and daughter feared, quite correctly, that he was about to cry. As readers of Schultz's book know, he can be lachrymose. He cried when his skeptical father-in-law urged him to abandon his coffee dream early on and get a real job, and when one of his early investors tried to wrest Starbucks from him, and when the first Starbucks opened in Harlem. But Schultz collected himself onstage, then told his stockholders that he shared their concern and disappointment over Starbucks' recent performance.
"And I promise you," he said, "this will not stand." They were the very words George H.W. Bush had used before Desert Storm. But few there, including Schultz, would have thought such rhetoric a tad overblown. The applause swelled again.
The economy was bad, he went on, but that must not be an excuse. Starbucks had lost its edge, he said, evolving from "a culture of entrepreneurship, creativity, and innovation to a culture of, in a way, mediocrity and bureaucracy." Even this year's celebrity entertainer, K.D. Lang, couldn't ignore Starbucks' sorry state. "I pray that everything switches up for you," she told the audience solicitously between songs.
Schultz had sounded a warning a year earlier, in February 2007-four months after the stock began to dip-in a memo he'd sent to Donald. In it, he deplored "the watering down of the Starbucks experience" and "the commoditization of our brand." With the disappearance of manual espresso machines and the aroma of freshly ground coffee, he wrote, much of the "romance and theater" had vanished. He also bemoaned all those "sterile, cookie-cutter" stores.
Schultz can make himself seem like a saint, which can be a little disconcerting. How many people do you know who describe themselves as "benevolent"? He also embellishes-calling Starbucks' iconic store at Pike Place Market its first (it's really the fifth) or saying that Starbucks was named after the character in Moby-Dick (only partly so) or that he served the first latte in America (he didn't)-and has let people depict the Brooklyn streets on which he was raised as something out of West Side Story (they weren't). The press has generally overlooked such things.
Schultz has thin skin, perhaps because only very rarely has it been punctured. After Craig Harris, then covering Starbucks for the Seattle Post-Intelligencer, reported that on top of the $100 million Schultz had made in 2006, he had received more than $1.2 million in perks, including $475,685 for the personal use of company jets, the reporter says that Schultz ignored him for the next six months. What calluses Schultz bears are relatively new.
Why? Part of it is the sheer force of his personality. "He's the most self-assured person I've ever shaken hands with," recalls Taylor Clark, author of Starbucked: A Double Tall Tale of Caffeine, Commerce, and Culture. "It's almost like Bill Clinton: He has this ability to charm people with the immensity of his presence." Then there's the sheer magnitude of his accomplishments. Others in his generation-Jobs, Bill Gates, Jeff Bezos, Sergey Brin, and Larry Page-have also changed the culture, but they've done it with new, high-tech toys. Schultz did it with something that had been around for hundreds of years.
Schultz convinced people that Starbucks was the best coffee in the world and conferred cachet on anyone carrying a cup of it. He convinced them that Starbucks stores were latter-day settlement houses, a "third place" between home and work. He convinced them that Starbucks was healing a planet rent by waning faith in religion, politics, institutions, and corporations: Instead of bowling alone, they could come in and sip caramel macchiatos in company. (It was a neat trick, providing comfort and caffeine, a jolt and a caress, all at once.) He also convinced them that they could indulge themselves philanthropically. His coffee growers were well compensated, his workers content; as he regularly reminds people, Starbucks spends more annually on health insurance than on coffee beans. Why would employees need unions? They had him. Starbucks could be inescapable, homogenizing, and globalizing and still not be McDonald's.
The one drink you hear most about when studying Starbucks isn't the venti no-foam half-caf latte or any of the infinite other permutations of what Starbucks sells. It's Kool-Aid. Kool-Aid is what people say Starbucks baristas have drunk. It (along with health insurance, stock options, and rules requiring them to be that way) explains why they're so cheerful. And Schultz has taken the biggest swig of all. "There's no guile there," says the TV producer Norman Lear, Schultz's good friend and a partner in some of his musical ventures. Whatever Schultz is selling he's already bought for himself.
Schultz sprinkles words like integrity, authenticity, transparency, and truth around whatever he writes or says. Starbucks is not about business or making money, he says, but about love and conscience and creating the kind of company his parents-and everyone else's-never got to work for. If Bill Clinton and Tony Blair sought a "third way" politically, Schultz has found one corporately. A few years ago, he was invited to preach that gospel at the investor Herb Allen's annual gathering of business panjandrums in Sun Valley, Idaho, and Schultz says it was a revelation to his audience. "It was a different message from what had been delivered there before," he recalls. "It was a little risky, but it was me."
"Schultz believes he has created the perfect company, one that can solve the world's problems and alter the course of history," says Bryant Simon, a professor of history at Temple University and author of the forthcoming book Consuming Starbucks, which has taken him to hundreds of Starbucks stores. No wonder Schultz bridles at criticism and cynicism. If you had perfected capitalism, wouldn't you?
Schultz was born in 1953 in the Canarsie section of Brooklyn. His family lived in the Bayview Projects, a perfectly respectable community then filled with young, upwardly mobile Jewish families, hardly the Dickensian hellhole which, to the annoyance of the many others who passed through there, it is invariably portrayed to have been. (Schultz is a past recipient of the Horatio Alger Award.) His father struggled through a series of blue-collar jobs; a broken ankle that laid him up without pay for a time is what Schultz credits for his decision to provide health insurance to any employee working more than 20 hours a week.
As a boy, Schultz was far more concerned with box scores than with stock tables. At Northern Michigan University, he majored in communications, not business. But, he says, "I've always had what others have described as a great antenna-seeing things around the corner that others didn't see-sachel." (That's the Yiddish word for something between "street smarts" and "smarts.") He became a salesman for Xerox and then for the Swedish kitchenware company Hammarplast. A coffee store in Seattle was buying an awful lot of his appliances, so he flew in from New York to check out the place. It was Starbucks, founded in 1971 by three disciples of the revered Berkeley coffee guru Alfred Peet. Schultz fell in love with the company and talked his way into a job there in 1982. After that fabled trip to Italy the following year, he persuaded his partners to let him sell coffee by the cup as well as the pound. But when they showed little real enthusiasm for the project, he left and started his own company. Schultz bought Starbucks from them in 1987 for $3.8 million of other people's money.
Starbucks' founders don't talk much about Schultz these days. "You remember the movie Bambi? And the little rabbit Thumper?" one of them, Gordon Bowker, asked Melissa Allison of the Seattle Times earlier this year. "And Thumper's mother said, 'Thumper, what did your father tell you?' And Thumper said, 'If you can't say something nice about somebody, don't say anything at all.'?"
With Schultz's keen insight into real estate and America's insatiable appetite for caffeine and class, Starbucks grew exponentially. "New Starbucks Opens in Restroom of Existing Starbucks," the satirical newspaper The Onion announced in 1998. There was always room for another store. Schultz didn't believe in franchising. Starbucks owned every domestic outlet, with one exception: Schultz agreed to go fifty-fifty with Magic Johnson on stores in minority communities. There are now 116 of them. "He was a partner, friend, and mentor all at the same time," Johnson says. "And he went into urban America way, way, way before anyone else."
In his book, Schultz admits he was afraid that Starbucks could become "just another soulless big chain." It was highly symbolic in 1999 when he replaced the manual La Marzocco espresso machines with automatic behemoths. The reason, he says, wasn't efficiency but ergonomics: The old models caused repetitive stress injuries. Besides, he insists, the new machines are more reliable.
For many, though, the coffee has never been the same. "The taste of the espresso coming out of those new machines is pure crap," Double_Tall_Latte wrote on StarbucksGossip.com. "There's no crema. No sweetness. No depth." Not that many Starbucks patrons noticed. By now, many of the coffee snobs have gone elsewhere, replaced by teenyboppers determined to do anything to blunt, or obliterate, the taste of coffee. "For most Americans," wrote JavaJohn on the same site, "Starbucks means little more than driving through in an S.U.V. while chattering on a Bluetooth and ordering an overpriced, artificially sweetened milk shake." (The Center for Science in the Public Interest has reported that a venti Java Chip Frappuccino has as many calories-650-as a cup of McDonald's coffee with 11 creamers and 29 packets of sugar.)
But Wall Street liked the switch and wouldn't have tolerated too much tinkering. "I bet he goes to Italy and walks those streets and wants to throw up," says Mark Inman, the president of the Specialty Coffee Association of America, about Schultz. "He started with all these good intentions, but he boxed himself into a corner, and I don't think he has a way out." With a derisive laugh, Schultz says that's hardly the case.
Schultz stepped down as C.E.O. in 2000, yielding to Orin Smith (who retired in 2005, making way for Jim Donald). Schultz's new title was chairman and chief global strategist. By then, Starbucks had 3,500 stores. Schultz's new position allowed for other pursuits. He appeared before Congress, on television, and in Clinton's Oval Office evangelizing for national health-care legislation. "I always say, jokingly, that Howard is running for president or something, because the things that concern him you also hear from people who are running for office," says DreamWorks chairman David Geffen, who knew Schultz even before Schultz joined the board of DreamWorks Animation SKG. "Howard is genuinely concerned with these issues." (A lifelong Democrat, Schultz calls Bobby Kennedy his political hero. He supported Bill Bradley for president in 2000 and has contributed to the campaigns of John Edwards, Hillary Clinton, and Barack Obama this time around.)
Then there was sports. In 2001, Schultz joined a group buying the Seattle SuperSonics pro basketball team. He took the largest chunk-42 percent-for $84 million and became the principal voice of ownership. It was, he says, the fulfillment of a lifelong dream. But it was also, he adds, "an unequivocal mistake, on every level."
Schultz turned into one of those annoying courtside celebrities, à la Jack Nicholson or Spike Lee, who express proprietary exasperation whenever things go wrong. The players resented his histrionics, along with the attempts of this rich, white coffee guy to cozy up to them. The mediocre Sonics were beyond his powers to fix or control, something alien to Schultz. Nor could he persuade Seattle to build a new arena for the team, leading him to speak intemperately about his beloved adopted hometown, then to sell the team (at a handsome profit) to people determined to move it elsewhere. Fairly or not, Schultz became Seattle's version of Walter O'Malley, the man who robbed Brooklyn of the Dodgers. He claims he was hoodwinked, but the lawsuit he filed to rescind the deal has not restored his luster.
Schultz and his wife live in a gated community above Lake Washington; a Kiefer and a Rothko reportedly hang in their home. They also own a beachfront house in East Hampton, New York, not far from where they met in 1978. For a time, believe it or not, Schultz tried to keep the Hamptons Starbucks-free. "It's a place I live in the summer, and I just didn't want to be reminded of Starbucks," he explains. But he eventually acquiesced. Business is business, after all, and if Starbucks hadn't gone in there, he reasoned, someone else surely would have. Earlier this year, he bought, from Jonathan Tisch of Loews, a $24.8 million pied-é-terre on Fifth Avenue in Manhattan. Real estate and media mogul Mort Zuckerman lives in the penthouse.
Schultz has begun a foundation that focuses primarily on the needs of children. His wife runs it, and his two children-a son and a daughter, both in college-participate in it. He doesn't talk much about his personal life. When rumors flew a couple of years ago that the Schultzes had separated, shareholders, fearful that any turmoil in the life of a man who owned 5 percent of the outstanding Starbucks shares might affect their investment in the company, anxiously called their stockbrokers. For a time, Schultz was sufficiently gossip-worthy for one Seattle newspaper, along with Neil Cavuto of Fox News, to link him to Maureen Dowd of the New York Times. In fact, they'd done nothing more than have dinner together with friends after an event for Dowd at a Seattle Starbucks. (Schultz says he's a happily married man.)
Perhaps trying to out-Schultz Schultz, his successors kept up, or even intensified, the pace of expansion. By 2005, more than 10,000 new Starbucks stores appeared all over the planet. (One place that's oddly exempt from Starbucks' caffeinated imperialism is Israel, where Starbucks opened, then closed, several years ago. Critics charged that Schultz doesn't want to antagonize the Arab world by doing business with Israel, which is a much smaller market. Schultz is, in fact, a vocal supporter of Israel. He explains that the market there for fancy coffeehouses is saturated-a word generally absent from the Starbucks lexicon-but that he hopes one day to make inroads there.) Schultz himself predicted that Starbucks would one day have 40,000 stores, more than McDonald's. Wall Street began to wonder whether Starbucks was overdoing it. And then the press began turning on the company, particularly in late 2006, after the government of Ethiopia accused Starbucks of blocking trademark protections for the names of the country's top coffees. Starbucks' treatment of coffee farmers has been a recurrent issue for the company; at the annual meeting, in March, it announced that Conservation International will now judge-and, when appropriate, certify-that its coffee is ethically and environmentally correct.
On the heels of the highly publicized Ethiopian debacle came Schultz's notorious 2007 memo to Donald, which was leaked to outsiders and garnered huge media attention, most of it favorable. (Schultz could not believe that someone had betrayed him; company techies tried, without success, to finger the culprit until Schultz put a halt to it.) Some posts on StarbucksGossip.com insisted the memo was a fake, at least until the company acknowledged its authenticity. Others wondered why it took Schultz so long to spot problems that were not new, concerning decisions he had either initiated or ratified. "Of course the romance is gone," one person wrote. "Of course the company has become a symbol of excessive corporate capitalism. Of course the place has become the McDonald's of the industry, with worse coffee than McDonald's itself. This is what happens when you go from a few hundred to 13,000 stores. This is what happens when your C.E.O. starts believing his own hype or distracts himself with new toys like mediocre N.B.A. franchises. The universe may be able to expand forever; companies like Starbucks can't."
The site's webmaster, Jim Romenesko-a Starbucks junkie who also runs a popular site for media news-says that most postings about Schultz are positive. For instance, in January, Darleen recounted how she'd written to tell Schultz about her intrepid shift supervisor (even losing a baby hadn't kept her from opening her store) and how Schultz had sent her tickets for four box seats at a Mets game. Some demand obeisance to the Great Leader. In February, one contributor to the site wrote about being touched by Schultz's appeal to use shot glasses instead of paper cups when making espresso. "Can't you just do what the founder of your company asks of you without second-guessing it?" she asked her fellow baristas.
Schultz says he looks at the site about once a week and that it's all fine by him as long as no one gives away anything proprietary. But one more item on Schultz's transformational agenda is MyStarbucksIdea.com, which has become Pravda to Romenesko's samizdat.
StarbucksGossip.com often contains viewpoints that one would never hear from Starbucks' considerable public relations apparatus. In an open letter to Schultz written in February 2007, for instance, Sbuxmanager told of frantic supervisors ordering him to add an extra worker whenever the boss, who stayed in a nearby hotel, was in New York. "You go into stores and you don't even realize the dog and pony show that is being put on for you," he told Schultz. "The Starbucks experience is gone," declared a post by Patrick C. "They expect you to churn out a different complicated drink every 20 seconds, for eight straight hours. Then you need to have a cheesy fake smile on your face, to please some random person you can't stand. For that, they'll give you the minimum wage."
Four years ago, a small but hardy band of baristas attempted the near-impossible task of unionizing a single Starbucks store on Madison Avenue in New York. The leader of the effort, a young firebrand named Daniel Gross, took on what he called "the myth of the socially responsible Starbucks," complaining of subsistence wages, sadistically unpredictable schedules, and understaffing. He noted that only four out of 10 Starbucks employees actually receive its vaunted health benefits-a lower rate than at Wal-Mart-either because, as part-time workers, they don't work the 240 hours a quarter required to qualify, or because, at between $7 and $9 an hour, they can't afford the premiums, copays, and deductibles. (A Starbucks spokesperson says it's because they have coverage from other sources and that 80 percent of its employees are covered by some kind of insurance.)
As soon as the unionization drive was announced, Schultz sent out a company wide email expressing his dismay and disappointment. It was almost as if his feelings had been hurt. He visited the epicenter of the unionization effort, the store on Madison Avenue where Gross worked. Gross, a member of the Industrial Workers of the World, a.k.a. the Wobblies, says that when he tried talking to Schultz, he was rebuffed, though Schultz denies it. Gross was later fired.
After his visit, the I.W.W. says that Starbucks sent antiunion managers into the store and sicced high-priced lawyers from the Washington, D.C., law firm of Akin Gump Strauss Hauer & Feld on Gross and his cohorts. The local office of the National Labor Relations Board sided with the union, filing complaints that Starbucks had engaged in numerous unfair labor practices and twice taking it to court. One case was settled; the other, which required weeks of testimony, is still pending. But the company's war of attrition has largely succeeded: The union drive in New York has effectively been neutered.
Gross and his lawyer, Stuart Lichten of Schwartz Lichten & Bright in New York, estimate that Starbucks has gone through several million dollars in legal fees to suppress the union. Even if the Wobblies had successfully unionized the Madison Avenue store, Lichten says, Starbucks could easily have shut it down; after all, there are plenty of other Starbucks stores nearby. Why then, I ask him, would the company spend so much to squelch something so weak?
Partly, Lichten says, it's to keep Gross from ever returning to Starbucks. But partly too, he adds, it's because of the boss's vanity. Under Schultz's benevolent rule, unions should be unnecessary; it is "a personal insult," he says, that anyone feels otherwise. "They also see it as retro," he adds. "It's not new-age to have a union. Unions are for General Motors. They're the 'third wave,' or whatever they call it." Schultz says he won't talk about the matter because it's still in litigation.
In another courtroom, a judge in San Diego ruled in March that by forcing baristas to share tips with their supervisors, Starbucks had violated state law and ordered it to cough up $86.7 million, plus interest, in damages. The ruling, which Starbucks has appealed, received lots of coverage, as anything involving Starbucks, particularly anything embarrassing, invariably does.
Schultz still relishes his first encounter, a year ago, with Paul McCartney, whom he watched on The Ed Sullivan Show as a boy and whose CD, Memory Almost Full, he sold in his stores. "It happened so fast. We got out of the car, I walked in, and I just felt different, like God, I can't believe this!" Schultz recalls. "And when I was in front of him-this close, as you and I-it was like Annie Hall, where I'm talking but I'm saying something else, and what I was trying to say was, 'I can't fucking believe this!'?" The two spent more time together last summer; over dinner one night, McCartney sang "Blackbird" a cappella to Schultz and his wife. That time, Schultz recounted to McCartney the thrill he'd felt upon first meeting him. "He said, 'I had the same feeling,'?" Schultz recalls with a laugh. "Yeah, Paul."
Whatever happened in the rest of Schultz's empire, his pet project, Starbucks' entertainment division, had always been a source of pleasure. Ever since its modest beginnings, when it issued a few jazz compilations, it had led a charmed life. It grew more sophisticated in 1999, when Schultz bought Hear Music, which pioneered the use of listening stations in Starbucks stores. For many older customers, Starbucks became the perfect curator, introducing them to a few old works and a few new works. And in 2004, it had a triple-platinum hit with Genius Loves Company, the Ray Charles release that won eight Grammys, including Album of the Year.
Schultz had always loved the glamour and buzz of show business. Part of him, it seemed, wanted to be to American culture what he'd already been to coffee: a Jack Welch or Steve Jobs rather than a yuppified Ray Kroc. He envisioned Starbucks as a way of life. Music revved him up to another level. People still talk about the morning of May 11, 2005, when, after learning that promotional material for a new record release had not arrived in the stores on time, Schultz erupted in a way last seen from Mount St. Helens, three hours to the south. The episode came to be called 5/11.
Of course, the success of Genius Loves Company didn't come as a result of just Starbucks. Ray Charles was Ray Charles, he died shortly afterward, the movie about him came out, and it was an extraordinary album. But in its wake, Schultz "got that gleam in his eye," recalls someone who was watching. He quickly moved to expand the business, bringing in Ken Lombard, director of Magic Johnson's development corporation. The trouble is, Schultz apparently didn't bother asking Johnson about Lombard first.
Lombard, it turned out, knew little about music according to several people he worked with. He'd never heard of the Who, for instance, and thought Steely Dan was a person. He didn't know other music executives, nor did he understand Starbucks' unique bond with its listeners. He dumbed down, went mainstream, or, to put it in terms of coffee beans, moved from the elite arabica to the more vulgar robusta. Lombard was mercurial, infuriating lawyers and agents who dealt with him. "Lombard was convinced that any record Starbucks deigned to carry would automatically sell at least 150,000 units," says Ken Hertz, an entertainment lawyer in Los Angeles, whose firm negotiated with the company on behalf of Herbie Hancock, Alanis Morissette, and other clients. "Based on that assumption, if six titles were good, 30 or 40 were better. He turned Starbucks from a tastemaker into a shameless huckster." Lombard's first foray into film production, Akeelah and the Bee, was a dud. Worse, he abused associates and underlings, say several former employees of the music division. Several executives working under him left. Repeated complaints about him came to nothing, though, because he was an F.O.H. (Friend of Howard)-in fact, a V.G.F.O.H.? Donald demanded Lombard's resignation, but Schultz countermanded him. (Schultz denies this.) As to why the savvy Schultz stuck with Lombard, everyone is simply baffled. "By all accounts," Hertz says, "Howard Schultz is an extremely loyal guy."
In February, a month after his "return," Schultz appeared with Lombard and Kenny G. on the cover of Billboard. "The Future Sound of Starbucks," the headline declared. In fact, the real future sound was that of a firing squad. More complaints about Lombard reached the upper levels of the company. And the dispute went public when Jeff Leeds of the New York Times reported that the recording industry's ardor for Starbucks had "gone the way of yesterday morning's grounds." His mind now on coffee, Schultz didn't need such distractions; on April 24, he fired Lombard, according to several employees, one of whom saw Lombard escorted from the building by the head of human resources. (Starbucks denies that Lombard was fired. Lombard did not respond to email and voicemail messages.) Two weeks later came the pink slips. Of 40 people in the entertainment division, all but a dozen were let go. Music had been Schultz's baby, and suddenly, inexplicably, almost violently, most of it was gone with the bathwater. Schultz says that he has only restructured and management of the record label will be handled by Concord Music.
One veteran Schultz watcher says that Schultz's greatest successes have come with a strong No. 2-Donald's predecessor, Orin Smith-by his side, keeping him on course. Some fear that without such a person around, Schultz's more emotional, impulsive side might go unchecked, particularly given the cult of personality at the company. One story has it that after targeting those cursed breakfast sandwiches, Schultz was reminded of how much money they made and, in a panic, flirted with sparing them. "Howard's emotional approach to things can be very powerful and inspiring," this Schultzologist says, "but it also poses the greatest danger, especially now that his legacy is at stake."
To complicate things further, in May, investor Nelson Peltz, who likes to pressure companies into increasing their profit margins and, therefore, their stock prices, disclosed that he'd bought a position in Starbucks. Analysts say that he's unlikely to change things much, both because his stake is small-less than 1 percent of the company's 730.7 million shares-and because Schultz is firmly in control. But the appearance of such a corporate scavenger brings with it a "certain funereal smell that will scare the dickens out of Howard," says Jeffrey Sonnenfeld, a professor at the Yale School of Management.
To Sonnenfeld, Schultz's situation represents the classic dilemma of charismatic leaders. Only such people can do monumental things, like build entire companies and cultures from scratch. Yet only they project auras big enough to stifle or inhibit their successors from adapting to inevitably changing times and marketplaces. And then, only those people can come back and do what's necessary to fix things, but only if they are ruthless enough to destroy part of their own creations. That's what Steve Jobs did at Apple. Schultz, Sonnenfeld theorizes, may be too nice and sentimental to do likewise, which is why much of him is looking backward. "He has to break the romantic attachment to the past," Sonnenfeld says. "For Howard, it's a painful unlearning, and that's what we're seeing now."
No one's predicting a quick turnaround for Starbucks. Lucky for Schultz, there is no Burger King to Starbucks' McDonald's. The closest thing may be Dunkin' Donuts, though its largely blue-collar, no-nonsense, small-medium-and-large clientele feels lost amid Starbucks' couches and grande Italianate pretension. I ask Jon Luther, the C.E.O. who, to the extent possible, has made Dunkin' competitive with Starbucks, how he felt when he heard Schultz was back. "I did a couple of high fives around the building," he says: Starbucks was in real trouble, maybe partly because of Dunkin'. But Luther, a man who's spent 40 years in the food business, quickly backtracks. This was, after all, Howard Schultz he was discussing. Howard Schultz. An American icon. A godsend to the entire coffee industry. A man to be reckoned with. And certainly not a man to dis. So he quickly elaborates. "On the other hand, we woke the next day and said, 'Uh-oh,'?" he goes on. "I would never underestimate Starbucks or Howard Schultz. Nobody's throwing dirt on their grave. They'll be back."
The interview is over, the tape recorder turned off. But Luther still isn't finished. "Just don't get me in any trouble with Howard," he adds as he prepares to leave. "I don't want him to be mad at me."Visit Portfolio.com for the latest business news and opinion, executive profiles and careers. Portfolio.com© 2007 Condé Nast Inc. All rights reserved.