Grounds For Success Coffee talk with Starbucks CEO Howard Schultz.

Everyone knows Starbucks, the ubiquitous retail chain that sellscoffee beverages, beans and accessories, but few know HowardSchultz, the self-effacing chairman, CEO and mastermind behindStarbucks' astonishing growth.

A child of Brooklyn's Bayview Projects, Schultz earned abachelor's degree in communications, worked as a salesman forXerox, and eventually became vice president of U.S. operations fora Swedish housewares manufacturer. It was there that he noticed afour-store retailer in Seattle was ordering a large number of hiscompany's drip coffee makers. He decided to find out why, andhe scheduled a sales trip to Starbucks Coffee, Tea and Spice in1981. Schultz was so impressed with the then-10-year-oldcompany's dedication to providing customers with qualityimported 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 exoticbeverages such as espresso, there were 1,500 of them in Milanalone--all of them packed. Certain that coffee bars would do wellin the United States, he convinced Starbucks to open one thefollowing year, then left the company to start Il Giornale, his ownchain of coffee bars, in 1985. Two years later, he raised enoughventure capital to buy out Starbucks' two founding partners andmerged the firm with his own, renaming the new company StarbucksCorp. The combined operation had 100 employees and 17 locations inthe Seattle area.

Today, Starbucks has more than 1,500 outlets staffed by morethan 25,000 employees; 1997 revenues exceeded $1 billion. Schultzrecently explained his business philosophy in Pour Your HeartInto It (Hyperion), written with Dori Jones Yang. He has notforgotten his BIZ Experiencesial roots and firmly believes they arethe key to his company's achievements. Here he shares histhinking about how to be a successful BIZ Experiences.

BIZ Experiences:Last year, your attrition rate was 57percent, compared with an average of more than 250 percent forretail stores and restaurants nationwide. Back in 1992, your storeemployees voted to decertify their union. You must be doing thingsdifferently.

Howard Schultz: Our mission statement about treatingpeople with respect and dignity is not just words but a creed welive by every day. You can't expect your employees to exceedthe expectations of your customers if you don't exceed theemployees' expectations of management. That's thecontract.

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

BIZ Experiences:You also provide better tangible rewardsthan most companies in the retail and service industries.

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

BIZ Experiences:You say you had a hard time beingcompletely 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. Atfirst, we were also concerned about whether we should shareinformation about some of the problems management was facing. Thatchanged a few years ago when there was a severe frost in Brazilthat damaged the coffee crop. I got up and made a speech that wasvery uncharacteristic of me, telling everyone what we knew. Noteveryone appreciated it; some wanted a leader with unbridledconfidence. But there are times when it's important to tell thewhole truth.

BIZ Experiences:You are opening a store a day and hiring500 people a month. What qualities do you look for?

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

BIZ Experiences:How important is diversity in the workforce?

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

BIZ Experiences:How can an BIZ Experiences make asuccessful transition from the small, original business to one thatneeds professional managers?

Schultz: The ability to recognize limitations in yourselfis what determines whether you have a great idea that can become agreat business. You can't keep your finger on the pulse of allthe issues you'll face; no one person can do everything.Entrepreneurs are bold thinkers, but they're usually notdetail-oriented. You need the self-esteem to hire people who aresmarter than you and give them the autonomy to manage their ownareas. 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 companygrows. You have to hire people who have experience at the levelthat is your goal. And you have to get these people and putdisciplines in place well before you need them, because youcan't play catch-up when you're growing very fast.

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

BIZ Experiences:How do you keep the BIZ Experiencesial soulof a firm intact when you have to run it with a bureaucracy and asystem?

Schultz: This is the most challenging issue--how to stayintimate when you get big. You have to make sure closerelationships are maintained among employees and with customers, nomatter how many other initiatives there are. You can't letrelationships get buried while you focus on sales, profits,competition, your investors and so forth. That's why we spendso much money on communication and travel: to be sure we stay intouch.

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

BIZ Experiences:As a company grows, it becomes morecomplicated, and individuals within it tend to become focused ontheir responsibility and less aware of how they impact others inthe firm. How can you avoid compartmentalization?

Schultz: That's the primary role of the BIZ Experiences.I can't do a better job than our CFO or our head ofretailing--they have more expertise and experience. But I dobelieve I have an advantage in the history of building thisbusiness and in my connection with the people. This helps me makesure everyone remembers the guiding principles and the big pictureand doesn't get bogged down in the minutiae of decision-making.Open communication between departments and among all levels of thecompany is important so people don't get too narrowly focusedor forget how their decisions interact with those of others.

BIZ Experiences:When your company was smaller, you hadcontrol of product quality and everyone serving anything with yourname on it. Now you're in partnerships with Dreyer'sselling coffee ice cream; Pepsi-Cola marketing Frappuccino; Barnes& Noble; United Airlines; and others. How can you maintain yourstandards when you form partnerships?

Schultz: One reason we've been able to exert anunusual amount of control over our products is because we neverfranchised. When we began to license and form strategicpartnerships and joint ventures, we spent a lot of time with theother [companies'] management to see how they operate in goodtimes 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 sometimeswe had to change our original concept of how to do things, but wealways adhered to our central values and learned a lot from thesebigger firms.

BIZ Experiences:You went into this low-margin commoditybusiness at a time when coffee-drinking was declining, but youdecided to change that. Why did you think you could change publictastes rather than adhere to the usual business credo of givingcustomers 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 thecoffee people bought was stale and they weren't enjoying it.Once they tasted ours and experienced what we call "the thirdplace"--a gathering place between home and work where theywere treated with respect--they found we were filling a need theydidn't know they had.

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

BIZ Experiences:How do you ensure adequate feedback fromcustomers?

Schultz: We're very fortunate to have customers whoare passionate enough about what we do that they let us know veryquickly when they're dissatisfied. We have customer commentcards in the store, we get thousands of phone calls to our customerrelations department each year, and we train our partners to givefeedback about what they hear.

BIZ Experiences:In your book, you claim you didn'tthink about the competition when you were growing the business. Isthis realistic for most firms?

Schultz: I meant we didn't want to concentrate onwhat others were doing and be reactive because then we would havebeen designing our stores against the competition instead offor the customers. The first step in building a business isto try to develop an enterprise customers will embrace and beexcited about, to target a market and try to crack the code forsuccess without worrying too much about what others are doing.

BIZ Experiences:You did very little advertising earlyon. What alternatives have you found successful?

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

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

Schultz: The main thing is to get experts involved at thestart because there are all kinds of hidden costs. Don't try tofigure it out on your own. If it's done well, mail order can bean effective way to build a brand name. We use it to seed newmarkets: We look at where our mail order customers are whenwe're deciding where to open stores next.

BIZ Experiences:You started out raising venture capitaland then, in 1992, went public. How difficult was eachexperience?

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

As for going public, you get immediate access to capital andliquidity, but you have to be ready for intense public scrutiny andfinancial discipline. Management has to be aware that it'sbetter to underpromise and overdeliver each quarter because WallStreet can be shortsighted and unforgiving.

BIZ Experiences:How do you balance the demands of yourcareer with your personal life?

Schultz: I've gotten much better about this, andI'm very disciplined about the things I won't do, liketravel on weekends. I try to be home for dinner with my family mostnights. I've learned a balanced personal life makes for a moreproductive business life. Feeling great about your family life addsvalue to the company.

BIZ Experiences:From your vantage point now, whatqualities does it take to be a successful BIZ Experiences?

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

You need to be willing to surround yourself with people moretalented than you are in certain areas. You need a degree of fearof failure to keep you going. And, while everyone wants leaders whodemonstrate courage, passion and boldness, you should not be afraidto show vulnerability now and then.

Scott S. Smith is a freelance journalist living in LosAngeles.

Contact Sources

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