Starbucks’ Schultz Is Still Dreaming Big

by Susan J. Aluise | March 23, 2012 11:51 am

“Starbucks represents something beyond a cup of coffee,” Starbucks’ (NASDAQ:SBUX[1]) Chairman and CEO Howard Schultz has said. In the early days, that meant serving “a great cup of coffee” and building “a company with soul.”

Schultz’s rags-to-riches story is the stuff of legend. He grew up poor in the Bay View housing projects in Canarsie, Brooklyn. His dad was an army veteran who had dropped out of high school and made a living as a truck driver until he broke his hip and a leg in an accident. Schultz’s father had no health insurance and essentially was cut loose by his employer, leaving the struggling family of five even worse off.

But Schulz’s mom encouraged him to dream big — about college and a better life. Schultz worked hard, aimed high and eventually landed a football scholarship to Northern Michigan University, earning a communications degree in 1975.

Although he started his business career as a Xerox salesman, he caught the coffee contagion that would launch an empire in 1981. As vice president in charge of U.S. operations for Swedish coffeemaker company Hammarplast, Schultz discovered that a young Seattle company that specialized in premium, dark, whole-bean coffee roasting was buying more of his drip coffeemakers than Macy’s (NYSE:M[2]) was ordering.

So he visited Starbucks (named after the obsessive Captain Ahab’s first mate in Herman Melville’s Moby Dick), breathing in the rich aromas of the freshly roasted coffee beans. It was love at first sniff. “There was something magic about it, a passion and authenticity I had never experienced in business,” Schultz wrote in his book about the company[3]. “Maybe, just maybe, I could be part of that magic. Maybe I could help it grow.”

After convincing the owners to hire him as head of marketing and operations, Schultz’s dreams got bigger. On a trip to Italy, he fell in love with the omnipresent coffee bars across the country, which served not only a great cup of espresso but also served as a social hub that delivered a “customer experience.”

Starbucks’ owners weren’t sold on the idea of serving coffee, so Schultz started his own espresso bars under the name Il Giornale. In 1986, his startup was doing so well that he bought Starbucks, rebranded his coffee bars with that name and put more clothes on the company’s iconic, twin-tailed mermaid logo.

The first three years were tough: Starbucks lost nearly $2.3 million. But by the end of 1991, though, the company was soaring, with more than 116 stores and nearly $60 million in sales. Starbucks’ IPO, at $17 a share in 1992, left it with a market cap of nearly $300 million.

Then in 2000, Schultz stepped back, handing off the CEO job to his chief operating officer, Orin Smith. He stayed on as chairman and chief strategist, but new interests — such as the Seattle Supersonics NBA team he bought for $250 million — pulled his focus.

Starbucks continued its upward trajectory even after Smith retired in 2005 and Jim Donald took the helm.

But white-hot growth and Donald’s plan to have 40,000 stores worldwide turned out to be a plan for disaster — SBUX shares fell 29% during Donald’s 33-month tenure — and more than 40% during 2007. To make matters worse, McDonald’s (NYSE:MCD[4]) and Dunkin’ Donuts (NASDAQ:DNKN[5]) were getting into the premium latte business. An alarmed Schultz stepped in to replace Donald in January 2008 — just as the economy hit a reef.

The stunning success of Schultz’s second tour at the helm of Starbucks is rare, which is why he has been called the “Steve Jobs of coffee.”

Schultz didn’t simply tighten Starbucks’ belt — he wielded the budget axe the way Braveheart swung his legendary Claymore. Schultz slashed $500 million in costs, closed 800 stores and eliminated 4,000 jobs. He put the brakes on aggressive expansion, which he believed was watering down the company’s brand. At the same time, he beefed up employee training, moved into instant coffee with the Via and began seriously tapping the opportunities in Europe and Asia.

Perhaps more important, Schultz got the company through the Great Recession and has lifted the share price from less than $7 in November 2008 to a record high of over $55. In 2011 the company’s profit topped $1 billion. It’s no wonder Schultz’s 2011 compensation was  $68.8 million[6].

Success of that magnitude is hard to sustain. But Schultz believes the key to doing so is remaining true to the guiding principles that have enabled the company he took public 20 years ago to grow into a global colossus of more than 17,000 stores in 40 countries. That means commitment to the customer experience, the company’s “soul” and the mantra of change and innovation.

All of those priorities were on display this week at the company’s annual shareholder meeting in Seattle. Schultz has broadened his definition of a great cup of coffee with the expansion of Starbucks’ strategic partnership[7] with Green Mountain Coffee Roasters (NASDAQ:GMCR[8]), pairing its Vue convenience packs with Green Mountain’s new Keurig Vue Brewer.

Earlier this month, Starbucks announced plans to launch its single-cup Verismo[9] espresso and premium coffee system. The new coffee-and-milk-pod system, which will be marketed in partnership with Germany-based Krueger, will hit stores this fall.

The soul of Starbucks is evident in Schultz’s Create Jobs for USA program[10], which aims to help foster job growth in under-served neighborhoods and plans to spend $180 million on U.S. factories to create 150 manufacturing jobs.

“Delivering long-term shareholder value is essential,” Schultz told an audience of about 2,000 Starbucks shareholders on Wednesday. “Amidst continued worldwide economic uncertainty, Starbucks has demonstrated that it will continue to build shareholder value, but never before has that value been more closely aligned to our values. Simply put, the value of your company is driven by your company’s values.”

Those values have sometimes led the company into controversy, including its decision in January to openly support gay-marriage legislation in Washington State. Support from major employers such as Starbucks, Microsoft (NASDAQ:MSFT[11]), Google (NASDAQ: GOOG[12]) and others is credited with the bill’s passage in February. But after Wednesday’s shareholder meeting, opponents of same-sex marriage urged a boycott of Starbucks[13].

Then there’s change and innovation. In a shot across the bow to Jamba Juice (NASDAQ:JMBA[14]), Starbucks officially entered the juice business on Monday[15] with the opening of the company’s first Evolution Fresh store in Bellevue, Wash. The brand, which Starbucks acquired for $30 million four months ago, also is being introduced in retail grocery channels. Ironically, Schultz had been an early investor in JMBA.

Next month, Starbucks will take on Red Bull with the retail grocery roll-out of a new line of “natural” energy drinks called Starbucks Refreshers. The fruit-flavored, carbonated beverages get their kick from green coffee extract.

The bottom line: Schultz is not about to let Starbucks rest on its laurels. He will continue to drive the company toward the next level — whether that’s global markets, new beverage lines, innovative product-distribution strategies or even social issues. The stock has a market cap of nearly $42 billion, a current dividend yield of 1% and a one-year return of 60%.

For a big dreamer, that makes for a pretty nice buzz to kick off the day.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Endnotes:
  1. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  2. M: http://studio-5.financialcontent.com/investplace/quote?Symbol=M
  3. Schultz wrote in his book about the company: http://www.nytimes.com/books/first/s/schultz-pour.html
  4. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  5. DNKN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNKN
  6. Schultz’s 2011 compensation was  $68.8 million: http://investorplace.com/2012/01/starbucks-ceo-howard-schultz-compensation/
  7. the expansion of Starbucks’ strategic partnership: http://investorplace.com/2012/03/starbucks-green-mountain-are-still-a-team/
  8. GMCR: http://studio-5.financialcontent.com/investplace/quote?Symbol=GMCR
  9. Starbucks announced plans to launch its single-cup Verismo: http://investorplace.com/2012/03/starbucks-single-serve-coffee-may-kill-green-mountain-sbux-gmcr-keurig-verismo/
  10. Schultz’s Create Jobs for USA program: http://www.reuters.com/article/2012/03/21/us-starbucks-idUSBRE82K19720120321
  11. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  12. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  13. opponents of same-sex marriage urged a boycott of Starbucks: http://www.seattlepi.com/business/article/Anti-gay-marriage-group-wants-Starbucks-boycott-3424741.php
  14. JMBA: http://studio-5.financialcontent.com/investplace/quote?Symbol=JMBA
  15. Starbucks officially entered the juice business on Monday: http://news.starbucks.com/article_display.cfm?article_id=635

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