My views on the market, tech, and everything else

A Dozen Things I have Learned from Howard Schultz


1. “Success is best when it’s shared.”  “Culture and values trumps strategy.” “Business is a team sport.” “Service is a lost art in America.  It’s not viewed as a professional job to work behind a counter. We don’t believe that. We want to provide our people with dignity and self-esteem, so we offer tangible benefits.” Bricks and mortar retail means people directly interacting with people. Former Starbucks executive Howard Behar puts it this way: “We’re in the people business serving coffee, not the coffee business serving people.” Howard Schultz’s clearly believes that the focus on people is the primary reason for the success of Starbucks. Howard Schultz is also very focused on developing and maintaining a strong company culture and improving teamwork. Company culture, teamwork and people are important for every company, but it seems it is even more important in a retail business. Next weekend I will do a post on Costco’s Jim Sinegal and you see the same focus on people, culture and team work in what he says and more importantly what he does. As just two examples of a focus on people, Starbucks offers stock options and health insurance to both full and part-time employees. What is arguably most interesting about Starbucks is that they have built a moat in a services business that might be viewed by some people as a natural commodity. Why don’t prices at Starbucks drop closer to cost?  Why does Starbucks have meaningful pricing power? One can argue that Starbucks benefits from economies of scale but the network effects that create many moats in other businesses today seem absent.  Howard Schultz seems to have combined a number of elements to create a moat for Starbucks (i.e., a focus on people, economies of scale, customer experience and brand). In his February 14, 2007 memo to management Howard Schultz recognized that Starbucks was in danger of becoming a commodity.  An otherwise rational drive for greater efficiency at Starbucks had degraded important aspects of the experience like the in-store aroma and what Howard Schultz calls the “romance and theatre” of the customer’s relationship with the barista.  Howard Shultz specifically noted that the efficiency-driven loss of individual elements of the Starbucks experience was greater than the sum of the parts.

2. “Starbucks built its brand in a very unusual way — not through advertising or marketing – but quintessentially through the experience.”  “Mass advertising can help build brands, but authenticity is what makes them last. If people believe they share values with a company, they will stay loyal to the brand.”  “Authentic brands don’t emerge from marketing cubicles or advertising agencies. They emanate from everything the company does…” I’ve never been a big believer in market research personally.” Acquiring customers in a cost effective manner is how the very best founders build shareholder value. Trying to build a brand with TV advertising is increasingly impossible to do without destroying shareholder value.  Howard Schultz understood from the beginning that nothing creates brand value and shareholder value like strong customer word-of-mouth. Yes, Starbucks eventually invested in brand advertising in the mass media but that was late in its history.

3. “We are witnessing a seismic change in consumer behavior. That change is being brought about by technology and the access people have to information.” “Any business today that embraces the status quo as an operating principle is going to be on a death march.” Customers today have many choices and loads of information about their choices. They don’t need to accept an inferior offering.  Technology and customer access to information have also made markets far more winner-take-all. If a CEO misses a shift in the market his or her company can quickly find itself dead.

4. “If the stewards of any consumer brand believe that they can create local relevance while sitting in a white tower somewhere in the U.S. — and dictating the ways in which consumers will react all over the world — they are on a collision course with time.”  “I will be a sponge absorbing any innovative idea, product or category from any part of the world.” Thinking globally and acting locally is simple to say, but hard to do. Keeping Starbucks true to itself and its brand while adopting to local tastes is something that requires a deft touch that is more art than science.

5. “When you’re in a hole, quit digging!” “If the Barista does not care and produces an inferior espresso that is too weak or too bitter then Starbucks has lost the essence of what we set out to do 40 years ago … Starbucks has always been about so much more than coffee. But without great coffee, we have no reason to exist.” When you recognize that you are making a mistake, stop. Try to avoid denial. Treat sunk costs as sunk costs. As an example, when he returned to become Starbucks CEO in 2008 after seeing problems in the business Howard Schultz shut down all stores for three hours and everyone was retrained. A 2008 Starbucks leadership conference of 10,000 employees held in flood-damaged New Orleans which involved a full day of volunteering in the city was similarly transformational for the company at a critical time.  As a point of contrast, my daughter and I want inside a temporary tent recently in Seattle and were served a free cup of coffee by a leading maker of coffee machines. The coffee went in the trash about a block later.

6. “Our history is based on extending the brand to categories within the guardrails of Starbucks. [We won’t] abuse the trust people have by going off and doing things not consistent with the heritage of coffee.” When Howard Schultz returned to the CEO job he found Starbucks selling teddy bears to increase same store sales. He quickly put an end to that offering.  Starbucks does try new things, but tries not to stray too far from the core business. The decision to expand the Starbucks business to include offerings like evening alcohol and a light bites menu, which includes bacon-wrapped dates and Malbec wine is walking a fine line. Time will tell if this was a good decision.

7. “Many start-ups make mistakes because they are focusing on things that are farther ahead, and they haven’t done the work that has built the foundation to support it.” “There is a discipline of being very self-critical, with real quantitative metrics to study the investments that we’re making across the board.” The advantage Starbucks gets from having better back end and logistics systems is highly underappreciated. Great locations, stores and coffee are not enough to generate a sustainable profit. Howard Schultz is a huge believer in investing in assets like human resources systems and employee benefits and training. The systems that Starbucks has in place to handle the back office and logistics are highly underappreciated. Starbucks is also a world-class coffee and food distribution company. The use of technology by Starbucks in retail applications is superb.  For example, Starbucks use of digital payments is second to none.

8. “Don’t be threatened by people smarter than you.” “You can’t build any kind of organization if you’re not going to surround yourself with people who have experience and skill base beyond your own.”  “A” employees not only hire other “A” employees, but seek out people with different skills that complement theirs. Diversity in hiring is not only the right things to do but is the best thing for the business.

9. Underpromise and overdeliver. In the long run, that’s the only way to ensure security in any job.” It’s that simple.

10. “While Wall Street has taught me a lot, its most enduring lesson is an understanding of just how artificial a stock price is. It’s all too easy to regard it as the true value of your company, and even the value of yourself.” “When a P/E gets to a certain point and a stock price gets to a certain point, you begin to believe that the organization, the enterprise, is worth that. And then you get to a point where you’re managing to either uphold it or to increase it.” “In 2006 and 2007, I think growth covered up a lot of mistakes. Hubris and a sense of entitlement set in.” “Growth should not be—and is not—a strategy; it’s a tactic. The primary lesson I’ve learned over the years is that growth and success can cover up a lot of mistakes. We’re going to make more mistakes. But we’ve learned a great lesson. And as we return the company to growth, it’ll be disciplined, profitable growth for the right reasons—a different kind of growth.” I have a very smart friend who read an early draft of this post and he essentially said: “Put the Wall Street material at the bottom of the list and put people on top.” Now that this post has dealt with people, product, services and brand first, the discussion can turn to finance. Howard Schultz believes that Starbucks was lulled into some dysfunctional behavior during a period of stock market success. Howard Schultz had moved from company CEO to Chairman during that period but he said the issues came into existence during his watch. He was responsible for the problem as company chairman he admits. The experience reinforced his view that the best approach for a CEO is to ignore short term stock price gyrations.  When Howard Schultz returned to become CEO he found that the company had shifted its focus from customers to meeting the expectations of Wall Street, which was a huge mistake. You only find out if you are swimming naked when the tide goes out and when financial growth stops you can quickly see problems you did not know existed.

11. “I really believe that you cannot use the stock market as a proxy for the economy.”  Stock markets can be up in a down economy or down in an up economy. Growth an economy is not necessarily in phase with growth in stock prices. Focusing on what is happening now in a business is the best way forward. As an aside, and 100% in contrast to Howard Schultz, I met with a CEO of a major company once and all he wanted to talk about was Federal Reserve policy and other macroeconomic topics most probably since he only was in the job because his grandfather founded the company. He was an art history major and knew little about the company itself.  This CEO drove the company right into the ground after only a few years in the job. In stark contrast here’s Howard Schultz: “The only time that I’m not thinking about Starbucks is when I’m sleeping.” Retailers like Howard Schultz and Jim Sinegal visit their stores *all the time*.  As Jim Sinegal says: “retail is detail.”

12. “Citizenship over partisanship” Unlike most other CEO’s Howard Schultz is willing to weigh in carefully on public issues given his focus on culture and values. This has never been so important. Being a civic leader is good for a business and more importantly it’s the right thing to do.


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