Monday, May 14, 2007

A Note From Starbucks

As a follow-up to Dave's post against public companies and their misdirected focus to please the street, I have found a great letter written by Howard Schultz, Chairman of Starbucks, to Jim Donald the CEO. While this letter is seen as something of a coup where a private letter has become public in which they are admitting their weaknesses, I see it as an amazing departure from the strategy of a public company looking back to thinking more like a private company. Building a business for the sake of the business (either service or product) verus always working for Wall Street. In my opinion this is not the sign of a weak company but the sign of a great company, maybe even one that will rise above the world of Publicly Traded Stocks (but probably not).

I am not yet sure how, but the future of great companies is different than today's version of the public company.

Starbucks chairman warns of "the commoditization of the Starbucks experience"

Starbucks chairman Howard Schultz wrote this to CEO Jim Donald earlier this month. The memo's authenticity has been confirmed by Starbucks.

From: Howard Schultz
Sent: Wednesday, February 14, 2007 10:39 AM Pacific Standard Time
To: Jim Donald
Cc: Anne Saunders; Dave Pace; Dorothy Kim; Gerry Lopez; Jim Alling; Ken Lombard; Martin Coles; Michael Casey; Michelle Gass; Paula Boggs; Sandra Taylor

Subject: The Commoditization of the Starbucks Experience

As you prepare for the FY 08 strategic planning process, I want to share some of my thoughts with you.

Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.

Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces. For example, when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific decision became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista. This, coupled with the need for fresh roasted coffee in every North America city and every international market, moved us toward the decision and the need for flavor locked packaging. Again, the right decision at the right time, and once again I believe we overlooked the cause and the affect of flavor lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma -- perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage? Then we moved to store design. Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee. In fact, I am not sure people today even know we are roasting coffee. You certainly can't get the message from being in our stores. The merchandise, more art than science, is far removed from being the merchant that I believe we can be and certainly at a minimum should support the foundation of our coffee heritage. Some stores don't have coffee grinders, French presses from Bodum, or even coffee filters.

Now that I have provided you with a list of some of the underlying issues that I believe we need to solve, let me say at the outset that we have all been part of these decisions. I take full responsibility myself, but we desperately need to look into the mirror and realize it's time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.

I have said for 20 years that our success is not an entitlement and now it's proving to be a reality. Let's be smarter about how we are spending our time, money and resources. Let's get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. We source and buy the highest quality coffee. We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and the 150,000 partners and their families who are relying on our stewardship.

Finally, I would like to acknowledge all that you do for Starbucks. Without your passion and commitment, we would not be where we are today.



Karen said...

very interesting!

Dale said...

Awesome. Let's see if it works.

KJ said...

Unfortunately, this type of business honesty is rare and is oft interpreted as being weak. There are so many examples of companies which have grown into huge super-powers but have been cut down by the forces of over-expansion and/or arrogance. IBM in the late 80's early 90's; GM and Ford in the 80's and 90's; Krispy Kreme and Boston Chicken (it will always be Boston Chicken to me) are cases of over-expansion; WEEI in Boston (OK, they haven't failed yet...but their explicit arrogance and blatant disregard for producing a quality product has allowed for competitors to break through. 1510 the Zone did not work; ESPN Radio 890 is working and will work). IBM and GM/Ford are probably the most interesting and applicable case studies. IBM grew to the point where they completely owned the computer landscape. However, they promoted from within and exuded arrogance. They lost touch with the marketplace and with emerging technologies....resulting in legitimate upstarts and new products which were just better. They used up their ~5 year buffer zone with the public (the time where a company actually makes an inferior product...but the public still assumes they have the best product because "they always do"). And, eventually, they basically folded and had to be completely rebuilt as a modern company in 1993. By the way, you can substitute GM/Ford into that entire description and it applies 100%...except that GM/Ford got TEN YEARS before the american populous fully understood that american cars were fundamentally subpar (not necessarily the case today...certainly the case in the 90s).

Anyway. Nincompoops at the top don't like to be told that the methods they used to grow 7000% are now the problem....even if they are. You need to have serious executive clout to send an email like that and not have in-fighting. I mean Jack Welch type clout. Moving to the top of the totem pole (is that term still socially allowed?) takes one type of business skill....staying there takes another.


Martha said...

I think that's fabulous and very admirable.