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Starbucks’ CEO Howard Schultz: ‘The soul of the company was being compromised’

The chief executive on succession, unions and the future of the coffee chain.

Starbucks’ CEO Howard Schultz: ‘The soul of the company was being compromised’

Starbucks interim CEO Howard Schultz said the coffee chain was commited to China, but acknowledged that its performance in the market would be choppy (Photo: GETTY IMAGES NORTH AMERICA/AFP/File/SPENCER PLATT)

Howard Schultz was supposed to be in the White House by now, healing America’s divisions with empathetic concern and entrepreneurial practicality. Instead, four years after retiring and three since his abortive presidential campaign, he is back for a third shift as Starbucks’ chief executive and facing a daunting set of challenges.

The Schultz returning to the helm of Starbucks is no longer the hyperactive true-believer who convinced Americans, and then the rest of the world, to pay US$5 (S$7) for a cup of coffee that used to cost 50 cents. Nor is he the bleeding-heart executive making progressive policy through his company’s benefits package. Rejection is a bigger part of the story this time, including the billionaire’s third-party run in 2020, which lasted only a matter of months. His decision to pull out was precipitated by a back injury but followed howls of opposition to his political ambitions from across the ideological spectrum. Republicans lampooned him as a latte-drinking liberal, and Democrats panicked he would split their vote, handing re-election to Donald Trump. “Yeah, that was a very humbling year for me,” he says softly. “And certainly I was . . . I did not succeed.”

At work, the returning founder has been greeted by the biggest upheaval in consumers’ caffeine habits in decades; Beijing’s zero-COVID policies have hobbled the Chinese market on which much of Starbucks’ growth strategy depends; and America’s vexing social problems keep spilling over into his coffee shops. Most jarring has been the barista revolt, an uprising of disaffected staff who paint Schultz as a ruthless union-buster.

Schultz is sitting in a room in Starbucks’ headquarters, overlooking Seattle’s skyline, its traffic and its industrial waterfront. We will come back to his frustrated political ambitions. For now, he seems more at ease discussing what went wrong with his company while he was at home licking his wounds and how he has retooled the strategy for a chain that opens a new store every few hours. “Sometimes you need to look much deeper, even when the company is financially performing well, as to what’s behind the curtain,” the 69-year-old says. “And I began to just feel like the soul of the company was being compromised for the pursuit of financial results.”

Sometimes you need to look much deeper, even when the company is financially performing well, as to what’s behind the curtain

He came back to Starbucks in March, when the company announced that Kevin Johnson, who had succeeded him as CEO in 2017, would be retiring. Schultz would come back for an interim period while hunting for a replacement. At the time, Starbucks was bouncing back from the initial shock of COVID-19, which closed cafes and left most of its triple-shot regulars brewing at home. With 35,000 stores and 400,000 employees in 80 countries, it has never been bigger. Yet Schultz felt that the people he had left in charge were more concerned with buying back stock to sate investors than with keeping his green apron-wearing employees happy.

In September, Schultz found his successor: Laxman Narasimhan, an Indian-born McKinsey alumnus who was running Reckitt Benckiser, makers of Lysol disinfectant and Durex condoms. He will shadow Schultz for six months before taking the reins next April, an unusual arrangement for an experienced CEO. Schultz will then take a back seat boardroom role, becoming a non-executive founder.

Not that Schultz waited to begin making changes. He suspended the company’s multibillion-dollar share buyback programme on his first day back in April, because it was “my strong belief that the company was out of balance”.

His business, once a byword for a supposedly more caring, more stakeholder-friendly corporate America, had in other words come to symbolise the imbalances he sees in US society and in capitalism more broadly. Schultz contends that an anxious, lonely generation of Americans, shaped by the Sep 11 attacks, the 2008 financial crisis and the pandemic, has lost trust in corporations, government and other institutions. “I’ve always prided Starbucks — and myself — on overcoming all that. But, in this case, the company did not.”

Having diagnosed the malaise, Schultz must now convince Wall Street and his own employees that he can cure it before retiring again. This time, he swears, for the last time.

“Love and responsibility brought me back to Starbucks,” Schultz told Wall Street in May. For all his focus on trying to rebalance the company in workers’ favour, however, some of the employees he calls “partners” still aren’t feeling the love.

Starting in a cluster of coffee shops in Buffalo, New York, a green-aproned rebellion has been spreading across Starbucks’ US network for more than a year. Staff in almost 250 stores have voted to unionise, demanding changes ranging from full-time status for partners working more than 32 hours a week to the right to wear union-branded paraphernalia on the job. They have accused Starbucks of paying “poverty wages”, denying higher pay and benefits to union members and illegally firing activists. A regional director of the National Labor Relations Board, which mediates such disputes, has accused Starbucks of more than 200 labour law violations in a “virulent, widespread and well-orchestrated response” to employees’ organising efforts.

Starbucks denies the claims and alleges that federal labour officials have conspired with union leaders. In a meeting with staff, which leaked in April, Schultz painted union organisers as an “outside force” threatening the essence of his company. The union drive at Starbucks has parallels elsewhere — an Amazon warehouse on Staten Island, a Home Depot in Philadelphia and an Apple store in Maryland. But this is not the kind of trend Schultz wants to ride.

The story Schultz and his team tell of what went wrong differs from the baristas’ analysis. It’s a tale of the pandemic’s unpredictability, the shortcomings of shift-scheduling software and the ever more elaborate demands of a digitally empowered consumer. Waves of COVID cases left managers short-handed, which put pressure on those who showed up. Managers staffed up to compensate, which left baristas complaining that they were working too few hours.

Schultz likes to say that Starbucks sells “human connection”, summoning an image of customers dropping into their local coffee shops where friendly faces cheerfully craft their regular brews and send them on their way a little happier. COVID-19 was unkind to human connection, and customers’ sudden fear of other people spurred more of them to place their orders digitally, to pick up with as little connection as possible. The ease of requesting caramel drizzles, cinnamon sprinkles or vanilla sweet cream cold foams on Starbucks’ mobile app also meant that partners were suddenly having to make far more time-consuming customised drinks. “Starbucks was not at its best in managing through the pandemic in relation to the people in our stores,” Schultz says. “There were mistakes made,” he adds in the passive voice, “so that created an environment of hostility.”

Schultz is hardly the first CEO to be called heartless. But he has spent decades telling people that his inspiration was to avoid anyone suffering the fate of his father, whose jobs as a driver and factory worker provided no security, no health insurance and little chance of advancement. Starbucks was a pioneer in offering hourly workers healthcare benefits. It already helps baristas offset the costs of abortions, adoptions, college educations, fertility treatments, gender-affirming procedures and immigration applications. After dozens of frank meetings with staff, he says that he has found it “very difficult” to reckon with anger from his own workers. One adviser puts Schultz’s reaction to the unionisation drive more starkly: “He’s so personally betrayed by it.”

Schultz and his team had convinced themselves that they were the good guys, voluntarily building a culture of “shared success” in a different kind of company. The employees who instead cast management as villains are rattling Starbucks’ self image. Schultz, who grew up in Brooklyn’s working-class Canarsie housing projects, says if his partners choose to unionise, “that’s their American right”. He qualifies, adding: “I also respect the company’s right to demonstrate to our partners the long history of Starbucks: Of doing what’s right for our people, of sharing success and, most importantly, our vision for the future.”

Strictly speaking, Schultz did not found Starbucks. The business had been located in Seattle’s Pike Place Market for a decade by the time the then coffee machine salesman stopped off for a cup of Sumatra in 1981. The shop is still there, opposite the fishmongers’ displays, with its brown, more topless version of the ubiquitous green mermaid logo. Schultz was so taken with the business he moved from New York to become its director of operations and marketing. It took another five years and a revelatory taste of Milan’s cafe culture before he raised the money to buy the company and start building the Starbucks we know now.

Starbucks employees who support unionization protest in the company's hometown ahead of Investor Day, in Seattle, Washington, U.S. September 12, 2022. REUTERS/Hilary Russ

These days, though, nobody quibbles when he is introduced, as he was at the investor day, as “our iconic founder . . . the one and the only Mr Howard Schultz”. The executives closest to him tell me that his return has given the business an urgently needed extra shot of “entrepreneurial DNA”. At the same time, though, they insist that the business will do just fine — better than ever, in fact — once he steps back for the third time.

Starbucks executives I meet in Seattle have two things in common. First, and least surprisingly, everyone is keen to tell you how caffeinated they are. Frank Britt, who Schultz brought in as chief strategy and transformation officer this year, drinks double tall soy lattes. Narasimhan, the incoming CEO, has learnt to share that he takes his espresso doppio macchiato with a little hot milk on the side. Chief financial officer Rachel Ruggeri — “grande quad espresso over ice with extra ice, twice a day, every day” — tells me she had consumed nine shots of espresso by the time she took the stage at its investor day.

Second, everyone talks Schultz’s language, characterised by a heart-on-his-sleeve sincerity that can sound gratingly insincere. “Elevating humanity”, “servant leadership” and “nurturing the human spirit” are not everybody’s cup of pistachio cream cold foam cold brew. They also fit uneasily with some of the harder-nosed decisions Schultz has taken since returning to Starbucks, replacing a handful of top executives associated with Johnson. “He can be very genial, but he can also be uncompromising in what he expects of people,” one former colleague says. “Anyone who stands in the way, that’ll be it.”

Michael Conway, Starbucks’ international president, describes Schultz’s return as “a gift” to those colleagues who had never had the chance to work with its founder before. “It’s the legend and now he’s back, and they can say, ‘I was part of that’,” he says. Britt, for his part, describes Schultz as “the originator of the tribal knowledge” in Starbucks. Over his two absences from the company, “the fidelity of the tribal knowledge has lost some of its signal”, he says. But his return reconnected Starbucks to its founding values. Switching similes, he likens Schultz to a chiropractor who, with a few well-aimed adjustments, has clicked the patient back into alignment.

Of all his executives, Ruggeri provides the best indication of how Schultz’s charisma translates into results. She felt some trepidation when he returned, she admits, because she remembers the days when she used to have to wake early to send him a report on the previous day’s sales by 4.30am. (Schultz still rises at that hour, starting by reading the Financial Times, The Wall Street Journal and The New York Times.) “He has a sense of urgency. He has a sense of ‘it’s never enough’,” Ruggeri adds. “I’m a very urgent person, naturally — if you drink nine shots of espresso [a day], you tend to be — but he has made me work harder, made me work better, made me think more broadly. Howard pushes in a way that makes you want to be better . . . I don’t know what drives a person like that, but I wish I could harness it for myself.”

The fruits of Schultz’s restless ambition were laid out at September’s investor day: US$1 billion of investment this year and another US$450 million in 2023 are being poured into higher wages, more training, store redesigns and new equipment, particularly in the US.

Schultz has long described Starbucks stores as a “third place”, neither home nor work but a comforting middle ground where friends can connect over a cup. The pandemic-driven surge in mobile and drive-through ordering has demanded an expensive rethink of its properties, but also of the jobs the employees in them do. “A big element of his strategy to counter unionisation in the US is to improve the partner experience,” says Schultz’s former colleague. So Starbucks executives rattled off plans to encourage customers to tip baristas and programmes to help staff pay off student loans. They talked of tools to automate time-consuming inventory checks and to help managers and baristas agree on schedules. And they showed off new coffee machines that will slash the time and effort needed to make its drinks.

One enables baristas to produce a Frappuccino in under half the current time, with less bending to pull milk and whipped cream from fridges. Another cuts a 20-hour, 20-step cold brew process to four steps and a matter of seconds. “When you consider that we spend over US$50 millon a year on labour to brew our cold coffee, this is a significant game-changer for us,” outgoing chief operating officer John Culver told analysts, dangling the notion of greater “labour leverage” in Starbucks’ future business model. It sounds like a euphemism for cutting partners’ hours. Ruggeri insists that it means partners will spend fewer of those hours on frustrating, unproductive tasks.

“There’s a fundamental change happening in the frontline workforce marketplace in this country, period, the end, regardless of whether you work at Home Depot, Starbucks, you name it,” says Britt.

Frontline workers are demanding more of almost every employer. With US unemployment near historic lows, the company’s new language about helping partners “thrive” in their careers is clearly more than just a way to rebut union leaders’ narrative about its working conditions. Staff turnover, which spiked last year, has begun to fall below pre-pandemic levels, Britt told analysts.

Wall Street paid more attention to the figures Ruggeri gave them. “A new era of growth” should see Starbucks’ earnings expand by 15-20 per cent annually over the next three years, she said, funding about US$20 billion in dividends and buybacks. After lagging the wider market at the start of the year, Starbucks’ shares have begun to rally. “It’s just the beginning” of the comeback, Schultz says.

Howard Schultz (Photo: Johannes Eisele/AFP)

Laxman Narasimhan will be Schultz’s fourth successor. In 2000, he stepped back to be chairman, making Orin Smith CEO. Smith was followed by Jim Donald, who Schultz elbowed aside in 2008, after lamenting “the commoditisation of the Starbucks experience”. Schultz left again in 2018, handing the key to the Pike Place store to Johnson, a former Microsoft executive. What then has he learnt about picking other people to run his company? “That’s a good question. Patience, discipline,” he replies. More importantly, though, he was looking this time for someone “steeped in humility”, with an innate understanding of Starbucks’ culture and values. In the past, he says obliquely, his focus on candidates’ operating expertise “overshadowed the critical nature of cultural relevancy”.

Schultz marvels at Narasimhan’s lack of ego in agreeing to spend six months learning the job from him, and at his “origin story”. At the investor day, the incoming chief talked about his hard beginnings in Pune, where his brother died when he was six. It was a story of loss, he said, but also of resilience, as he climbed the “ladders” that were provided to him, opportunities he now hoped to offer to Starbucks’ partners. “I came to this country with nothing. And so, sitting in front of you, I truly am the epitome of the American dream,” Narasimhan told the audience, before mentioning his love of art, design and writing poetry.

Narasimhan’s style is what the company needs now, Ruggeri tells me. “There’s a generation now that is not looking for leadership of power and authority,” she says. Today’s young employees, who expect more of a say in their companies’ futures, have “changed the world”, she argues. “If you do not listen to this powerful and forceful generation, you won’t survive as a company.”

If you do not listen to this powerful and forceful generation, you won’t survive as a company

Not all Starbucks investors have been won over. SOC Investment Group, which works with union-sponsored pension funds holding about 1.8 million shares of SBUX, has called on Starbucks to review its succession-planning policy. Poor preparation left Starbucks “overly reliant on Schultz” as a stop-gap solution while it sought out external candidates, SOC charged. “I really hope he’s not being set up for failure,” Dieter Waizenegger, SOC’s executive director, adds of Narasimhan. Schultz put together Starbucks’ new strategy and leadership team before naming its next CEO, he notes. Narasimhan, Waizenegger argues, “is being set up to execute a playbook that Schultz is giving him — and he may not be Howard Schultz.”

Schultz says Narasimhan has “blessed” everything in the reinvention plan and adds that his own board role from April will be just that of a respectful supporter. “I can tell you one thing, there will only be one leader at Starbucks, and it will be Laxman, not me.” With a family foundation to get back to, “I’m off to the sunset.”

Schultz’s failed political career still looms large. “After something like that, you’ve got to look in the mirror and ask, you know, what happened?” he says. If he saw any personal shortcomings in the reflection, he does not mention them. He was just too early, he says, and “too idealistic” in believing that he could represent millions of centrist Americans who felt neglected by Republican and Democratic parties, which he sees as being in thrall to their extremes. He is now supporting moderates in both parties, notably Stacey Abrams in her race for the governorship of Georgia. “I think America has lots of issues, and a real void of leadership,” he says.

Some of those issues are visible among the homeless encampments and the fentanyl users on Seattle’s streets, where thefts and aggravated assaults have been rising. In a city that is also home to corporations as rich and powerful as Amazon, Boeing and Microsoft, I ask Schultz what part companies should play in tackling such challenges. “The role of business in trying to solve these problems is 100 per cent. However, business cannot solve this problem without legislation and laws being passed to enable business to do its job,” he replies firmly. Schultz says he has been calling mayors around the country because so many Starbucks partners have told him that they fear for their safety. “I can’t unilaterally solve that problem without . . . the leaders of those cities doing their job in relation to crime, mental illness and homelessness. And Starbucks can’t be a public bathroom for America.”

In July, Starbucks closed 16 stores, citing concerns for its staff’s security. Some of those had voted to unionise. In a message to employees, two executives listed the concerns showing up in incident reports flooding into head office, from racism to a growing mental health crisis. Starbucks was training partners in everything from how to de-escalate tense situations to how to respond to active shooters, they said, but it would close bathrooms or entire stores if it could not keep staff safe.

Schultz relays a recent off-camera conversation with Jim Cramer, the caustic CNBC presenter. Knowing that Schultz has considered the Kennedys his heroes since being taken to see JFK at the age of seven, Cramer asked whether he could imagine what the US would be like had Robert Kennedy, the former attorney-general who was assassinated on the campaign trail in 1968, become president. “You say that to me [and] I can just wax on for a long time about how different the world would have been,” Schultz says, leaning across the table with a brighter light in his eyes.

He urged Cramer to listen to a speech that he has listened to countless times himself: the “ripple of hope” address that Kennedy gave to South African students in 1966. It is “the greatest single speech that you’re going to hear,” Schultz says passionately. “The words, listen to the words. It’s just . . . it’s riveting. It’s riveting,” he repeats, transported.

I find the speech later and two lines stick with me from Kennedy’s appeal to a “new idealism”. There is the passage Schultz has cited as his inspiration: “Each time a man stands up for an ideal, or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope.”

And then there is Kennedy’s warning against the danger of believing that there is nothing an individual can do against “the enormous array of the world’s ills”. Many of the world’s great movements, Kennedy says, “have flowed from the work of a single man”.

Misty-eyed and hard-headed, dream-filled and determined, Schultz may not have saved America, but he thinks he has saved Starbucks. If it all starts to waver, could he be tempted back? “No, this is it,” he insists. “I made it very clear, this is it for me.”

Andrew Edgecliffe-Johnson © 2022 The Financial Times 

Andrew Edgecliffe-Johnson is the FT’s US business editor

Source: Financial Times/bt
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