Starbucks Chairman Howard Schultz: Eyes Wide Open

Starbucks has enjoyed all the financial success Howard Schultz could have hoped for, yet his worst nightmares also have materialized.

By Scott Hume, Editor-in-Chief -- Restaurants & Institutions, 2/1/2008

In 2000, R&I named Starbucks Corp. Chairman Howard Schultz our Executive of the Year, acknowledging his success in elevating not only the perceived value of what had been a "commodity" product but also perceptions of the coffeehouse as a place to meet and to work.

Schultz, who in 2000 was about to turn over chief executive officer responsibilities to Orin Smith, told R&I what kept him awake at night as Starbucks accelerated its global expansion. "What worries me is the question, ‘How do we maintain our culture, our intimacy with the customer?’" he said. "What doesn’t worry me anymore is how large the market is and how big the prize ultimately can be around the world. I can clearly see the path to how big the opportunity is. The question is whether we can do that and preserve intact, and possibly enhance, the experience the customer has."

Last month, it was clear that Schultz was again having trouble sleeping, and too much coffee wasn’t the cause. He announced that he would reassume the role of CEO, replacing Jim Donald, who had succeeded Smith in 2005. Starbucks has become a global brand of the first magnitude, but Schultz’s nightmares about failing to preserve the brand’s connection with its customers had become all too real.

"Unlike many other places that sell coffee, Starbucks built the equity of our brand through the Starbucks Experience," Schultz wrote in a memo to employees last month. "It comes to life every day in the relationship our people have with our customers. By focusing again on the Starbucks Experience, we will create a renewed level of meaningful differentiation and separation in the market between us and others who are attempting to sell coffee."

What Schultz always has known, and what has helped Starbucks become a multinational success, is that consumers are reluctant to pay a premium price for a cup of coffee unless there is value added. In a widely disseminated memo to Donald in February 2007, Schultz warned that the adoption of automated espresso machines had removed "much of the romance and theatre" and blocked customers’ view of baristas preparing beverages to order. Vacuum-sealed bags eliminated the aroma of freshly roasted coffee and a more-efficient interior design meant that many stores "no longer have the soul of the past ... and the warm feeling of a neighborhood store."

Start stripping away what makes a dining experience special, memorable and personal, and consumers will buy food or beverages from the lowest-price provider. Several foodservice operators as well as author Joe Pine make that same point in this issue. The current economic slowdown may put pressure on pricing, but if the value that is added through caring service, inviting ambience and true hospitality is compromised, the nightmares begin.