Starbucks CEO's Tall Order
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Project Ferrari is what it's called around the Starbucks Center in Seattle. For the past several months, behind locked doors on the sealed-off seventh floor of corporate headquarters, they've worked on it. Few people have ever seen the stuff, and almost no one has tasted it. And suddenly here it is, swirls of yellow, red, white, and purple in parfait cups, bathing in grapefruit or blueberry juice, or espresso. Two of Howard Schultz's "partners" -- that's what Starbucks calls its roughly 200,000 employees -- approach the door to his office, carrying the cups on silver trays. "Come on in!" Schultz shouts at them cheerfully.
The substance does not yet have a name, at least in English; the fellow who came up with "Starbucks" 37 years ago is on the case. Early this year, shortly after Schultz had resumed the post of C.E.O. at the company he'd built from a small chain of coffeehouses into an international colossus, he received word that a magical new drink had been discovered in a small Italian town. He promptly dispatched a trusted aide -- one of several who had rejoined him since his return -- to see if it matched the hype. "You've got to get over here," the man promptly reported back. "I think we have the next Frappuccino!"
Italy has been good to Schultz. As most Starbucks baristas know, it was in Milan, barely 25 years ago, that he had his famous epiphany, the one that convinced him that he should bring the Italian espresso bar to what sometimes seems like every crossroads in America. In the company's more recent past, it might have taken a year or two before anything came of such a suggestion. At today's Starbucks, though, no one is waiting around: Within 48 hours, Schultz and seven associates were en route to Italy aboard a corporate jet, and within a few weeks, the deal had been struck. The no-name half-drink half-dessert will be in Starbucks stores in California this summer and all over the place by next year. "Thank you, guys!" Schultz shouts as the two depart. Pour Your Heart Into It, he called his 1997 corporate autobiography. And pour his heart into it is precisely what Schultz now does. (View slideshow.)
"You got a real treat!" he tells me. "You'll love this. Take this one first. Try that one!" He stops and samples some. "Oh, it's so good," he whispers. "Tell me this isn't, like, over-the-top! Is that fantastic? We haven't released the name. Or what's in it. But it's unique." He turned to a different cup. "This is what the Italians call affogato, which is espresso on top of this." He tastes it. "Completely different flavor. But fantastic." He tastes some more. "Oh, God! It's so unique and fantastic. This is what we have to keep doing. We have to keep pushing the envelope around innovation. This has juice in it. Isn't it fantastic? Taste the fruit one! This is so refreshing! It's refreshing and indulgent at the same time!" (And, he points out, it's low-cal.) Sure, he concedes, the coffee purists -- the same cynics who are forever declaring that Starbucks has lost its soul -- will sneer. "But we're in the business for our customers. And they're going to love this!" (View an interactive look at the growth of the Starbucks chain.)
"Howard Schultz enthused" may be redundant. But it is also something to see, and these days he's more than enthused; he's reinvigorated. "I'm energized, and believe it or not, I'm excited by this," he says. The this here is not the (my best guess) frozen yogurt with ground ice and various flavorings that we've just consumed, but the sudden, shocking end to the long and gilded age of Starbucks, which in the past year and a half has seen earnings drop, the number of customers diminish, the stock lose more than half its value, and activist investor Nelson Peltz take a stake. "In a very perverse way," he says, "if someone said to you, 'You hoped this would happen?' No, absolutely not. But there's a piece of me that is embracing this underdog thing where people are counting us out, because they're going to be wrong. I promise you that. They're going to be wrong."
"We're not this young, beloved, entrepreneurial enterprise anymore," he concedes. "We have to do business in a different way. And now we're being tested, for the first time." That goes not just for Starbucks but for Schultz himself. He too has had an incredible run, which has taken him from making cold calls for Xerox to having Mick Jagger over to his house for dinner. ("Very nice guy, and really interested in business.") These days, lots of people are waiting for Schultz to fall, or at least be unmasked. These days, he's taking his coffee not mit schlag but mit schadenfreude. Online and in the press, as well as among coffee mavens, Seattle sports fans, environmentalists, nutritionists, fair-trade advocates, and even some of his own baristas, he is under attack.
Or maybe he is simply being held to his own lofty rhetoric. The question now is whether Schultz can be loved on Wall Street and everywhere else at once, whether he can remain what he has always aspired, and thinks himself, to be: a mogul, sure, but also a mensch.
Only last year, Schultz told talk-show host Charlie Rose that Starbucks was "fairly recession-proof." The economy had dipped before, but Starbucks had always managed to be what Schultz likes to call an affordable luxury. But this time the economy is in a tailspin; the housing market has collapsed; the price of the two fluids most vital to Starbucks' health -- petroleum and milk -- has skyrocketed. Fewer people are walking into the same Starbucks stores than last year. Never before had that happened, even when Starbucks was opening new stores virtually on top of old ones.
In January, Schultz, who'd ostensibly handed off day-to-day control of the company in 2000 to go off and think grand thoughts, had resumed the reins, replacing Jim Donald, who had been C.E.O. since 2005. The day after he returned, the stock shot up more than 8 percent. But it was a short-lived jolt, a corporate doppio espresso. In late May, the price hovered at about $18 a share; 20 months before, it had been nearly $40. A flurry of initiatives -- what Schultz has dubbed, with characteristic grandiosity, his "transformational agenda" -- hasn't yet helped.
Starbucks is closing 100 underperforming stores and cutting way back -- at least by its own exponential standards -- on expansion in the U.S.? There's a super-duper new Swiss-made espresso machine, one promising mass-produced perfection. (It is also lower-slung, allowing baristas to make all-important eye contact with customers.) There's the Clover, an ingenious and expensive -- $11,000 a pop -- machine for French-pressing coffee by the cup. (So dazzled was Schultz by it that he bought the company.) And there's Pike Place Roast, a new blend designed to strengthen Starbucks in the world of drip coffee, where McDonald's and Dunkin' Donuts are nipping at its heels. The blend's name -- honoring the location of what has come to be known as Starbucks' flagship store -- is a nod to the company's roots, and so is the packaging; it features Starbucks' originally zaftig, busty mermaid, which had been bowdlerized many years ago to placate American bluenoses.
This February, in a great theatrical stroke, Schultz closed more than 7,000 stores for three hours to allow 135,000 baristas to relearn -- or learn -- how to make decent espresso. (Three hours apparently sufficed; much of the process at Starbucks is automated anyway.) Schultz insists, though, that the gesture, which cost the company an estimated $10 million in labor costs and lost revenue, was no gimmick. It did seem to confirm what aficionados have long known: Starbucks' espresso often isn't very good, and it has gotten worse. But the stunt garnered priceless publicity, including a Stephen Colbert depiction of Starbucks withdrawal that outdid anything Ray Milland endured in The Lost Weekend. When the clip was shown at the company's annual meeting in March, it brought down the house. "People want to know why we don't advertise," Schultz joked afterward.
Starbucks, Schultz says, will look forward "with laser, laser intensity" by looking back to where it all began: the coffee. The company's Great Satan is the poor breakfast sandwich, which, while it earns handsome profits, embodies Starbucks' deviation from its core business, besides stinking up the joint and obliterating the heavenly aroma of freshly ground beans. Schultz has ordered it banished.
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