An excerpt from Howard Schultz’s book “Onward”

At the end of April 2008, we faced Starbucks' second-quarter earnings. The numbers told a dispiriting story. Compared to a year earlier, global operating income for the quarter had sunk an unbelievable 26 per cent, to US$178 million. Earnings were down 28 per cent, to US$109 million, as our operating margins shrank from 10.7 per cent to 7.1 per cent of net revenues. Most frightening of all, the company’s total comps were negative for the first time in Starbucks history. In the United States alone, customer transactions were down 5 per cent and ticket sales – how much each customer spent per visit – had gone up a mere 1 per cent! It’s hard to overstate just how much these numbers shocked many of us at Starbucks. After almost 16 years of 5 per cent or higher comps, such poor performance was so unfamiliar, even unthinkable, that it quite literally took our breath away. Although Wall Street no longer knew our comps because we’d stopped reporting them, the numbers, which were printed in red on our financial spreadsheets, were branded on my brain. Faced with these results, it was requiring more and more faith for Starbucks’ senior leaders to believe that we could actually transform the company. I had complete confidence that Michelle, who had worked closely with me to finalise the Transformation Agenda, and Cliff shared my vision, but not all of the people on the team believed in or had the discipline to execute the strategy I was putting in place. I recalled what another second-time CEO had told me when I regained control of the company: “Most of your top leaders will be gone or new within a year.” His prediction was coming true. In addition to bringing in Cliff to head our US business, appointing Michelle chief of global strategy, and naming Chris Bruzzo interim CTO and Chet Kuchinad head of partner resources, I’d recently convinced one of Starbucks’ most talented former leaders and wonderful architect, Arthur Rubinfeld, to rejoin Starbucks as president of global development to manage our real estate portfolio, new store designs, and creative concepts. His most pressing assignment was to review the quality of our current retail portfolio, a task whose outcome – closing stores – had the potential to cause enormous pain to a lot of people inside and outside the company. Again, it was a chaotic period. Leading Starbucks continued to be a delicate balancing act as I authorised investments to improve the customer experience and boost sales while simultaneously insisting that we cut costs and closely manage expenses, especially in areas not directly related to our core business. On the second-quarter earnings call, I felt a bit schizophrenic. On one hand I was promising revival. On the other I was reporting what felt like a slow death. “There are no sacred cows,” I told the financial community prior to explaining another significant decision the company had announced earlier that week, one that for many people had come out of the blue. Starbucks was overhauling its entertainment strategy. Cutting this cord was particularly rough for me, especially since as chairman I’d been bullish on entertainment from the start, first seeing it as a natural extension of the brand and later championing deals with record labels, getting behind movies, and sanctioning a rash of non-coffee-related products. By now it was clear to most of us that the entertainment group, as it was currently structured, had devolved into a bloated distraction incompatible with our new mission and economic realities. Its president, who has a truly creative mind and much success in his wake, left the company, as did a number of other talented people. My intent was not to abandon the role Starbucks had established as a cultural arbiter of sorts – music and books would remain part of the Starbucks Experience – we just had to embrace the role in a redefined, more cost-effective manner while capitalising on our existing relationships with AT&T for Wi-Fi, Apple for in-store technology, Concord Records for CDs, and the William Morris Agency for books. I asked Chris Bruzzo to oversee the entertainment division, which we agreed would refocus on digital strategy, CD compilations, and literature. The second quarter did have some bright spots. Sales in our consumer packaged goods (CPG) business – primarily the coffee and Tazo teas sold in grocery stores – were up, and so was CPG’s operating income. Since the launch of Pike Place Roast three weeks earlier, brewed coffee sales also notably increased, especially in the Northeast, the biggest market for brewed. Pike Place Roast was already our number-one whole-bean coffee. As for competitors, our internal research showed no indication that we were losing business to any one company, such as McDonald’s. This was good news, yet we also had to fight public perception as well as the fast-food giant’s aggressive marketing budget. Our research also revealed that our declining sales were not primarily the result of our self-induced problems. “The economy is the top box why people are not coming as often or not coming in for a treat,” I told Jeffrey Bernstein, an analyst with Lehman Brothers, when he pressed me about the sputtering economy’s effect on consumer spending in our stores. An irony did not escape me during the call. Lehman Brothers, the fourth-biggest investment house in the United States, was in the midst of its own crisis as the market raised serious questions about its financial stability and continued to devalue its stock. And Lehman wasn’t alone. Other stalwart financial institutions like AIG and Bear Stearns were crumbling, and their risky investments were the source of the credit and cash crunches that had the entire country reeling! Wall Street was on its own course to crash, taking the rest of us with it. So why did I feel like Starbucks was a punching bag? The “$4 latte” – that untrue catchphrase that cast Starbucks as a symbol of excess in frugal times – was hardly the consumers’ enemy during this period of economic turmoil. But it sure was an easy target. I refused to give in to increasing external pressures and focused on anything that would keep the company moving forward, even if at times it felt like we were going the wrong way in a wind tunnel. GCR Extracted from Onwards by Howard Schultz, published by Wiley 2011, available now from all good bookstores. RRP $US24.95/UK£14.99

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