CHAPTER 23
When They Tell You To Focus, Don’t Get Myopic

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too; . . .
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son!

—RUDYARD KIPLING, “IF”

December 1995 was the holiday season from hell.

Every Christmas, we, like most retailers, prepare to be incredibly frenzied—in the roasting plant, in the stores, in the offices. At Starbucks, it’s the one time of year when our retail merchandise—coffee beans, espresso machines, chocolates, mugs—become as important as the daily lattes and cappuccinos. Usually, the holiday spirit pervades the bustle, customers ooh and aah over the colorful products on the shelves, executives pitch in at the cash registers, and we collapse at the end of the month with contented smiles, promising ourselves that we will be better organized next year.

Christmas 1995, however, was a different story. Windstorms and heavy snows hit several different regions, forcing a number of stores to close for days at a time. The papers were filled with desperate quotes from retailers, trying to wish shoppers into their stores. Predictions for the shopping season got ever gloomier.

Each morning our retail sales team met in the conference room next to my office. These meetings were increasingly full of bitten nails and twitching ankles. Someone would hand out the computer reports of the previous day’s sales, broken down by region, by product category, by sales dollars, by number of customers. It was like getting our test scores. We would compare actual versus budgeted figures, and would revise our forecast every week. If we didn’t make plan one day, we would recalculate some numbers to figure out what we needed to make plan for the rest of the week, and then for the month and quarter and year.

The key figure was the daily comp, which measured sales growth for stores open a year or more. With more stores open, overall sales were obviously growing. But was each individual store selling more than the year before?

Monthly comps had been averaging about 5 percent growth over the same month in the previous year. Now the daily comp numbers were coming in at 2 percent, 1 percent, 0, sometimes even negative. It was a frightful trend.

Adding to the pressure was the fact that our stock kept breaking through record highs. If we didn’t make our numbers for the month, we knew, investors would react dramatically and the stock would plummet.

To make things worse, we knew our profit targets would be hard to meet anyway, since Starbucks still had high-priced coffee inventories purchased during the summer of 1994. Orin expected some of his cost-saving measures would bear fruit, but it was too early to calculate just how much impact they would have on the bottom line. With Orin, I could be honest about how dejected I was. He felt the same way.

What could we do? Most of the key decisions that determined our sales had been made six months earlier, when we ordered merchandise, designed packaging, and bought coffees for our blends. We quickly discovered some mistakes that we couldn’t fix. For Christmas 1995, we had rejected the traditional red-and-green packaging for playful pastels, and customers didn’t take to it. We had ordered too many espresso machines and not enough affordable gift items. Our planning was off, so that we had prepared far too much inventory of certain coffees, including our Christmas blend. We had packaged our gift coffees in big one-pound bags, as usual, but also offered, for the first time, tiny quarter-pound samples of coffee as stocking stuffers. The small bags were a hit, but we had already prepackaged most of our coffee in the larger bags before December. People at the roasting plant had to work overtime, frantically emptying coffee from big bags and stuffing it into tiny ones. It was an added expense we could ill afford.

Still, in previous years we had always been able to boost holiday sales with special promotions or other last-minute tweaking. So Orin and I created a game plan. We’d check which products were selling ahead of plan, which behind, and refine our advertising message accordingly each week. Scott Bedbury had been eager to try some image-building slogans like Brew unto Others, but we ended up focusing on the more straightforward Great Gifts for under Twenty Dollars. At my suggestion, we even offered free coffee after 5 P.M., to encourage customers to stop by our stores after shopping. In a spending mood, they might notice and want to buy some of our merchandise.

Early in the month, it felt as though our business had become a high-stakes poker game. The chips were down, but I was sure we would win, one way or the other. But with each passing day, I felt less and less sanguine. I decided to cancel my family vacation to Hawaii. That was hard on Sheri and the kids, but I felt I needed to be in the bunker with the troops.

Every morning, I received a fax at home with the previous day’s sales figures. Then I’d rush into the office for a 7:30 A.M. meeting with Orin. After that, we’d meet with the retail operations team. I began to dread these meetings. My stomach would be twitching, but I knew I had to appear optimistic. The people in our offices and stores were jittery, and I wanted to pump them full of optimism. The worst thing I could do, I thought, was to start spreading the word that I was terrified about the holiday season. That would just exacerbate the problem.

One of the fundamental aspects of leadership, I realized more and more, is the ability to instill confidence in others when you yourself are feeling insecure.

Finally, in mid-December, I came to a conclusion that was both painful and liberating. Because of the size and scale of the company, I no longer am able to make the singular difference in solving crucial problems. In the old days, Starbucks was like a speedboat, nimble and easy to steer around obstacles in its path. Whatever the issue was, I could get involved and, with concentration and effort, help bring about a solution. If sales were lagging, we could change sales tactics with a day’s notice, responding quickly and intuitively. I could turn the steering wheel one inch or a half-inch, and the entire boat would turn. The results were immediate.

By 1995, Starbucks had become more like an aircraft carrier. Once it was set in a given direction, its course couldn’t easily be altered. No matter how much I jerked the wheel at the last minute, the ship ploughed ahead. It had grown too big for quick handling.

As a large company, we needed to rely more and more on planning and discipline, rather than on our instincts and last-minute fine-tuning. That’s an ability we should have developed long before December 1995, but unfortunately, it took a major problem to make us all understand that we needed to find more accurate forecasting methods and plan for longer lead times. And I was beginning to accept what management consultants have advised me since: To be an enduring, great company, you have to build a mechanism for preventing and solving problems that will long outlast any one individual leader.

Once I realized this, I changed tactics. I decided to communicate my worries openly, not only with my managers, but with everybody inside the company. I called a big meeting of all the people who worked at our offices in Seattle. Since our commons area wasn’t finished yet, we gathered in a cafeteria on the third floor, everyone standing in a crowd, with me at the center.

The cafeteria was decorated with Christmas trimmings, but there was no holiday spirit in the room. I was surrounded by long faces and somber eyes. Although most partners didn’t see the daily numbers, rumors had been circulating that we were not going to hit our targets.

What I did then was uncharacteristic, for I’ve always been known for delivering upbeat, rousing talks. But on this day, I knew, a speech like that would have simply stuck in my throat.

“Perhaps for the first time in the tenure of many of your years at Starbucks,” I began, “we’re having a disappointing holiday season. We’re not performing as well as we had hoped for. There’s no excuse. It’s no one’s fault. But I’m worried.” I explained my concerns and what the ramifications would be if our sales and earnings numbers fell short of plan.

“Success,” I told them, “is not an entitlement.” We had to earn it, every day. Just because Starbucks had achieved all its goals in the past didn’t mean that we were immune to mistakes. We had to be in a mode of constant renewal and recognize that the future of our company was not based on what we achieved yesterday. We had to persevere, even when our near-term targets seemed out of reach.

For a bunch of overachievers, that message was hard to swallow. I could see eyes glancing downward and feet shifting weight.

“I hope we’ll make our numbers,” I concluded. “But if we don’t, we’re still the same company we were a month ago.” I tried to get them to focus on the long-term issues: what the company stands for, not to allow a disappointing season to get in the way of the great enterprise we had built, and to learn from our mistakes.

People came up to me later on, saying, “I’ve worked for other companies, and I’ve never heard a CEO speak so honestly and emotionally about a difficult situation. I appreciate how directly you explained what we’re dealing with.”

But I also heard others tell me they wished I hadn’t been so straightforward. They had viewed me as the conquering hero, the star hitter who could turn even the worst game around, and they didn’t like it when I stepped off my pedestal and admitted I wasn’t invincible. They thought I should have hidden my personal vulnerabilities and concerns. A few fellow managers came to my office later that day, saying, “Howard, I really don’t think you should have done that. What’s the point? Why add more fear?”

It took a few months before my inner circle came to the same conclusion about the company that I had reached. Going through adversity like that together helped hone the senior management team—fully one-third of whom had been with the company less than six months.

One problem all of us in management had was dealing with the guilt. Unlike the coffee-price crisis, this was a disaster we felt we could have prevented. We felt personally responsible, that we had let each other down. The magic had always started with us, and this was the first time we couldn’t sprinkle stardust and wipe the problem away.

Today, with hindsight, I’m convinced that speaking frankly was the right course of action. The head of a company can’t, and shouldn’t, always be the cheerleader. He has to be willing to let his people see the weaknesses and the pain, as long as they understand them in the context of the company’s greater accomplishments.

When the chips are down, it’s wrong to give a rah-rah Knute Rockne speech. People want guidance, not rhetoric. They need to know what the plan of action is, and how it will be implemented. They want to be given responsibility to help solve the problem and the authority to act on it.

A lot of managers find it hard to admit their fears to those who depend on their decisions. But I believe that if you level with your employees in bad times, they will trust you more when you say things are going well. I think our people came away from the experience of Christmas 1995 with a higher degree of faith in me and, more importantly, in what Starbucks stands for.

DON’T LET THE FUTURE SLIP

AWAY, SLICE BY SLICE

Other insights struck me that Christmas, too. One is how easy it is to lose sight of the long term when short-term problems scream for attention. When times are tense, it’s easy for people in the ranks to make bad decisions because they don’t understand the larger implications.

In the early days, the business was easier to understand, and each manager could quickly see what impact his choices would have on the company as a whole. As we grew, we hired more experts with specialized functions, but many of these people—because they came from larger, more risk-averse companies and because they had observed only a thin slice of the business—had narrow viewpoints.

One of my most gnawing fears is what I call incrementalization. What may look right for each specialist’s slice of the business could be a disaster for the company as a whole.

It was eggnog latte that drove the point home to me during that holiday season. That’s a drink that Dave and I had introduced back at Il Giornale in 1986. It has since become a great seasonal favorite for Starbucks customers.

In 1994, someone in the food and beverage group found a great way to save money and time. Rather than going to all the trouble of opening carton after carton of eggnog to make these drinks, went the reasoning, why not use a premixed, eggnog-flavored syrup? It could be dispensed by pressing a button on a lever, holding the caffè latte underneath. It was simple and elegant. We tested the new version of the drink at our Portland stores during the 1994 holiday season, and it was well-received. But when we went to roll it out nationally for Christmas 1995, somehow the syrup did not taste the same, and no one caught the error. Because of the size and scale of the company, I was never informed of the change.

So in the middle of this lousy Christmas season, I was reading customer comment cards, as I always do, and I began to notice many of them making the same complaint: “Your eggnog tastes bad” and “What happened to the fresh eggnog?”

I strode into a food and beverage meeting and said: “What is going on with the eggnog latte?” The members of the department looked at one another sheepishly. On paper, the syrup made a lot of sense, and Portland customers hadn’t complained during the test. But when eggnog latte sales started falling sharply, they realized what a blunder it was. Here was an example of the business being sliced so narrow that no one was paying attention to the overall effect.

We learned our lesson. The following Christmas, we brought back the real dairy version of eggnog latte.

A good chief executive keeps the broader picture in mind when everyone else is focusing on the details. But management also should strongly urge department heads to consult one another and examine the wider implications of policy changes. A decision to cut costs or raise efficiency will add value only if it is consistent with the overall long-term goals the company is trying to achieve.

GETTING ABOVE THE NOISE

IN AN OVER-RETAILED NATION

Whatever mistakes we may have made internally, the major reason for our weak Christmas sales was external. As December went on, we began to hear alarming reports from other retailers. Gymboree, a great company, had negative 19 percent growth at comparable stores for the month of December. Computer City’s comps were off 8 percent. Mervyn’s fell 1.4 percent. For all U.S. retailers, same-store sales for December fell 4.1 percent, according to Telecheck Services.

By comparison, our troubles looked minor league. We ended the month with positive same-store sales growth of 1 percent.

Clearly the problem was bigger than Starbucks.

The United States has become an over-retailed nation in which too many stores are chasing too few customer dollars. Consumers simply face too many choices in the marketplace to be able to wisely decide how to spend their disposable income.

By the time Starbucks entered the national arena in the early 1990s, over-retailing had become a serious problem. Every year we find it harder to get our message out. We don’t have a huge national advertising budget as large companies do. People are busier and less inclined to shop around and try out new places.

Yet over-retailing creates tremendous opportunity for Starbucks. Unlike packaged food brands, we are able to connect with people, one at a time, through our stores. And because we strive to consistently deliver a quality product and a quality experience, when other retailers are falling into mediocrity, we stand out.

But surprising and delighting our customers gets harder every year. We’ve led our customers to expect a high standard of service. Like every good retailer, we continually have to differentiate ourselves by offering products or experiences they can’t get elsewhere. We have to work to provide more depth, more variety and richness in store design. Rather than driving down the highway exactly between the dotted lines, we may have to bounce off the guard rails a few times.

Customers are always looking for something fresh and interesting, especially at Christmastime. That demand necessitates continuous self-renewal and reinvention from retailers across America, and for us specifically. We have to keep on trying to create new categories and new products that will capture customers’ imaginations.

Every retailer dreams of a blockbuster product that will fly off the shelves. That’s what the Blue Note Blend CD was for us in March 1995, and Frappuccino in the summers of 1995 and 1996. But you can’t expect to develop that kind of a hit every four weeks.

That’s why, even in the face of heart-rending Christmas sales numbers, I kept pushing our R & D and marketing teams to continue their efforts for new product development. We need those farsighted projects to retain customers’ interest and loyalty.

Even though we could identify obvious external trends that explained our disappointing sales, it would have been wrong to just sit back and say, “Everybody’s having a bad year. It’s not our fault.” We have to keep looking for a way to rise above the noise in an over-retailed nation.

THE BEST CEOS ARE BOTH

FARSIGHTED AND NEARSIGHTED

In the end, we didn’t figure it out that year. In early January, when we announced our same-store sales numbers, the stock price sank. Later that month, we calculated that we had missed our profit-growth target by only one percentage point, thanks to Orin’s backroom improvements. Starbucks was still very profitable, but earnings were not growing as quickly as we had predicted.

Still, Wall Street analysts were merciless. A few blamed me and my product innovations for distracting the company from its core business. History, one of them said, shows that the biggest danger for retail and restaurant operators is a loss of focus. “When this occurs, any brand equity the company has built up begins to dilute,” he said. “We would prefer to see more attention paid to store-level execution.”

That burned me up. It’s precisely this short-term orientation that annoys many CEOs about Wall Street. A company whose management is not planning for the distant future can never grow beyond the latest faddish concept.

Even inside Starbucks during those months, some people groused that I was putting too much pressure on them, demanding work on longer-term projects when our core businesses needed urgent repair. I heard resentment in some voices. While they were mopping up the post-Christmas mess, I was playing with my new toys: ice cream, bottled Frappuccino, a big new contract with United Airlines.

Was my eye off the ball?

No. My eyes were focused on the long-term future. I was looking around the corner, to see what would hit us next. Procter & Gamble had just bought one of the largest suppliers of whole-bean coffee to the supermarkets, Millstone Coffee of Everett, Washington. Were the majors coming after us? Should we reconsider our early decision not to sell our coffee in supermarkets? What products could we create that would be proprietary, that would give us an unassailable niche in an ever-more competitive marketplace? How could we leverage the Starbucks brand, keeping its elegance and style but reaching more customers? We needed to pursue a long-term vision of building the Starbucks brand by creating new products. To be ready by the year 2000, we had to start experimenting immediately.

With improvements in manufacturing, retail operations, and planning, Starbucks also got better at handling the short-term future. During Christmas 1996 we avoided many of the problems that beset us in the previous year. Once again, the overall retail climate was weak, and weather was bad, especially in the Pacific Northwest. Our same-store sales growth, at 2 percent, was not as good as we would have liked. But our cost containment efforts had worked well, and earnings came in right at Wall Street’s consensus estimate. As managers, we knew what to expect, and the stock market did not overreact.

We did everything we could to ensure strong sales during the holiday season in 1996. We did our homework. We executed according to a well-crafted plan, and, with far more accurate forecasts, packaged almost exactly the right amount of coffee to meet demand. What’s more, I was more sanguine and could put it in context. I didn’t expect a last-minute Christmas miracle, and I could focus on the outlook for the new year. With a new vice president for merchandising, Peter Gibbons, hired from Disney, and a larger staff in Don Valencia’s labs, we had new products in the pipeline for summer.

That second year, we were all calmer. I realized it wouldn’t be the end of the world if we weren’t able to knock the cover off the ball for Christmas. Why? Because we all knew the value that we were creating, over the long term, for the brand and for the company. Christmas sales do not determine the fate of Starbucks.

Wall Street, too, understood, and the stock began to rise in January, reflecting the positive outlook for 1997.

Like the captain of that aircraft carrier, I set my eyes on the horizon and steamed ahead. This time I didn’t even miss the old speedboat.