Howard Schultz brews strong coffee at StarbucksNovember 17, 2011: 6:10 AM ET
He rescued the coffee chain. It had record financial results this year. Now the CEO is on a campaign to save the country from its politicians. Here's how he blends capitalism and activism.
By David A. Kaplan, contributor
FORTUNE -- The president of the United States wasn't on the phone to talk about Pumpkin Spice Latte.
Back in September, two days before Barack Obama delivered his speech to Congress on jobs, he put in a call to Howard Schultz, the chairman and CEO of coffee king Starbucks. Schultz was on the President's mind because the business icon had suddenly become a political activist, announcing that because he was disgusted with Washington's dysfunction, he would cease making campaign contributions to incumbents in either party. Deploring a system that has "chosen to put partisan and ideological purity over the well-being of the people," Schultz asked fellow corporate executives to join him in a boycott. More than 140 quickly did, including the CEOs at Pepsi (PEP), Disney (DIS), Intuit (INTU), Whole Foods (WFM), J. Crew, AOL (AOL), the New York Stock Exchange (NYX), and Nasdaq. Obama evidently took note. He had no personal relationship with Schultz, a registered Democrat, and the two had met only once, when Obama was the junior U.S. senator from Illinois. "Howard," said the President, "I'd like to talk to you about a number of things, including your campaign initiative, as well as your thoughts on the economy and job creation." Seated at his desk at Starbucks headquarters overlooking Puget Sound, Schultz barely had time to collect his thoughts; the White House had set up the call two minutes in advance. Said Obama: "Let's have an honest and straightforward conversation."
Because they did -- for more than half an hour, Schultz recalls -- he's circumspect about this previously undisclosed discussion. Schultz says he went out of his way to let Obama know that his decision to cut off political cash was not directed at the President specifically, even though Democrats had received almost all his donations in the past. "I'm much more concerned about America than the Democratic Party," he told Obama. Yet if you read between the lines, it's clear that Schultz's campaign moratorium had the shock value he intended. Schultz and the President discussed Schultz's "concerns for the country," the budget predicaments facing 42 states, and "the profound crisis of confidence in America."
There aren't many CEOs who would get such presidential calls, or who would meet a few weeks later at the presidential palace in Paris with Nicolas Sarkozy to discuss eurozone economic issues. (Sarkozy's wife, Carla Bruni, is a big Starbucks customer.) But it's been that kind of year for the 58-year-old Schultz -- out in the realm of political and social activism, as well as inside the caffeinated corporate suite. His dynamic union of the public and the private has made Schultz a signal American CEO -- all the more so when government seems so bereft of effective leadership. That's why Schultz earns the No. 1 spot on Fortune's Businessperson of the Year list for 2011. His company, with 17,000 retail stores, in every state and 56 countries, is becoming a dominant player among global food empires. The ubiquitous brand has transcended mere coffee to become a lifestyle emblem. And Schultz has proved that it wasn't just Steve Jobs who could come home to a company to save it. "It's been quite a year," Schultz told me, just before he officially announced the results of a memorable fiscal 2011 to Wall Street a couple of weeks ago.
Brewing big numbers
With a market capitalization of about $33 billion, Starbucks Corp. (SBUX) itself is soaring: the best financials ever, more stores than ever, rapid expansion abroad, and still more new words for "big" and "sweet." The consumer brand that Schultz has built over a quarter-century -- stepping out of the CEO job in 2000, only to return eight years later -- has never been stronger. Revenue hit nearly $12 billion for the year ended Sept. 30, and profits $1.7 billion. A third of the revenue came from overseas. In the most recent quarter total revenue reached $3 billion for the first time; in the key measure of stores open at least a year, sales were up 10% domestically (and 9% internationally) compared with 2010. And, not least important, Pumpkin Spice Latte was up 44% this autumn!
Starbucks' chief bean counter, CFO Troy Alstead, calls the numbers "phenomenal" in a distressed economy and with coffee prices historically high. The company also just announced the $30 million acquisition of Evolution Fresh, a boutique California provider of super-premium fresh-squeezed juices. Starbucks intends to use Evolution as its entry into the "health and wellness" food category; expect to see a separate menu of juices to go and food next year at some Starbucks, as well as at standalone stores called Evolution By Starbucks. "We're going to make a big bet in health and wellness," Schultz says.
Starbucks' stock price reached an all-time high in early November, up more than five times from its 10-year low in 2008. As of early November, shares were up almost 37% since the beginning of the year (compared with the S&P 500's (SPX) 0.4% decline). If you'd invested $1,000 in Starbucks at the initial offering price in 1992, you'd have more than $70,000 today. One longtime employee inherited $75,000 around the time the stock fell below $8 in 2008; with Schultz leading the turnaround, she invested it all in SBUX -- and now has about $450,000.
Schultz himself still owns about 4% of the outstanding stock. Including investments in consumer companies he holds through Maveron, a venture capital firm he co-founded -- and the tens of millions of dollars of equity he owns in Groupon (GRPN) as a director -- his net worth is in the neighborhood of at least $2 billion, which isn't bad for a kid who grew up in the projects of Brooklyn, on the seventh floor at 1560 East 102nd St. Obama himself, according to Schultz, said he was "very aware of my personal story."
The freeze on campaign contributions that Schultz discussed with Obama was merely Schultz's first step in calling out a paralyzed government. Several weeks ago -- with an extensive press rollout, a full-page New York Times ad, and a $300,000 one-minute commercial during Game 7 of the World Series -- he announced "Create Jobs for USA," a grass-roots private fund that will make loans to small businesses in underserved markets across the country. With the change they have left from breaking a 10 to get a Venti Iced Caramel Macchiato, Starbucks customers in the 6,700 company-owned U.S. stores can buy a special $5 red-white-and-blue wristband with the message INDIVISIBLE on it.
All the money will go to the nonprofit Opportunity Finance Network, which supports 180 community-development financial institutions. With 50 million espresso-dependent U.S. customers each week, Schultz expects to raise tens of millions through the Create Jobs for USA plan. More than 100,000 wristbands were sold in the days after the launch on Nov. 1. The Starbucks Foundation -- funded primarily by the company -- donated an initial $5 million; Schultz and his wife, Sheri, plan to donate a substantial sum of their own. "Business leaders cannot be bystanders," he says, adding that he's concerned that the Occupy Wall Street movement is a harbinger of social unrest. "This is how Starbucks and other companies can use their collective scale to do good for America. If the country were a brand, you'd be shorting it now."
Bono -- the singer, humanitarian, and fan of French Roast -- knows all about the power of creative capitalism. "We think of Starbucks not as a coffee company but a media company," he says, explaining why he approached Schultz five or so years ago about bringing the company into his Project Red campaign to eliminate AIDS in Africa. Some of his activist friends initially objected. (Et tu, U2?) But Bono says, "When you're looking for neon on your side and you can't afford it and when the politicians are telling you, 'I'm not hearing about your issue out at the pig roast,' a company like Starbucks helps you get attention."
The jobs initiative and the freeze on campaign money raise the question of whether Schultz might have a future in public office. After all, there's only so much you can do at the helm of a single company. He's tall, trim, and tan, and has graying temples and pearly whites -- the beaming smile and empathetic tone would seem to make him a political natural. The question has come up. After Game 1 of the World Series, Schultz went to dinner with his close friend Tony La Russa, the manager of the St. Louis Cardinals, who would go on to win the championship and retire. Schultz and La Russa took me along. Schultz, as eager a fan as he was attending Yankee games with his father once upon a time, wanted to hear all about how La Russa led his team to victory. This was a social occasion -- I agreed to put my notebook away. La Russa disagreed. He wanted something on the record. Looking at Schultz and then turning purposefully to me across the table, he said, "Howard, you should run for President."
An entrepreneurial epiphany
Howard Schultz created the American coffeehouse on a Grande scale. Affable and astute, he's been a nonpareil salesman all his professional life. After majoring in communications at Northern Michigan University, he made cold calls in Manhattan for Xerox's (XRX) latest invention -- the "word processor" -- then went to work for the U.S. division of Hammarplast, the Swedish kitchenware maker. Schultz learned that a lot of its coffee equipment was being sold to an unremarkable retailer in Seattle's Pike Place Market called Starbucks Coffee, Tea and Spices. Starbucks had been around since 1971 and had four stores. Coffee purists loved its whole fresh Arabica beans, sold in little bags. Schultz was restless and intrigued -- and ventured west to pay a visit. A violinist was playing Mozart by the door. After courting Starbucks' founders for months, in 1982, at 29, he joined Starbucks as head of marketing.
Schultz then had what he calls his entrepreneurial "epiphany." The following year, at a trade show in Italy, he discovered the small espresso bars all through Milan and Verona. He watched the flamboyant baristas grind the beans, pull the shots of espresso, foam the milk. It was "great theater," he thought. Here was a Continental subculture that Americans knew nothing of -- a "third place" between a person's job and a person's home. Schultz also did the math: Italy -- a country with a fifth of the U.S. population -- had 200,000 of these cafés. "I was taken by the power that savoring a simple cup of coffee can have to connect people and create community," he wrote in memoir earlier this year. You didn't hear such perorations from Dunkie, the old mascot at Dunkin' Donuts (DNKN). Starbucks' founders didn't get it. They eventually let Schultz begin selling fresh-brewed cappuccinos by the cup, but he quit to start his own three-store espresso bar. In 1987, Starbucks decided to sell -- and Schultz rounded up $3.8 million from investors to buy it.
By the time the company went public in 1992, Starbucks had 165 stores. Back then, some on Wall Street were dubious. As Schultz recalled to an interviewer, "They'd say, 'You mean you're going to sell coffee for a dollar in a paper cup, with Italian names that no one in America can say -- at a time when no one's drinking coffee and I can get coffee at the local coffee shop for 50¢? Are you kidding me?' " The company grew at an astonishing pace for the rest of the decade. It wasn't Milan, but the "third place" had arrived. It became commonplace in America to see a vast range of people at the local Starbucks: hurried bankers in suits, parents with strollers, students with laptops, someone writing a novel or dozing off in a comfy chair. "We're not in the coffee business -- we're in the experience business," says Schultz, who typically drinks four to five cups of his product a day (Aged Sumatra, made in a French press, no milk, no sugar) and for some reason says he doesn't sleep much.
There were Starbucks counters at the airport, Starbucks ice cream and coffee at grocery stores, Starbucks CDs, and Starbucks food. NEW STARBUCKS OPENS IN REST ROOM OF EXISTING STARBUCKS, merrily reported The Onion.
In 2000, after running daily operations for 15 years, Schultz decided to step down as CEO. He was 46. Though he had presided over a company with an annual growth rate of 49% for eight years, he was "a bit bored." He stayed on as chairman. And he tried his hand as the owner of a professional basketball team, which was pretty much an unmitigated disaster -- he wound up selling the Seattle SuperSonics, who moved to Oklahoma City. Getting him to talk about it is like watching someone pass a kidney stone.
In his absence, Starbucks thrived at first. On some blocks in some cities the ratio of Starbucks to traffic lights was 2 to 1. There were photos of people making Starbucks coffee on Mount Everest. By 2007 there were 15,000 stores, including ones in Brazil, Bahrain, and the Bahamas.
Yet the perils of breakneck mass-market expansion began to set in. Customer traffic started to decline for the first time. Consumers developed a love-hate relationship with a brand whose product they were addicted to but whose price point could seem ludicrous. The emergence of bloggers and social media gave critics an instant platform. McDonald's (MCD),with its own line of espresso beverages, went snarky. four bucks is dumb, declared billboards in sight of the alluring green-andwhite siren atop Starbucks headquarters. On Valentine's Day in 2007, Schultz e-mailed his successor and senior management, lamenting the "commoditization of our brand" and "the watering down of the Starbucks experience." The memo, which leaked to a Starbucks gossip website, became his cri de coeur.
In early 2008, Schultz returned as CEO. In short order he shut down 800 poorly performing U.S. stores and laid off 4,000. Staff were retrained, technology modernized, operations improved. For half a day, all U.S. stores were closed so that baristas could learn how to make better espresso. Starbucks spent $30 million to bring 10,000 store managers to New Orleans for a weeklong pep rally and a combined 50,000 hours of community service to Hurricane Katrina victims.
But second acts by corporate leaders don't always work. For every Steve Jobs, there's a Jerry Yang. At Starbucks, Schultz roused the troops and invigorated innovation. "When you start a company," he says, "it's a singular focus. You have the wind at your back. You have much less to lose. In football terms, we tended to play defense, as opposed to trying to score."
He came back a little less impulsive, a little more relaxed. "Sun Valley and Davos no longer mattered," he says. "For a long time I really wanted to be invited to all those high-profile conferences that CEOs were invited to. I thought that meant something." He was invited, and he went to a few, but he rarely goes anymore. "I no longer needed approval or adulation from the outside world -- maybe because the stock price was at an all-time low and the noise coming from every constituency was so bad and so critical about both the company and me. I just drowned it out. I had to transform both the company as well as myself." He cycled more with friends and family, and went back to playing chess.
Prosperity has now returned to Starbucks. Next year it aims to open 200 company-owned stores in the U.S., as well as remodel 1,700 others that will aspire to more of a neighborhood feel -- earth tones, wood counters, long tables, handwritten menu boards, better sightlines. The food's better: Vivanno smoothies, the Ham & Cheddar Artisan Breakfast Frittata, Bistro Boxes for lunch. Starbucks joined the instant-coffee market with Via in 2009, introduced K-Cup single servings a few weeks ago, and is coming out with its first mild roast, called Blonde, in January. Abroad, the company plans 600 new stores, with about a quarter in mainland China -- on the way to a projected total of 1,500 in that country by 2015. India awaits. Vietnam will get its first store in 2013. With its 17,000 stores altogether, Starbucks has more than any food chain other than McDonald's and Subway.
And U.S. job creation? Starbucks had a net of 3,700 new employees this year and will add several thousand in 2012.
The right thing for its own sake
You don 't have to be Dr. Phil to recognize the roots of Schultz's business benevolence. Schultz lives very nicely now -- Bhambi Custom Tailored suits, a Colorado ski retreat, and a beach house in New York's Hamptons, where Bono and Madonna have visited -- but the memory of Brooklyn is never far away. The corporate canon of Starbucks really dates to Schultz's 1950s and '60s childhood in Canarsie -- a neighborhood that still serves no Frappuccino and won't be employing any cheery $10-an-hour baristas anytime soon. Schultz's father was an uneducated veteran of World War II and worked in a series of blue-collar jobs, never making more than $20,000 a year: factory worker, cabbie, truck driver delivering cloth diapers. The oldest of three children, Schultz felt the enduring "sadness" of his father's work life. When Schultz was 7, he came home to find his father "sprawled on a couch" with a cast on the lower half of his body: Fred Schultz had fallen on a sheet of ice at work and broken his hip and ankle. He was fired and sent home -- without health care coverage, worker's compensation, or severance. That image both haunts and inspires Howard Schultz.
Few American employers offer what Starbucks under Schultz has long given its 107,000 "partners" (what the company calls its employees) in the U.S. In addition to equity grants of "Bean stock," all fulltimers and part-timers putting in at least 20 hours a week (which means nearly all of them) get health care benefits. When Schultz returned as CEO, he refused calls from institutional investors to reduce health care coverage. That would have been anathema to the corporate "ethos," Schultz says, and it would ultimately have been "self-destructive" in "sapping the reservoir of trust" that employees had. It was pretty good PR too, particularly during hard economic times. For Schultz, though, doing the right thing for its own sake -- which these days costs a quarter-billion dollars annually in health insurance premiums -- wasn't inconsistent with the corporate mission of turning a profit.
Something similar happened with the Rwandan cows. On a 2009 trip to see subsistence coffee growers in that country, Schultz met a woman named Mukamwiza Immaculate and asked what she most dreamed of having. A Friesian cow, she softly told Schultz (with a camera rolling). "If I had a cow," she explained through a translator, "I could give fresh milk to my children every day." Schultz was momentarily speechless. When he returned to the U.S., he arranged the purchase of 55 cows for 55 families through the Starbucks Foundation and contributions from employees.
At a recent Nasdaq luncheon Q&A, Schultz was challenged about his expansive view of "corporate social responsibility": Was it not the role of the corporation simply to maximize profits for shareholders, who in turn can use the proceeds to do good in the world if they choose? And was it not arrogant for a corporation to do the do-gooding itself? Schultz would have none of it. "Companies should not have a singular view of profitability," he replied, with the conviction of a preacher rather than the caution of a CEO. "There needs to be a balance between commerce and social responsibility … The companies that are authentic about it will wind up as the companies that make more money."
Bill Bradley, the former U.S. senator and basketball star, who's been on the Starbucks board since 2003, says the company's reputation is central to its success -- a kind of halo effect. "You don't get millions to support your social networks just by selling coffee," he says. "People have to admire the company." He does -- and goes for those Tazo Green Tea Crème Frappuccinos, but, please, no whipped. Way back when, Schultz was an admirer of Bradley. In the early 1970s, high school senior Schultz once slept outside Madison Square Garden all night to buy tickets to watch him play for the New York Knicks. (Schultz paid for his ticket by buying four and scalping three.)
Schultz believes beneficence is good business. Full health benefits breed devotion in the rank and file. Cows for Rwandan workers make those workers more loyal and productive. "To be a benevolent organization, you have to make a lot of profit," he acknowledges. "But if your sole goal is to maximize profit, you're on a collision course with time. We've made commitments that have become accretive to the brand, but it was never by design." By design or otherwise, Starbucks employees get health benefits, and Rwandan coffee growers get fresh milk.
Schultz's two major political initiatives this year -- the CEO moratorium on campaign contributions and the wristbands -- reflect the same MO. (Starbucks will also donate half the profits from two inner-city stores to community organizations). "People don't feel as if they are going to have access to the American dream," he says. "I can feel it. It's in the streets, and it's in the homes, and it's in the schools." Perhaps he proposed both initiatives because he was appalled by the behavior of D.C. politicians in the summer scuffle over the debt ceiling and because he believes the public sector right now is incapable of microfinancing in the service of jobs creation. Or maybe he thinks the patina of both efforts will make the Starbucks brand shine. Either way, politicians may feel some pressure, and somebody might get funding to start a small business. Even so, political action has its risks. Many businesspeople prefer to keep their heads down -- half the country may not agree with your views. So if there's any calculation in Schultz, it cuts both ways.
Less Machiavelli than mensch
Of course, it helps to have a flair for marketing. It was Schultz himself who came up with the idea of the red-white-and-blue wristbands -- to be seen at Starbucks counters and to be worn by customers. It was also Schultz who persuaded Fox and Major League Baseball -- hours before game time -- to make room for the Create Jobs for USA ad during Game 7. And it was surely Schultz who got La Russa, the Cardinals manager, to wear a wristband during that game.
A cynic might be tempted to say this is actually marketing of the highest order -- that selling wristbands will just draw more folks in to buy Peppermint White Chocolate Mochas this joyous holiday season. But there's a story about Schultz that suggests he's less Machiavelli than mensch -- told by Billy Etkin, 55, who runs a mergers-and-acquisitions investment-banking boutique in Manhattan. In 1995, Etkin's first wife, Susan, was diagnosed with multiple myeloma. Etkin and Schultz did not know each other at the time, but a mutual friend from the Hamptons heard that Susan was going to Seattle for a bone marrow transplant in early 1997. The friend told Schultz and his wife. When the Etkins arrived in Seattle, they found that a furnished apartment had been set up for them by the Schultzes. The Schultzes opened their home to the Etkins' young children. Howard checked in with Billy every few days. No cameras were turned on. Few knew, or know, of the Schultzes' kindness. One month after the transplant, Susan died in Seattle. Etkin and Schultz both well up when they talk about what happened.
"It was pure, unvarnished goodness," Etkin says. "It was a grim time, and I was grateful for Howard's help, and I figured I'd go back to New York and he'd go back to running his company, and that would be the end of it." Instead, they and their families became dear friends.
Sticking with what he does best
If Schultz has ambition and charisma and values -- and a low view of the current dramatis personae in Washington -- why doesn't he enter the political fray? Tony La Russa keeps pushing the idea. Yet he also loves to tell a story about his friend. Some years ago, during spring training in Florida, Schultz joined La Russa in the dugout during a game. One of the Cardinals reached first base. Thinking about trying to steal a base, La Russa turned to Schultz and asked, "Should I send the runner?"
"What do you want to do, Howard? It's your call. Decide right now!" More silence. Though a knowledgeable student of baseball -- and a fan of the game, with a signed Ichiro glove in his office and a Mark McGwire bat from the Great Home Run Chase of 1998 (Nos. 44 to 47) at home -- Schultz couldn't come up with a reply. And in baseball you often need to make instantaneous decisions. But he offered a thought a few minutes later: "Tony, let's try a squeeze."
"But Howard," La Russa replied, "there's nobody on third." La Russa can hardly go on with the story, he's laughing so hard. Schultz laughs too.
The runner eventually made it to third. So Schultz again recommended the squeeze play. "But Howard," said La Russa, "now there are two outs."
So how does La Russa explain Schultz's failure as impromptu baseball manager? "He was out of his element," La Russa says. "Just because you're a leader in one thing doesn't mean you'll be good at being a leader in something else."
Another sports guy, Bill Bradley, agrees. "I will fly before Howard Schultz ever runs for public office," he says. "He loves what he does."
Howard Schultz doesn't protest. "I can do more good at doing good at Starbucks than I ever could in politics." If 2011 is any measure, he's no doubt right.
This article is from the December 12, 2011 issue of Fortune.>