Grounds for success

Entrepreneur, May, 1998 by Scott S. Smith

Everyone knows Starbucks, the ubiquitous retail chain that sells coffee beverages, beans and accessories, but few know Howard Schultz, the self-effacing chairman, CEO and mastermind behind Starbucks' astonishing growth.

A child of Brooklyn's Bayview Projects, Schultz earned a bachelor's degree in communications, worked as a salesman for Xerox, and eventually became vice president of U.S. operations for a Swedish housewares manufacturer. It was there that he noticed a four-store retailer in Seattle was ordering a large number of his company's drip coffee makers. He decided to find out why, and he scheduled a sales trip to Starbucks Coffee, Tea and Spice in 1981. Schultz was so impressed with the then-10-year-old company's dedication to providing customers with quality imported coffee beans, he signed on as director of Starbucks' retail operations and marketing the following year.

In 1983, while attending a housewares convention in Milan, Italy, Schultz noticed the coffee-bar phenomenon. Serving exotic beverages such as espresso, there we. re 1,500 of them in Milan alone - all of them packed. Certain that coffee bars would do well in the United States, he convinced Starbucks to open one the following year, then left the company to start II Giornale, his own chain of coffee bars, in 1985. Two years later, he raised enough venture capital to buy out Starbucks' two founding partners and merged the firm with his own, renaming the new company Starbucks Corp. The combined operation had 100 employees and 17 locations in the Seattle area.

Today, Starbucks has more than 1,500 outlets staffed by more than 25,000 employees; 1997 revenues exceeded $1 billion. Schultz recently explained his business philosophy in Pour Your Heart Into It (Hyperion), written with Dori Jones Yang. He has not forgotten his entrepreneurial roots and firmly believes they are the key to his company's achievements. Here he shares his thinking about how to be a successful entrepreneur.

Entrepreneur: Last year, your attrition rate was 57 percent, compared with an average of more than 250 percent for retail stores and restaurants nationwide. Back in 1992, your store employees voted to decertify their union. You must be doing things differently.

Howard Schultz: Our mission statement about treating people with respect and dignity is not just words but a creed we live by every day. You can't expect your employees to exceed the expectations of your customers if you don't exceed the employees' expectations of management. That's the contract.

We give our employees - we call them partners - 24 hours of training, which includes not just the nuts and bolts of what we do but also [explains] how we treat our people. Many. of them come from companies where they were not treated well, and they are understandably very cynical. They don't trust management. We rebuild that trust by providing an environment that shows them we value their input, where they won't be reprimanded for constructive criticism, and where they are rewarded for initiative. Some of our best ideas have percolated up from the bottom.

Entrepreneur:. You also provide better tangible rewards than most companies in the retail and service industries.

Schultz: It's ironic that retailers and restaurants live or die on customer service, yet their employees have some of the lowest pay and worst benefits of any industry. That's one reason so many retail experiences are mediocre for the public. We pay our partners well at every level, compared to similar positions at other companies. In 1988, we did something no one else had done, which was to offer our part-time employees comprehensive health care; in 1991, we offered all employees stock options. These benefits have paid for themselves in increased productivity and commitment to the business on the part of our partners.

Entrepreneur: You say you had a hard time being completely honest with employees in the beginning. Why?

Schultz: We wanted to be careful about hurting morale, but we learned how to combine respect with open communication. At first, we were also concerned about whether we should share information about some of the problems management was facing. That changed a few years ago when there was a severe frost in Brazil that damaged the coffee crop. I got up and made a speech that was very uncharacteristic of me, telling everyone what we knew. Not everyone appreciated it; some wanted a leader with unbridled confidence. But there are times when it's important to tell the whole truth.

Entrepreneur: You are opening a store a day and hiring 500 people a month. What qualities do you look for?

Schultz: This is a time when there is a shortage of labor and few people want to work behind a retail counter, so hiring is a real challenge. We want passion for our business - workers who can interpret and execute our mission, who want to build a career, not just take a temporary job. Hiring people is an art, not a science, and resumes can't tell you whether someone will fit into a company's culture. When you realize you've made a mistake, you need to cut your losses and move on.