Stig Brodersen  4:14  

Yeah, reading the book, you can really feel how much he loves Starbucks and how much it hurts him personally that the culture was changing, and how it wasn’t about coffee in the community anymore, but more growth for the sake of growth. And that’s something we’ll circle back to quite a few times in this episode. 

Preston Pysh  4:32  

Alright, so at this point, instead of going chapter by chapter like we normally do for books, what we’re going to do instead is just kind of summarize the story of what takes place throughout the book. And we’re going to pick some of the high points and then at the end, what we’re going to do is summarize the top learning points that we had from reading this book. 

So the story I mentioned, it starts off January 2008. Howard Schultz decides he’s going to come back to Starbucks. The reason that he’s deciding to come back based on what he describes in the book, he felt that the core principles of how the business was founded were starting to erode. He felt that he needed to come back and fix those things. 

When you look at what took place between 2000 and 2008, whenever he wasn’t the CEO, and this is when Jim Donald was the CEO of the company, it was all about growth. It was all about expanding more businesses. It was standing up more stores worldwide. And Donald did a great job at that. I mean, the growth in store count from the time he was CEO until the time he left in 2008 was explosive. 

But for Howard Schultz, his opinion on what he wrote in the book is that during that period of time when they went through all this massive growth, there was also enormous erosion that happened with this brand and the way that the stores look, the way that the stores were being presented, the food that was in the store, the way the stores smelled was something that was repeatedly brought up. 

In fact, Stig and I were emailing each other about the book. And that was the one thing we were kind of poking fun at whenever we’re reading. It was like how many times he’s going to bring up how bad the cheese smells– the burnt cheese– how bad it smells in the stores. But anyway, that’s the reason that’s the starting point of where the story starts off as 2008, whenever he comes back as the CEO. 

Stig Brodersen  6:22  

In terms of growth, I mean, this was massive back then prior to 2008. They were opening six stores per day, all over the world. And like what Preston said, there was too much focus on sales growth. They were not thinking about the bottom line, and perhaps even more importantly, weren’t thinking about the right culture and creating the right community within Starbucks cafes. 

One of the things that’s happening with companies that grow really fast is that you would often promote people before they are ready. Even though there’s a lot to be said about people, [they] will be ready whenever you promote them, and they will grow into the shoes of being a store manager in this situation. That is not exactly what happened. 

Sometimes people have been there for a very, very short amount of time, and then they would have the responsibility for the entire store. Simply because focus was on growth, growth, growth. Just to relate back to this discussion about smell which was actually a very interesting story. He talked about smell throughout the book. It was so important to him. 

As Preston said, he went to Italy. He fell in love with the amazing coffee, and he fell in love with the lifestyle around a great coffee, a great espresso. So if you go into a Starbucks store, that is what Schultz is saying. He would get the smell of burnt cheese. And that was not the smell that he remembered from going to Italy. 

Well, first of all, he wasn’t too happy about selling sandwiches in the first place. He wanted this truly to be a coffee store where you can sit down and enjoy your coffee. Now, because the company really had to grow, they needed to sell different products. 

Also, because they realize that people actually left the Starbucks store whenever they were hungry. So either they would bring food to the store or they would simply just leave. They kind of have to bring sandwiches in, which was something that he really didn’t like. Because if you’re selling sandwiches, you need to have cheese if you want that hot. And one way or the other, it’s going to smell like cheese. It really shows you how passionate Schultz is with coffee whenever he was saying how potent the aroma was.

Preston Pysh  8:26  

Alright, so continuing on the story that was told in the book. So, he comes into the business at this point. And one of his very first actions that he makes is that he’s going to shut down all Starbucks stores across the world, because he’s going to implement a training video to teach people how to pour the perfect espresso. And so, this was a drastic change. 

A lot of people whenever he took this action or put this out there, I think a lot of people were kind of blown away, like, “What in the world are you doing? You’re going to shut down every single store for an entire day to teach people how to pour an espresso that they kind of already know how to pour.” And his argument was that, if you poured it too fast or you poured it too slow, he says that it’s bitter. 

I don’t drink coffee, so I just need to throw that out there to start this. I’m a terrible person to really be talking about Starbucks, but I can talk about the business side of it. He was very passionate about people knowing exactly how to do this to perfection. So, he shut down the stores for an entire day, and I think what it was more than anything else was a message; a psychological message to the workforce that quality is going to trump everything else, and that if the baristas that are pouring these drinks are not 100% satisfied with the way it came out. 

They literally had Howard Schultz’s permission to pour out the drink and start over again because he wanted them to focus that much on the quality, which I think is very admirable. I think it’s very customer-focused and centric. 

And anytime you see an executive, put the customer first over the potential loss or the lower net income that the company is going to produce, I think you’re setting the business up for a long-term win, and maybe a short-term negative opinion by different shareholders or whatnot. 

But in the long term that’s always going to come out as a win, when you take care of the customers first. So I think that that was a really interesting way to approach his first couple of weeks. [He] was implementing something like this and really kind of the shot across the bow, like,”Hey, things are going to be different now. Instead of focusing on growth, we’re focusing on quality,” and that was a drastic change.

Stig Brodersen  10:50  

In continuation of this, what might surprise you is that since Starbucks is focusing so much on great coffee, that they had a nationwide taste competition. They actually lost to McDonald’s, which was a very interesting discussion. That’s something he definitely didn’t like. 

He had like a long discussion about why Starbucks coffee was a lot better and how it was roasted differently than McDonald’s. This is actually not from the book, but this is from another talk I listened to by Malcolm Gladwell about coffee. And I really want to put that into the mix because I think it’s very interesting to understand from a business perspective. 

What he said was, if you ask people which kind of coffee that you like, then most people would say, they would like a dark, rich, hearty roast. That’s the type of coffee that they want. Now, the problem is if you actually ask them to blind test a lot of different coffees, that’s not the coffee that they want. 

Only 25% to 27% would like a dark, rich, hearty roast which is probably what Schultz found in Italy. Most people want a weak, milky coffee. That’s actually what they like. Schultz also realized that even though he was kind of not happy about it, that most people in this situation in America were growing up with weak, milky coffee. And that is also why they preferred McDonald’s coffee more than his. 

So, what does he do? Well, first of all, he would need to make what is called horizontal segmentation. He would need to come up with different kinds of drinks that would cater to different segments. So that’s also why you have the frappuccino. 

Right now, you have nitro brew. You have an espresso. So you have a lot of different types of drinks whenever you go to a Starbucks. But the signature coffee, the most important drink, had to be changed. That was something that he really didn’t like. 

He used words like, “Oh, we came up with a more approachable and more consistent coffee than what they had before, but I think he really wanted the dark, rich, hearty roast.” So, back then whenever he came in as a CEO, they actually changed the signature coffee. He probably would never say that it’s a weak coffee, but it’s definitely, he’s called it “more approachable,” what you drink now than what you used to at Starbucks.

Preston Pysh  13:07  

Even in the book, he was describing it as this mix of blends from these different countries and everything. But at the end of the day when I’m reading it, I’m as a non-coffee drinker, I was like, also, you just kind of made it a little bit weaker, so it was more applicable to more of the people coming into the store, and I took it the exact same way as you, Stig. 

The key takeaway from that though was, I was impressed with his adaptability to change. Even though, he’s this hardcore rich-blend kind of coffee guy and probably a coffee snob when it comes to what he’s willing to drink, he was very adaptable to “Hey, here’s McDonald’s. They just beat us in a taste test, and what are we going to do about it? Well, we’re going to roll something out that’s similar that people were going to like the taste of, and they did, and it had enormous success.” And then, so at this point, the story kind of evolves into all the financial woes that the company faced in 2008. 

So, the book kind of presents the information as if, because their growth was so bad, and they got away from their original objective of having a high quality product, and this and that, that the company peaked on their growth and they started to decline in their in-store comps from the previous year. [They] were down.

But as I was reading this as a person who studies a lot of financial history, the timing of when he came into the job in 2008, you were seeing credit start to contract and then by the end of the year, only nine months after he had gone into the position, had the world seen one of the biggest credit contractions since 1929. 

And so, his discussion of how the store was declining and all these other things, and he was fighting this massive dire financial situation. I think it was kind of I don’t want to say misrepresentative because he does talk about it being a financial crisis, but at the same time, it was flowered over with all these other qualitative things that he thought that the company was doing wrong. 

And that’s why their sales numbers were down whenever I think it was a much more macro economic kind of thing that was happening than what he was describing as a degradation in the quality of their service or their product. There might have been some of that going on, and it might have been some type of contributions. 

I’m curious to hear your thoughts on that, Stig. Do you think it was much more macro than it was the degradation of the quality of their product? I mean that’s how I interpreted it.

Stig Brodersen  14:57  

I think it is a tricky question. If you ask him, I think he would say more that not only quality in terms of the coffee beans, for instance, but also in terms of how much do the employees care about what they do? How much are the store managers really leaving the culture in that store? I think that’s what he meant with quality, like, how long do people have to stay in line? Are they just leaving for another store? Is that the problem? 

Is that really it, because there were definitely a lot of things happening around this time in terms of macro factors. And since this is a high marking product, at least compared to competitors, I guess a lot of people just saved on the date of Starbucks and perhaps not drank coffee and went to another place. 

Preston Pysh  16:18  

Yeah, I think that that’s probably more of a reason that they saw it drop is because you had McDonald’s and some of these other companies that were coming in at half the price. And let’s face it at the end of the day, when a person’s going to work in the morning, and they don’t have time to sit in a coffee shop, and they want to get their caffeine high for the day because they’re addicted to the caffeine, I don’t see that as a flaw in Starbucks. 

I see that as a flaw in maybe their pricing model of going through the drive thru and still charging $5 for a cup of coffee when another person can go to the gas station and get it for $1.25 or whatever. I think that that’s more where it will start to eat away a little bit of their premium, then I think you combine that with the fact that the economy was becoming tighter, and people had less money in their wallets, that those two things were more of a contributing factor than the smell of cheese whenever they go into a Starbucks. 

But Howard Schultz, the way he kind of describes it in the book, it’s more of the latter than the former. But I kind of disagreed on some of that, but I mean, this is the guy who’s the CEO running the company, so what in the world do I know? I’d say he’s a little closer to the issues than my analysis. But the listeners can decide what they think is more reasonable between the two different approaches. 

Interesting discussion though. Interesting to see his vantage point and maybe a different one there. So one of the things that I found kind of interesting, near the end of the book was this idea of Starbucks moving into the instant coffee realm, which looked at the whole brand behind Starbucks and everything. 

If Howard Schultz would have come up to me and said, “Hey, I’m interested in doing instant coffee.” I would have been really kind of looking at him with a strange look like, “I don’t necessarily think that might be the best approach, my friend.” I would have probably said, “I think maybe you need to focus somewhere else.” But what happened was is he got involved with an individual who was a chemist. Correct, Stig?

Stig Brodersen  18:11  

Yeah.

Preston Pysh  18:12  

And this individual, I don’t remember quite how the story went down. But the two of them got linked up. Howard Schultz and this chemist. And the gentleman said that “I think that I could really replicate the in-store taste of a freshly brewed cup of coffee with this approach that I’ve invented for creating instant coffee. It’s completely different than any other instant coffee that’s on the market.” 

And so, Schultz said, “Yeah right.” This gentleman, this chemist, what he did is, he basically made him a cup of what he was working on and said, “This is about a 60% solution of what I think I could get this to. You give me some more time and some R&D dollars, I think I could really get you to almost 100% solution.” So Howard Schultz drank it, and he was blown away. He’s like, “This is not instant coffee. This stuff is pretty phenomenal.” 

So, he decided to fund them and he brought them into the organization into Starbucks. And this gentleman started working on this formula to create an instant cup of coffee that tasted like the cup of freshly brewed store cup of coffee. 

And so, the one [who] created this, he got it totally to the 100% mark where he felt like he was able to replicate the taste. Starbucks started selling it and this was a big, huge ordeal whenever they launched this. I think it was around the 2009 to 2010 timeframe. 

Quite an amazing story about the process that they went through, but it was a really fascinating story. He does a great job at explaining all the finer details on the decision making. How controversial the decision was within Starbucks, which I think is an obvious concern for a lot of the people with the brand and what they were doing. But this ended up being a huge hit for the company and something that added a lot of revenue to their top line. 

So, in the end, Howard Schultz knew what he was doing. And he made a good decision on this one. And I think that it has helped Starbucks tremendously in the long run to add some more revenue. It didn’t degrade the brand as much as a lot of people said that it would, whenever he was considering the idea and playing around with the idea.

Stig Brodersen  20:20  

Really branding was the core thing about this. And he actually talks about this again and again. What do the people think of whenever they think of Starbucks? For me, it’s probably because I’ve been traveling so much. Whenever I see us in a Starbucks store, I’m thinking, “Clean bathroom and WiFi.” 

But he said that they were venturing into all these different fields, not only just food. They’re also launching new music artists. So, some artists had a big breakthrough because they were played a lot in Starbucks cafes. 

He even talked about teaming up with World of Warcraft, an online game. Because the demographics of people playing World of Warcraft and going to Starbucks cafes would be the same. And eventually they actually decided not to sell video games and not team up with them. 

I think that discussion about: What do we want to be known for? Is it just good coffee? [It’s] like the dark rich roast we talked about earlier, or is it instant coffee that we want to be known for? Great music? Computer games? What is Starbucks, really? I think that was a great discussion. And I think that it was the very soul of the book. What is [it] really that we are? What is our identity and how do we evolve? And how can we allow ourselves to go into different directions in terms of branding?

Preston Pysh  21:37  

Alright guys, so this is our roll up of what was in the book. There’s obviously a lot more. It’s an interesting read. I think it’s really good. But what Stig and I are going to do at this point is we’re going to talk about our top takeaways from the book. 

I have four takeaways that I’d like to highlight. So, my first one that I want to highlight is that an influential leader needs to care more about the customer and the brand than just the profits or the growth. 

The thing that I took away from Howard Schultz was you got the idea that for him, it was much more about carrying the brand of Starbucks than it ever was about growing it to be bigger or to become worth more than $3 billion– his net worth is $3 billion– to add more to his personal net worth. It had nothing to do with that. I think what he really cared about was just that quality of his baby that he created here. And I think that that’s really an important thing to think about. 

So when you think about businesses, especially publicly traded businesses that don’t have that person at the helm, who’s thinking in those terms of how can we take care of the customer? How can we protect the brand? How can we protect our competitive advantage in the marketplace for sustainability in the long run? How can we take care of our employees?

When you don’t have that key person at the helm, or if they’re not at the helm, they’re a person on the board of directors that has a lot of shares and has a lot of controlling interest in the business, when that individual or group of people are not present, I think that’s when you really see companies take a turn for the worse. Because what they try to end up doing is they just focus totally with the interests of the shareholders, and everything else is kind of somewhat secondary.

They’ll say that it’s the customers, but in the end, it’s not really the customers. It’s all about: How can we just produce the biggest fattest margin with the biggest bottom line? And when you see executives and board of directors that take that approach, and it’s all about the shareholders’ interests, what you actually see is the goodwill of the business slowly being chipped away at.

And this is something that I think happens very slowly until it’s taken too much of a hold and then it’s almost too hard to reverse because the competition has stepped in and taken over at that point. 

That’s something I really took away from this book. And it made me think about any business that I’m ever going to own, that I want to always try to have some type of controlling interest in that business, or at least know that a person who’s in charge has that controlling interest, that has those values to properly balance the interest between customers, shareholders, and employees; with customers and employees probably taking a much higher priority over the shareholders.

Stig Brodersen  24:31  

That was definitely one of my learning points, too. And it’s also very difficult to do in a corporation like Starbucks because it’s so big. The way that he describes how he was training people in the very early stages when he had less than 100 employees and then how it is today, I think it was very inspiring. 

He was even talking about how he went out to random stores today to speak to the barista even though he has more than 100,000 people. And obviously, it’s really difficult because you’re not just talking about people seeing coffee as their calling. You’re talking about people, a lot of times, students who are doing this to put themselves through school. They might not even drink coffee. 

How do you tell people to care as much as you do? And that was something he invested a lot in was to invest in his partners. That was Starbucks term for the store managers, because that’s where everything starts. He said, “I can’t necessarily reach the person on the floor, but I can reach the store managers, so I need to go through that route. I need to set the example and have that trickled down within the organization.” 

If you look at the financial statements after he took over, and he’s not shy to talk about it by the way…the margins have dramatically improved. It’s not only a question about more and more sales. You can see the margins, I guess he would say, because of the better service. 

They can also charge higher prices compared to the cost of the products. So for me, that was one of the key learning points. How can you care enough on the top level, so everyone in the organization will care as much as you do.

Preston Pysh  26:08  

So my next two points, I’m just going to do them together here. The second one that I had was pay attention to the small things and understand the customer really, really well. And that’s something that I think Howard Schultz definitely embodied with walking into the store. How does it smell? All these little tiny things that I think the typical person would just say, “Oh, that’s not a big deal.” They were big deals to him. And I think that you have to be obsessive about your business if you really want to take it to the level like Howard Schultz did with his business. 

The third point that I had was take the great things from other businesses or inspirations that you have, and co-op those ideas into your own product or service. This is what he did when he traveled to Italy. He saw what somebody else was doing that was really great. And then, he’s like, “How can I co-op this and build some of this into my existing company in store?” 

And man, you can’t get a better idea out of a book than that right there. If you have your own business, look at your competitors. What do you admire about your competitors? What do you admire about a product that maybe competes with yours? And now, how in the world can you bring some of that back into your own business, and kind of morph or admonish what you’re doing with those ideas? That’s something that I saw him do extremely well.

Stig Brodersen  27:28  

I really liked how he wanted to decentralize decisions. And because it was so important for him that people at a Starbucks feel like community. He wanted to adapt that to that country. Because, even though he went to Italy first, and then took that back home to the States, and talked about how they would be applicable in the United States. Well, he was also expanding internationally. 

Can we have the same store be as successful abroad? And it turned out, they couldn’t. So he’s putting a lot of emphasis on decentralizing to the respective store managers and giving that person that local and community feel. 

Let me give you an example of that. I’m just going to use my own Starbucks here as an example. My own Starbucks is located very close to a campus, so there will be a lot of students. It’s actually designed like a study cafe. Clearly, you can also find a comfortable couch, but it is designed like a student cafe, where you would come typically by yourself and just sit and study throughout the day. 

That is not the same Starbucks, I would see if I would go three miles from here. It is very different because they’re catering to a different segment. I think that is what Starbucks has done really, really well. Whenever you travel around the world, you’ll just see how every single store is just catering to that specific customer group. A lot better than a lot of the other big chains you see out there.

Preston Pysh  28:49  

Fantastic point. My last point is really short — do good. That’s what I gathered from Howard Schultz. Some of the book was self-aggrandizing, and you just kind of smile when you’re reading some of it. I mean, the guy’s accomplished enormous things. So, I guess you got to take a little bit of that. 

But the thing that I can say about Howard Schultz that I really valued was, I think he deeply, deeply values and wants to do good for his employees of his business, and not just the employees of his business, but also the vendors that they deal with in other countries. 

One of the stories in the book that we didn’t even talk about was he went to some developing country where they were buying coffee beans, and he asked one of the people there: “What’s the one thing that you would like to have that you don’t have access to?”

And the lady said, I would like to have a cow. And Howard Schultz was like, “Why do you want to have a cow?” And she said, “Well, if I have a cow, then I can harvest the milk from the cow, and then my children can drink the milk, and they can be stronger and healthier, and we can sell the excess milk to raise money, and all these different reasons.” That was her dream, just to have a cow. Howard Schultz was like, “Well, we’re going to get you a cow.”

There’s stories like that in the book. And some people might read them and think, “Oh, he just included that. I don’t buy that.” I really think that he is a genuinely good person. A lot of their vendors that they’re buying coffee from in developing countries, they’re paying a premium over what they could probably buy it out, because of the currency arbitrage and things like that. That’s what I really took away. 

I think that when you’re a good person like that, you’re often rewarded in ways that you don’t necessarily are able to tie the strings back to, “Hey, I did a good deed here, so I got a good return from that.” You don’t see that immediately. Sometimes it’s returned to you 10 years later from a completely different source that you have no idea where it came from. That’s my opinion. 

But I really liked that part of the book and that kind of sense that I got that Howard Schultz is trying to do good in the world. And I really like that. So, that was my final point. 

Alright guys, so that concludes our comments for the book “Onward” by Howard Schultz, the CEO of Starbucks. If you guys would like to get our executive summary of this book, it is about five or six pages long that we typed up for each chapter. 

You can peruse through and see what you think. If you like what’s in the executive summary, you can go buy the whole book yourself. Just sign up on our email list, and you’ll have access to all of our executive summaries and anything else that we publish in the future for all the books that we read.

Stig Brodersen  31:27  

Alright guys, that was all that Preston and I had for this week’s episode of The Investor’s Podcast. We’ll see each other again next week.

Outro  31:34  

Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com, and to win a free subscription to any of our courses on TIP Academy. 

This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.