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HOWARD SCHULTZ: When I returned as CEO, which I never had planned to come back, I would say that there were people both on the board at the time and many people at Starbucks and, certainly, hundreds of people of Wall Street that said, you're bringing him back? I mean, he's the problem.
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RAZ: From NPR, it's HOW I BUILT THIS, a show about innovators, entrepreneurs, idealists and the stories behind the movements they built.
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RAZ: I'm Guy Raz. And on the show today, how a poor kid from the projects in Brooklyn turned a small coffee company in Seattle into the third-largest restaurant chain in the world.
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RAZ: There was a time in America when a typical coffee experience involved a styrofoam cup at, like, a PTA meeting or a church social. And it was usually served out of a giant aluminum urn, warming up that coffee for hours and hours, and sometimes there'd be a pink cardboard box of half-eaten glazed donuts next to it. And if you have no idea what I'm talking about, consider yourself lucky because you may not know how hard it was to find good coffee in America before Starbucks.
Now, I know, I know, some of you are haters. Some of you wouldn't be caught dead in a Starbucks, too ubiquitous, too corporate. And that's OK. That's totally fine. But just consider for a moment how much coffee culture in America owes to Starbucks and to Howard Schultz because if he hadn't stumbled into a little coffee bean and spice shop in Seattle called Starbucks in 1981, it may never have become what it is today. Now at the time, Starbucks was just a local chain in Seattle. And it didn't sell brewed coffee, just the beans. But Howard was so blown away by the quality of the coffee he tasted from those beans that he quit his job and begged the owners of Starbucks to hire him.
Then six years later, when those same owners decided to sell, Howard raised the money to buy the company. And just a few years after that, he took Starbucks national. Now today, there are 27,000 Starbucks locations in roughly 70 countries around the world, which isn't bad for a kid who grew up poor in Brooklyn. A couple weeks ago in Seattle, I sat down with Howard in front of a live audience to hear about how he took that Seattle coffee bean shop and turned it into the Starbucks we know today.
SCHULTZ: Thank you very much.
RAZ: They didn't think you would be here. That's why they cheered so loud. They could not believe you walked out. They were just amazed. By the way, how many - how many cups of coffee do you drink every day?
SCHULTZ: Probably four or five a day.
RAZ: Four or five a day.
SCHULTZ: Yeah. And no caffeine after 5 p.m.
RAZ: Fair enough. And what is your preferred coffee drink?
SCHULTZ: French press of aged Sumatra would be my No. 1 choice.
RAZ: All right. OK. OK. Good.
SCHULTZ: Must be a lot of Starbucks people in here.
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RAZ: A lot of people know that you were raised in a housing project, Bayview, in Brooklyn. Can you - can you describe the apartment that you grew up in?
SCHULTZ: Sure. I grew up in Canarsie, which is at the last stop of the L train in Brooklyn, in a housing project that had 34 buildings, two-bedroom apartment for my mother and father, sister and brother. I think the rent in 1956 was $96 a month.
RAZ: Wow. Who were the people who lived there?
SCHULTZ: Who lived there were people who were construction workers, cab drivers, plumbers. And it was a childhood that was based on a real sense of community because there were people with like-minded values, and it was a very diverse group of people. And I think in an early age, I learned how to get along with a lot of different people because we were in one building with one elevator and you had to get along.
RAZ: Yeah. Your dad, World War II vet.
RAZ: He was a driver. Mom, receptionist. I guess at a certain point when you were a kid, your dad got injured on the job.
SCHULTZ: So my dad had a series of what I would loosely describe as really bad blue-collar jobs. And he went from one job to another. In the winter month of March of 1960, he was a delivery driver - this was, probably, one of his worst jobs - picking up and delivering cloth diapers before the invention of Pampers. He fell on a sheet of ice and broke his hip and his leg. And I came home from school, and he was kind of laid out on the couch. I witnessed what I would loosely describe as the fracturing of the American dream and despair, hopelessness. And what happened in 1960, if you were a blue-collar, you know, uneducated worker, despite the fact that you had served your country in World War II, there was no workman's compensation, there was no health care and you were dismissed. But what I witnessed scarred me. And that's what we kind of went through.
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RAZ: Were you a good student as a kid?
SCHULTZ: I was not a good student. I don't think I applied myself very well.
RAZ: But an athlete - you were an athlete.
SCHULTZ: I was an athlete.
RAZ: A pretty good athlete.
SCHULTZ: Yeah. I was an athlete because in the projects, the entire day was spent in the schoolyard, you know, concrete schoolyard playing any sport that you could invent or organize. You would dive on concrete to win.
SCHULTZ: And so my competitiveness, I think, was born out of being that kid in that schoolyard. You know, I became a very good high school football player.
RAZ: Which is so weird to think about because you're a pretty trim guy, right? I mean, you're not, like, a big, huge, you know, hulking, burly guy, right? But football was your sport. And you were - you were, like, very good. I mean, you were recruited by a Division II school.
SCHULTZ: But I was a fast white guy.
RAZ: So you are recruited by Northern Michigan University to go play football there. And did you think, I mean, did you think that there was any possibility you might go to the...
SCHULTZ: No, no, no, no. I never...
RAZ: ...To the NFL? No.
SCHULTZ: ...I never thought I was going to be good enough. And in fact, when I got to Northern Michigan and I saw the size of these guys and, you know, real Midwestern grit, the toughness and the competitiveness of what I experienced in the schoolyard started drifting.
RAZ: Did you get any playing time?
SCHULTZ: No, I got hurt right away.
SCHULTZ: I know it sounds funny, but at the time, you know, I - and here's the thing - a very famous guy was ahead of me in my position. And that was Steve Mariucci. He was a great player, became the coach of the San Francisco 49ers, and he was much better.
RAZ: So football was not in the cards. You were not going to play professional, so you had to go out and get a job after you graduate. What do you - what do you do?
SCHULTZ: I was very fortunate that when I finished school, I somehow convinced people at Xerox to hire me.
RAZ: What do you mean you convinced them?
SCHULTZ: Well, I really had no training. I did not have a business degree. I had a communications degree from Northern Michigan. But I got a sales job at Xerox. This was 1976. And at Xerox, first, they sent you to a sales training school in Leesburg, Va. And after that for six months, all you do is make 50 cold calls a day. But I'm not talking on a phone. You have to go make a physical cold call into an office.
RAZ: This is in New York or...
SCHULTZ: This is in New York City. My territory was 42nd to 48th from Fifth Avenue to the river.
RAZ: You just had to go door to door, office to office...
SCHULTZ: Every day.
RAZ: ...Knock on the door. And most of them were just saying no solicitors please, you know, not interested.
SCHULTZ: Yeah. And if you got a lead, you were not yet allowed to sell the product. You were an intern, basically. You had to give it to the salesperson. And my salary in 1976 - I tell my kids this and they go that's not true - was a thousand dollars a month. And I gave half of it to my mother because I was living at home.
RAZ: Yeah. Wow. So were you good at, I mean, were you good at cold calling?
SCHULTZ: I was really good, you know, I was really...
RAZ: You liked getting rejected constantly?
SCHULTZ: I didn't like cold calling. But once I became a salesperson at Xerox, it was clear to the people at Xerox that I had some talent. And I stayed there a number of years. But all along, I knew that the discipline, the regimentation, the lack of kind of personal creativity - I was very restless and I was looking for a way out. So it wasn't joyful. I wasn't happy.
RAZ: It's interesting because a lot of people we've had on the show like Sara Blakely, who started Spanx, started out, you know, selling things door to door. Do you think that was an important...
SCHULTZ: I do because I think the rejection of cold calling, the humility that comes with the disappointment of not someone saying yes to you, I went through a steep learning curve and I started having a higher level of self-esteem. Xerox and IBM, at that point in the mid-'70s, were two kind of pedigree companies that if you told somebody you're working for Xerox, people felt kind of good about you, until I told my mother I was leaving Xerox and she started crying. But I knew in my heart early on that I had an entrepreneurial zest for something different and was looking for a different kind of opportunity.
RAZ: So what'd you find?
SCHULTZ: So I left Xerox because a friend of mine shared with me that there was a Swedish company opening an office in New York and looking for a general manager. And I had no idea what the product really was, met the person who was in charge of moving from Sweden to New York. And he and I made a immediate connection. And he became a lifelong friend and mentor to me and hired me. And his name was Kai Eliasson (ph).
RAZ: And what were you selling?
SCHULTZ: At first, we were selling - they were opening up a division for furniture, and I had to move to North Carolina for a year while Sheri and I were dating in New York.
RAZ: You had met Sheri around this time? Sheri's now your wife.
SCHULTZ: Yeah. Sheri and I met in 1978 on July 4, and this was 1980 or so. North Carolina was not for me. And so I went to Kai and I said I want to come back to New York or I'm going to leave the company. And he said let me kind of think about all this. Let me figure out what to do. And he gave me the general manager job of the consumer division in New York. And unbeknownst to me, on a trip to San Francisco to see our largest customer, which was Macy's at the time, on the way back from California, I stopped in Seattle because there was a small coffee company called Starbucks selling this product. And it was a nonelectric kind of thermos coffee maker.
And I walked into the Pike Place store and I just said holy [expletive]. I literally had the kind of epiphany that just spoke to me, that this is such an extraordinary thing about what they were doing and the coffee, the romance, the passion that people had. And I met the founders. And over a course of a year, I persuaded them to hire me.
RAZ: Here's what I don't get. What was it? I mean, they were selling coffee beans, which is, you know, which is really cool.
RAZ: But I mean, you had this really great job and an apartment in New York and what made you think I have got to drop everything and sell coffee beans?
SCHULTZ: Well, there's two things going on. I think Sheri and I - we had an understanding that we did not want to raise our kids in New York City. We wanted to get out. And I was in Seattle on this spectacular, majestic day like today. So the combination of all of that and the experience I had as a customer and watching what was going on in that first store, I just immediately was kind of swept away with this is the kind of environment, product and young company I'd like to be part of. And I, over a course of a year, just kept banging the door to say to the founders if you expand the company, I think I can help you. And their dream - and nothing against them - their dream at the time was to expand to Portland, Ore. That was their big idea.
RAZ: And was that, I mean, part of your vision for the company at the time? Do you think we can expand and continue to sell coffee beans?
SCHULTZ: You know, I think - I had to learn the business. So I didn't know anything different at that time until I went to Italy a year later in 1983.
RAZ: By the way, were you a coffee drinker? I mean, did you know anything about coffee at that point?
SCHULTZ: I was a coffee drinker, but I did not know much about coffee.
RAZ: Just like Maxwell House and whatever.
SCHULTZ: Oh, a little bit better than that.
RAZ: All right.
RAZ: Sorry. Sorry.
SCHULTZ: Come on.
RAZ: So you knew something about coffee (laughter).
SCHULTZ: I knew enough that I had a great appreciation for the coffee I tasted for the first time at the original Pike Place store and I was just blown away. We had four stores at the time. And then the founder sent me to Milan, Italy - first trip for me to Italy - to a trade show representing Starbucks. And that's when I was walking the streets of Milan and every 20, 30 yards, you are intercepted, literally, with a Italian coffee bar. And I walked into all of these places and kept seeing the theater, the romance and the nectar of the gods, which is espresso.
RAZ: Those, like, big sort of copper espresso hand pump...
SCHULTZ: Yeah. All the elegance, the style. But what really struck me was the sense of community. And I started going to these stores almost the same time every day and I would start seeing the same people. I started realizing that this is a third place between home and work. But the beverage was the draw. And so I realized while I was in Italy that Starbucks was in the coffee business but, perhaps, the wrong part of the business. And I raced back with such enthusiasm and such passion that I overwhelmed them when I got back.
RAZ: You said we have got to do this. We got to sell brewed coffee because they were not selling brewed coffee.
SCHULTZ: No, there was no service of any cup of coffee at any Starbucks. It was just pounds of coffee for home use.
RAZ: And you come back to Seattle and you say guys, we have got to do this. It's going to be huge. And they say...
SCHULTZ: They viewed the beverage business in their parlance as being in the restaurant business. And they didn't like it. They thought it was messy. And that's not what they wanted to do. So I literally pounded on the table for a year. And I think they just said OK, get this kid out of our face and we're opening a new store on the corner of Fourth and Spring in 1985. It was 1,500 square feet. And they said we'll give you 500 feet of the 1,500 to open up an Italian coffee bar in the store. And that was it. I mean, so we opened the Fourth and Spring Starbucks store with its first coffee bar. Overnight, we had hundreds of customers every day. And we introduced cafe latte to the city of Seattle, basically.
Now here's the rub. It was so successful that it completely dwarfed the other side of the business. And the two founders at the time did not like the disproportionate level of sales and how the store was functioning. And they respectfully said to me we don't want to repeat this. And I was crushed. I was thinking how could you possibly - this is - look what's going on here, not to mention we're making more money. I was devastated. I almost didn't believe it at first. I was like, you really - are you serious? And so I think Sheri knew I was depressed. And I came home one night and said I don't think I can work for anyone anymore. I'm leaving Starbucks. I'm going to start my own. So I told the two founders what I was doing. And then they surprised me and said well, if you do that, we'd like to invest in you.
RAZ: Which is pretty cool.
SCHULTZ: But here's the rub. But of course, you're going to use Starbucks coffee.
SCHULTZ: But they invested and kind of gave me legitimacy to open up an Italian coffee bar in the Columbia Center tower when the building opened. I signed that lease with a developer in Seattle, very famous guy here locally, called Martin Selig. It was 700 square feet. And he asked me for a personal guarantee. I said sure, I have no problem with that.
RAZ: And by the way, you're, like, 32 years old.
SCHULTZ: And we had nothing. So he wanted a personal guarantee. I guaranteed it but knew there was nothing behind it.
SCHULTZ: And we opened the store called Il Giornale. I went back to Italy. I did a lot more research. I spent a lot more time there. And I named the company after the Italian newspaper in Milan. And we opened two stores in Seattle. And then - there was a great location in Vancouver, B.C. And we said sure, let's open in Vancouver. So we opened three stores. We are raising money to do that, by the way.
RAZ: Yeah, how did you do that? I mean, were people sort of saying yeah, of course I want to - Howard Schultz oh, my gosh, you know, future genius CEO, please take my money. Was it really easy to get that money?
SCHULTZ: No. The truth of the matter is that I spoke to 242 people to try and raise $1,700,000 to form Il Giornale. And Starbucks was a seed investor but did not give me enough money to open up a store. And Starbucks put a little contract in there, which was you have to raise $600,000 to use our $200,000. So I went out and tried to raise money. I was having a very hard time. It reminded me of cold calling, a lot of rejection because I remember people said let me try and understand this. The name of the company is a name no one can pronounce. You're going to sell coffee for $2 to $3 a cup of coffee in a paper cup with Italian names that no one's ever heard of and you want to give health care to your employees. And so it was a tough sell. Now, our first investor is in this audience. Her name is Carol Bobo (ph). I don't know where she is.
RAZ: Wow. Carol, that was a good move.
SCHULTZ: And Carol was Sheri's dearest friend. And we went over to their house. I had all this - I had the business plan. I had the pitch and everything. And Carol and her husband said we don't need any pitch. We're just going to trust you. And they wrote a check that night and gave me $100,000. And, you know, and things started happening after that.
RAZ: What was your ambition for Il Giornale? I mean, did you think this is going to be a national chain of coffee bars?
SCHULTZ: Well, here's an interesting story. So the original business plan was a hundred stores. And we weren't raising any money because people didn't believe we could open a hundred stores. And I didn't even have enough funds, resources, to kind of professionally reprint the document. So I figured out a way to kind of white-out the hundred and I wrote 75.
SCHULTZ: So we opened our first store in '86. And then a year after, Jerry and the founder of Starbucks had acquired Peet's Coffee Company. Many people don't realize that Peet's and Starbucks were one company two years prior to that. And Jerry came to me...
RAZ: This is Jerry Baldwin.
SCHULTZ: ...Jerry Baldwin came to me and said we've run into some financial trouble and we're going to have to split the two companies. And I've decided I'm going to move to California and I want to keep Peet's. The person who should buy Starbucks is you. And so the price is one time sales, six stores, $3.8 million, which was, you know, it was fantastic news. And I'll give you a 90-day exclusive to try and come back to me with $3.8 million. So I was extraordinarily excited. But I didn't know where I was going to get the money.
RAZ: Right. Yeah.
SCHULTZ: And so now we had to go back out and raise money. And it was very difficult.
RAZ: So how did you do it?
SCHULTZ: We went back to the original investors of Il Giornale. Some of them were interested, but a lot of them weren't because Il Giornale had three stores. We weren't - we didn't prove anything. So you know, Jerry kept checking in with me to see how are you doing on the fundraising? And about 60 days in, I said we're about halfway there and I'm confident that we'll get the $3.8 million. And he said I have to sit down and tell you something. We have a competitive buyer. And I said Jerry, you told me we had an exclusive. What do you mean? And he said one of your investors from Il Giornale has shown up and offered me $4 million cash with no due diligence.
And I was like, I just - I can remember that moment as if my - the world had just ended because I knew who it was. He told me. And the person at the time - there were three business titans in Seattle, and he was one of them. And they had invested in Il Giornale as a group. I didn't know what to do. And Jerry said I will hold for 90 days, but you have to know, on the 90th day, I have to sell. Two or three days later, I'm playing basketball, and a friend of mine, who is my young attorney at the time, Scott Greenburg - I tell him the story that night after the game. And him, trying to help me as a friend and as a lawyer, says, you need to come to the office tomorrow morning, and meet our senior partner and tell him this story. I didn't know who the senior partner was. I don't know anything. So I go to the office the following morning at 8 a.m., and he takes me into the office to meet Bill Gates Sr.
SCHULTZ: I walked in the office with Scott, and Bill Gates Sr. said, tell me the entire story. And I'm taking it to him chapter and verse like I am with you with more detail, and he's writing down, writing down. And I finish, and he said, Howard, we don't know each other. I'm just going to ask you this question one time. Is everything you told me true? And I said, it's 100-percent truthful. And he says to me, we're going to take a walk. And I said, to where are we going?
SCHULTZ: And he says, we're going to see the man. My heart was racing with such anxiety, trepidation.
RAZ: He's taking you to see this guy. He's trying to...
SCHULTZ: Yeah, I'm not saying the name, but he's taking me to see the competitive buyer. So 10 minutes later, we walk across the street, go up the office building, and we walk into this man's office. Now, Bill Gates is 6 foot 7. And in the mid '80s, he was in his prime, and he was a force.
And we walked in that office, and all I remember him saying is, you should be ashamed of yourself that you're going to steal this kid's dream. It's not going to happen. You and I both know this is not going to happen. And within 10 minutes, he told them to stand down. We're walking out of this office, and this kid's buying this company.
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RAZ: In just a moment, Howard Schultz explains how Starbucks spread from Seattle, to the East Coast and then all around the world. Stay with us. I'm Guy Raz, and you're listening to How I Built This recorded live in Seattle.
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RAZ: Hey, welcome back to HOW I BUILT THIS from NPR. I'm Guy Raz. So it's 1987, and Howard Schultz has just bought Starbucks, which had about six stores at the time. And he had this grand vision of expanding all across the country fast. But gourmet coffee shops weren't all over cities like they are today, and the idea of hanging out in one for hours, or working in one, or catching up with friends and just passing the time, that was kind of weird. And so when Howard started sharing his vision of rolling out these coffee stores from coast to coast, lots of people were like, Howard, that's a crazy idea.
SCHULTZ: Well, a lot of people said that. But we believed early on that what we had seen in Italy was replicable in America through an American lens. It was thinking, let's create a store that not only is a store for coffee but produces a sense of community between home and work. And I think early on, we realized that the brand we were about to build was going to be experiential.
RAZ: I mean, how did Starbucks do in the first few years after you bought it? Because you weren't profitable right away, right?
SCHULTZ: No, we weren't profitable. But in order to grow the company and to raise the money, we said, kind of metaphorically, we want to build a hundred-stories skyscraper. Well, we're going to have to invest to build the foundation. So we started investing heavily - like any other startup - in people, in processes, in IT, in infrastructure. And so the company lost money almost from the day I bought it. And investors I think understood early on that we were going to lose money in order to build a much bigger company.
RAZ: What - I mean, as you begin to expand and grow beyond the Pacific Northwest - and I think your first location was in Chicago - what was the secret? I mean, was it building a narrative around Starbucks, around the beans, around the farmers, around the, you know - around the story of coffee? Is that how you were able to bring people into the stores?
SCHULTZ: Well, first off, we did go to Chicago as our first city outside of Northwest, and it did not work right away. So...
RAZ: Why not?
SCHULTZ: I got fooled very easily because I selected that location in the summer, and then when the winter came, it did not have an interior entrance into the building that it was in. So the customers had to walk out of the building in the cold winter of Chicago to get to Starbucks. And you know what? They didn't do it.
SCHULTZ: But we didn't have any extra resources for traditional advertising or marketing. We did none of that. And even today, Starbucks is not a traditional marketing company. I mean, it sounds really old-fashioned, but we've built the company one customer at a time, one cup at a time.
And I think we were - we got a lot of positive PR about the equity of the brand, the experience. And people started anticipating that we would come to their city. And probably, the best example that is what happened when we opened - now I'm going to fast-forward - in 1996, and we opened in Tokyo in Japan for the first time.
RAZ: What happened there?
SCHULTZ: So no one at Starbucks had any international experience - no one. And we told our board, we're going to open up, we think, in Japan. So first, they - the board said, we should probably hire an outside resource or consultant, a word that really gives me hives. If we have to hire a consultant, it means that we don't really know our business.
And they went away, and they produced this big report. And before they presented it to the board, they gave me the bad news and said, Japan'll be a disaster. You can't go there. So Starbucks' no-smoking policy will not work, and no one - no person in the entire country will ever eat or drink in the street because you will lose face. And the unit economics of real estate - you can't sell enough coffee in Japan to pay for the rent. And I convinced a board that I believed that Japan would work.
RAZ: Just based on - what? - on instinct, on a guess?
SCHULTZ: I just knew. I mean, I just...
SCHULTZ: I'd - and I just felt we had to have the courage of our convictions. If we're going to be a national and a global company, we have to go somewhere, and Japan had a direct flight from Seattle.
RAZ: Perfect (laughter).
SCHULTZ: OK, so we make the mistake of opening up our first store in the middle of August in Tokyo. So of those of you who've been in Japan in August...
RAZ: It's hot.
SCHULTZ: The humidity is 100 percent. It's 95 degrees. You're in the street for five minutes and you need a shower. And we didn't have any cold coffee or Frappuccino at that time, nothing like that. It was hot coffee.
SCHULTZ: So the night before - this kind of a celebratory dinner with our Japanese partner, and there's an interpreter. And I'm thinking, tomorrow's just not going to go well.
SCHULTZ: Like, I can just feel it. It's going to be a problem. So I tell the partner through the interpreter that, I think you should expect, since it's so warm - it's not going to be a big opening. So just anticipate the fact that we're going to have to build this business, and wait for the cold weather. And the interpreter was afraid to tell him what I said.
SCHULTZ: And I find out 10 minutes later that the interpreter said, Mr. Schultz said it's going to be the biggest Starbucks opening ever.
SCHULTZ: I'm just - I say, did you really do that? So I get to my hotel room, and I get a call from someone in Seattle who's ecstatic, saying, we got CNN to cover the opening live.
RAZ: Oh, wow.
SCHULTZ: And I'm dying.
SCHULTZ: You know, I'm this - I mean, this is it. At 6 a.m. in the morning, we're driving up to the store. And there's a lineup of hundreds of Japanese people on the street.
SCHULTZ: And I turn to the same interpreter, and I say, did you hire extras?
SCHULTZ: And of course, no. And we cut the ribbon, and a young Japanese college student who slept overnight runs to the front of the line. And we follow him, and he says, double tall latte.
RAZ: What's so crazy to me is that as you're expanding in the early '90s, none of these huge players in coffee like Nestle or, you know, the other companies got into that game. I mean, they could have crushed you if they wanted to do what you did. Why didn't they see that opportunity?
SCHULTZ: You know, I've been asked that many times. I think the large companies just never believed that you could build a national company and brand around selling coffee in the cup. I don't - I just think they were naive, maybe arrogant, and they gave us a lot of runway.
RAZ: You guys started to do all kinds of branding partnerships in the '90s with ice cream-makers, with supermarkets - bottled Frappuccino - candy companies, record companies - were you ever worried that you were diluting the brand?
SCHULTZ: We were very - we did a lot of things, but we turned down hundreds of things that people wanted to do with us. And the - I think we're trying to say was, will our customers give us license to sell coffee? And remember, this was a huge decision back then as to whether Starbucks should be in Costco and discount the coffee. And it was a great debate inside the company because how could you sell it at Costco at a discount to your stores? And that - what happened was, we introduced hundreds of thousands of people to Starbucks who'd never been in a store.
Bottled Frappuccino in a JV with Pepsi became a multibillion-dollar business. And we started believing that we could build a brand in our store and then extended into another form factor in the grocery store. And we also learned that many people got introduced to Starbucks through bottled Frappuccino
RAZ: I guess around age 47, 48, you stepped down for the first time as CEO. The company, at that point, is doing 2 billion in revenue. You're pushing more stores outside the U.S. Why did you step down?
SCHULTZ: I felt like I was repeating myself. I felt I was no longer engaged in the fun, creative part of the business - is where I get the most joy.
RAZ: What were you doing? What were you focused on?
SCHULTZ: You know, between the lawyers, the HR issues...
RAZ: You just - it was less joyful?
SCHULTZ: I was not having fun. I just decided that I needed a break from the madness of it.
RAZ: And were you able to really step away?
SCHULTZ: Yeah, I did step away. You know, I was the chairman of the company. And as chairman, I should have been paying kind of more attention to the company. But I started doing other things.
RAZ: One of which was the Seattle Supersonics, which we can talk about or not.
SCHULTZ: I don't - I think we're going to leave that one.
SCHULTZ: No. Yeah, I'm not proud of that.
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RAZ: You wrote a famous memo to the board in, I guess, 2007, where you expressed regret over the commoditization of the brand. What was going on?
SCHULTZ: It was two things going on at that point. First off, the country was heading into a cataclysmic financial crisis. But I think, you know, as I look back on those years, I would describe it as the years of hubris, that Starbucks was growing at a pace in which growth and success began to cover up a lot of mistakes. And...
RAZ: Like what kind of mistakes?
SCHULTZ: Too many stores cannibalizing other stores, did not - the financial controls and discipline that were in place were not being leveraged. And I think the big mistake, though, was Wall Street and the stock price became an albatross on the company's neck. And so growth became the strategy of the company. And growth is not a strategy.
RAZ: And growth meant what, that customer service wasn't as good, that the product wasn't as good, that the experience of going to a Starbucks wasn't as good?
SCHULTZ: No, two things - growth meant too many stores too fast in areas that should not have had a Starbucks. And secondarily, the experience, which had defined the essence of the company, was being compromised by efficiency. And the company and the management team at that time started measuring yield sales per hour and doing things that were so dilutive to the essence of the foundation of the company. And it really started, I think, upsetting me. And I began to go into the stores and not recognize what we had built.
RAZ: What did you see?
SCHULTZ: Probably the signature thing that I saw was a new breakfast sandwich that contaminated the odor of coffee.
RAZ: This was the grilled cheese sandwich?
SCHULTZ: Yeah. And not that it was the wrong thing to do, but it was executed so poorly.
RAZ: Like the Starbucks smelled like cheese?
SCHULTZ: Yeah. Yeah, like burnt cheese.
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RAZ: Around 2008, Starbucks share price hits a record low. Some analysts were saying its days are numbered. Were they really?
SCHULTZ: At the time, I didn't think so. But I knew we were in a downward spiral, and the company needed to go through a major transformation. And when I returned as CEO, which I never had planned to come back, I would say that there were people both on the board at the time and many people at Starbucks and certainly hundreds of people on Wall Street that said, you're bringing him back? I mean, he's the problem.
SCHULTZ: And the analysts and the media were not very kind. But I when I came back, I came back for two reasons and that is what it means to love something and the responsibility that goes with it.
RAZ: When you told your wife, Sheri, that you were going to do this, what was her response? I mean...
SCHULTZ: A hundred percent supportive. I mean, she went through the same pain I was going through in watching what we had built and knew I had to go back.
RAZ: You were gone from running it for almost eight years. Did you think you were just going to go in quickly, stabilize it and then go back out?
SCHULTZ: I don't think I knew what I - how long I would stay at that point. But I think, as we discussed earlier, the problems were so severe. And every rock that I turned over was worse than I had imagined, to the point where I made some very drastic decisions.
RAZ: You had to shut 600 stores?
SCHULTZ: We closed 900 stores, and 90 percent of them had been open less than a year.
SCHULTZ: The thing that I did that was probably most telling was when we decided to close the stores for training. At 12:00, every store in America was closed for retraining.
RAZ: How much did that cost Starbucks?
SCHULTZ: I think we estimated about $24 million that day in terms of lost sales and labor.
RAZ: So your board just loved this. Your shareholders loved this.
SCHULTZ: Well, there were two things that I did that people said, he's really lost it. But the training was so vitally important because Starbucks Coffee Company forgot how to make quality coffee. And we had everybody in the company retrained. Now, the thing that galvanized the entire company was something else. And that was we were in a room one day, and I said, I feel like I need to communicate with every single store manager in person. And this was in 2008. This is during the crisis where no company was traveling.
And they said, well, you can't get 10,000 people in a room. What are you going to do? And I said, no, I want to go somewhere where we can get 10,000 store managers in a - like an arena. They said, what are you talking about? By the way, this event costs about $30 million dollars at a time when we didn't have the money. You know, fly everybody there, the food, everything. And so I had to give a $30 million speech.
SCHULTZ: This is, you know, in front of 10,000 store managers. And I'm writing some notes. And a couple hours before, some of colleagues say, well, what are you going to tell them? I said, I'm going to tell them the truth, the real truth. Because at this point, I knew we were really in trouble. I knew that we had about seven months left, if we continued on this track, where we would be insoluble.
SCHULTZ: And I felt so strongly that I needed to trust our people with the same information I had. And if I was going to ask them to do the things that they needed to do, which meant take every single customer interaction so personally as if this is your store, and make it so personal to understand, if we don't correct this situation, we are not going to be able to feed your families.
RAZ: And you said that on the stage?
SCHULTZ: I said that, yeah.
RAZ: How long did it take to recover?
SCHULTZ: Overnight, we began to change the trajectory. And within six months, we were starting to climb back. And within a year, it was a memory. However, the real question was, what did we learn? We were so hungry and so driven when we started the company. But when we were that successful, people got sloppy, they got lazy. And this is so vitally important - success in any business, no matter what it is, is not an entitlement. It has to be earned. And we stopped earning it. And that's why we got in trouble.
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SCHULTZ: You know, building a company is a lonely place sometimes because you're imprinted, especially as a man, of not demonstrating vulnerability. And I think one of the perhaps most undervalued characteristics of leadership is vulnerability and asking for help. And I've done that a number of times. So - and I think it's important. I think when you're vulnerable and you ask for help, people come towards you. And I think I've tried to do that every step of the way and be honest and truthful about what I know, what I don't, and most importantly, what I believe.
RAZ: Howard, I want to ask you about your approach to your employees. You call them partners. They're eligible for health care, education benefits. You can now earn a degree through Arizona State University if you work at Starbucks at least 20 hours a week.
SCHULTZ: Free college tuition.
RAZ: All of this is very expensive, but it does buy you a lot of goodwill from the public and from your employees. Is that why Starbucks does this?
SCHULTZ: You know the answer to that.
SCHULTZ: No. Health insurance, equity in the form of stock options, trying to prove something to myself, to my family. And many of us who were in the company were not born with a silver spoon. Many of us had come from similar backgrounds. And I think customers began to realize, we're paying these kids' - we're giving them ownership. They have health insurance. And the intimacy that was built between the barista and our customers because of the frequency began to build.
RAZ: Because you had less turnover?
SCHULTZ: We had much less turnover then and today than anyone in our industry.
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RAZ: Howard, my dad is in the audience tonight here. He flew up from LA to be here.
RAZ: What do you...
RAZ: Thank you. That's my dad. What do you think your dad would have made of your success? I mean, if he was sitting in this audience tonight and he was hearing your story, what do you think he would have thought about his son who became one of the most successful entrepreneurs in modern American history?
SCHULTZ: My dad passed away in '87 at the age of 65, so he didn't see any of the success that we have enjoyed. I think he would be so shell-shocked and so proud. And I think he would go back to what he experienced. And I think what he would be most proud of is how we have treated everyone in the company because he was that blue collar worker who was not respected for a lack of education and not being sophisticated and unfortunately never really got the chance to be himself or be valued in a company. He would marvel at that. In many, many ways - and I've said this before - the values, the culture and guiding principles of Starbucks really are defined by me wanting to build the kind of company that my father never got a chance to work for.
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RAZ: Howard, thank you so much for being here.
SCHULTZ: You're welcome. Thank you.
RAZ: Really incredible.
RAZ: Howard Schultz. He stepped down as CEO of Starbucks earlier this year. He's now the executive chairman. And you've probably heard the rumors that he stepped down, in part, to explore a possible presidential run. And I know, I know you were probably dying for me to ask him all about this. And I did, but just backstage before the show. And his answer was pretty coy. He mostly says he's not really interested. But when pressed on it, he says, never say never.
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RAZ: Hey. Thanks so much for listening to the show this week. This episode was recorded in front of a live audience at Benaroya Hall in Seattle. It was co-produced by Claire Breen and Ramtin Arablouei, who also composed the music. Thanks to Geoff Rogers, Sanaz Meshkinpour, Neva Grant and Lawrence Wu. Thanks also to Ali Prescott (ph), Jessica Goldstein and Andy Heuther. Our is Diana Mustak (ph). I'm Guy Raz, and you've been listening to a special live episode of HOW I BUILT THIS from NPR.
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