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Originally published Saturday, March 12, 2011 at 10:00 PM

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Starbucks CEO Howard Schultz discusses turnaround

As Starbucks approaches its 40th birthday later this month, its profits and share price have bounced back. It's a Wall Street darling again, thanks to new products like instant coffee, a new strategy that focuses on international growth, and a quarterly dividend.

Seattle Times business reporter

Starbucks at 40

Birth date: March 30, 1971

Mission: "To inspire and nurture the human spirit — one person, one cup and one neighborhood at a time."

Size: 17,000 shops in 55 countries, including more than 11,000 in the U.S.

Employees: About 137,000, down from 176,000 in 2008. About 3,000 work at its Seattle headquarters.

Profit: $946 million for the year ended Oct. 2010, up from $316 million two years earlier

Source: Starbucks

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Three years ago, Starbucks was in desperate shape.

Profits were falling, and Howard Schultz returned as CEO to save a company he had built from a small chain to a juggernaut with thousands of stores worldwide.

He made painful cuts, including closing 900 stores and slashing thousands of jobs.

Now, as Starbucks approaches its 40th birthday later this month, its profits and share price have bounced back.

The reasons for its return as a Wall Street darling include products like instant coffee, a strategy that focuses on international growth and a willingness to give shareholders a quarterly dividend.

Schultz's book about Starbucks' recent odyssey, "Onward: How Starbucks Fought for Its Life without Losing Its Soul," comes out March 29.

Shortly before unveiling a new logo on Starbucks' headquarters building in Sodo last week, he talked about the challenges of coffee prices, the health-care overhaul and recycling. Here are edited excerpts:

Q: Does climate change present a problem for Starbucks?

A: About a year ago, when we solidified the long-term relationship with Conservation International, that gave us more insight and more resources to both understand the challenges of the day and for us to try and participate as much as possible in taking steps to improve the situation. I wouldn't categorize it as a problem but an ongoing challenge and hopefully an opportunity.

Q: What's the opportunity?

A: In many places where coffee is grown, deforestation is a major issue. With Starbucks' position in the marketplace and the respect and relationships we have, we can — and have in some cases — been able to educate and influence people. Something else is important. What we want to do — and our responsibility — is to constantly ask the question, "Are we making our people proud to wear the green apron?" Sometimes, though, I think whenever a company like Starbucks tries to lead with its heart and do the right thing, you have to ask yourself, "Why are we held to a higher standard?" And I think it's because we try and do the right thing, where perhaps other companies are not engaged at the level we are.

Q: Since you that brought up, why do you publicize your good works?

A: We do a partner [employee] survey consistently about the culture issues and the trust issues and how we're doing as a company. And one of the primary things people tell us is, "Why aren't we telling the world all the good things we're doing?"

I don't think that we are a marketing-driven organization. Candidly, we try and do the right thing not because of creating press. We try and do the right thing to help the community... . If I look at all the things we do, the things that perhaps we promote are de minimis compared to the works that we do around the world that no one knows about.

Q: How are you feeling about the economy these days?

A: Managing a business, small or large, today requires an extremely disciplined, thoughtful approach with regard to the pressure that people are under.

I think one of the ways in which we've tried to overcome that pressure is to provide consistent value for our customers. And the Starbucks gold card and the Starbucks card program really have been a big success in meeting the customer more than halfway and saying, "This is how we can participate with you." I think the economic issues are still fairly fragile. I don't think the recession is over.

Q: How concerned are you about the high cost of coffee?

A:

I'm speaking to suppliers and have visited coffee farms, and I cannot uncover this big problem people are talking about in terms of supply issues.

I think that is a fictitious component of what has happened this year [to coffee], which has been driven primarily by financial speculation, hedge funds, index funds and people who have decided that the basket of commodities is a place where money can be made.

You have to ask yourself, "Why is it that almost every commodity is hovering around record 10-year highs?" It's not an accident. We've seen coffee now — yesterday it was over $2.80. A year ago, it was half that. If this continues, it'll become more challenging for us, as well as every other coffee company.

Because of the economy and the fact that we literally want to put our feet in the shoes of our customers, we don't want to — and have refused to — have an across-the-board price increase. It's something we are trying desperately not to do.

Q: There's a shareholder proposal about recycling again this year. Why don't you have recycling bins in all your stores?

A: Starbucks has stores in America in many, many communities that are governed by many, many different municipalities. Starbucks cannot dictate to a municipality in Cincinnati or Kansas City or Sacramento how or why or when there should be a recycling program. That's one of the primary problems.

On the other side of the equation, we are a buyer of paper goods from very, very large paper companies who have embedded significant capital costs in legacy factories. So when we go to a paper company and say we want a 100 percent recyclable cup or want to change the material — again, we are a buyer of the product, we can't dictate.

We've had two what I would loosely describe as summits in the past couple of years, when we brought all our vendors here to show them the strategic plan that the company has for the near term so they can understand the needs we have to be a very strong corporate citizen in all areas of how we purchase product, food, supplies.

We had a summit of paper suppliers this past year to talk specifically about how we can become a leader in this industry. I think we're getting to the point where we have more influence than we had in the past, but we still are dependent on the suppliers to make the sort of investments that are necessary to overcome this problem. And we're asking them to make it at a very challenging time, which is difficult.

Q: Starbucks was vocal about [wanting] health-care reform. How do you feel about how it worked out?

A: We have been a leader for almost 20 years now in demonstrating our heartfelt commitment to making sure that we provide health coverage for the majority of our people.

That cost last year was $250 million. We have faced double-digit increases for almost five consecutive years with no end in sight.

So, when I was invited to the White House prior to health care being reformed, I was very supportive of the president's plan, primarily because I felt it was literally a fracturing of humanity for almost 50 million Americans not to have health insurance.

There's no plan that would be a perfect plan, but the intent of the bill and the heartfelt commitment to insure the uninsured is the right approach. I think as the bill is currently written and if it was going to land in 2014 under the current guidelines, the pressure on small businesses, because of the mandate, is too great.

Q: Over the years, you've tried to attract more people into your stores in the afternoons. How is that going?

A: With fiscal 2010 being the strongest financial year in our history, and the first quarter, which ended in December the strongest in our 40-year history, there are a lot of compelling reasons — that are enduring — that suggest that the company has been transformed in many ways.

There are more people going into our stores today at different parts of the day.

Q: More traffic in the afternoons?

A: Yes. But being in any retail business today, we cannot embrace the status quo even though we are now succeeding. We have to keep pushing for reinvention and self-renewal. We must.

Q: What about selling beer and wine in the afternoon [as Starbucks does in a handful of stores, including on Olive Way in Seattle]?

A: We'll continue to test that. Olive Way is without a doubt a success. Our international partners want us to expand that internationally. We've been very careful not to move too fast. I don't think we understand it all yet. There will be more, but it will be modest in terms of numbers [of stores].

Q: The new food you introduced today is sweets, not the type of health and wellness offerings you've said you're focused on.

A: It's not one thing versus the other. We have a significant initiative inside the company around health and wellness. All I have to share with you is, stay tuned on that.

Q: Your first book [published in 1997] was about building this company almost from scratch. The new book is about a turnaround. Which was more fun to do — build a company or save one?

A: The entrepreneurial process of building something I think is much more fun.

Transforming a company, though, is more gratifying. Sitting here today having accomplished what we've done in a relatively short period of time, I think the company and our team did our best work. But managing and navigating through a financial crisis is no fun at all.

Q: Why is it more gratifying?

A: If you read the press a couple of years ago, there was a death march about Starbucks.

I think people underestimated the resiliency of the brand and particularly the resiliency of our people. So it's quite gratifying to see the company come back so strong and to demonstrate to our people the pride that we all have in what we've built.

Q: The last time you wrote a book, you retired as CEO about three years later. Does this mean you're headed that way again?

A: What I've told the board is I'm here to really see this through. I don't know what that means, but I'm not leaving anytime soon.

Q: You closed 900 stores and cut thousands of jobs. If you had still been chairman, would you have let [previous CEO] Jim Donald do that?

A: I don't think there would have been a change in the decision. The company was in a desperate situation, but it doesn't in any way remove you from the emotional feeling of making those very tough decisions.

Q: Did Starbucks grow too fast, was it bad real-estate decisions, or the economy, or what?

A: There's never one thing that creates a problem like the one we had, and never one thing that's going to solve it. But I think growth in and of itself does cover up mistakes, and success probably creates a fair amount of hubris.

When I came back, the first week I publicly apologized to everyone in the company because we had let our people down.

Even though I wasn't the CEO, I was the chairman and I was culpable. At the same time, I made a heartfelt promise that day that we would absolutely restore the company back to its glory days, and we have.

Q: How do you reconcile the need to hold onto Starbucks' roots while also growing and even doing things that aren't coffee, like you've talked about lately?

There's been a seismic change in consumer behavior, and it demands innovation and it demands relevancy.

The challenge and the art is for us without question to embrace the core values and the core experience while innovating on the edges, and we'll do that and do it well.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

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