3 Reasons It’s Hard to Hate Starbucks
Five years ago, Seattle-based coffee chain Starbucks (NYSE:SBUX) wasn’t in a good place. In its fiscal 2008 annual report, the company showed a 3 percent contraction in comparable store sales, a bitter piece of punctuation following three consecutive years of sales growth deceleration. Although net revenue was still up 10 percent for the year at $10.4 billion, operating income fell by about 52 percent to $504 million, and the company’s operating margin fell from 11.2 percent to 4.9 percent. Net earnings fell by about 53 percent to $315 million and return on equity fell from 29 percent to just 13 percent. If this is jargon to you, it translates roughly as “bad news bears.”
Although part of the decline ($267 million) was due to restructuring, the company’s outlook was still bleak. The financial crisis was in full swing that year, and history showed that the recovery would be — and has been — anemic. As Starbucks CEO Howard Schultz said at the time, “consumer conﬁdence was approaching all-time lows, and both Wall Street and Main Street were reeling.”
This is no exaggeration. By the end of 2008, Starbucks stock was trading below $10, less than half of where it was at the end of 2007 and well below its 2006 peak of just above $35. Investors apparently wanted nothing to do with a company whose business is predicated on premium coffee and free Wi-Fi.
But Schultz was unfazed, at least outwardly. Starbucks launched a series of initiatives captured under the broad umbrella of the “Transformation Agenda,” something that sounds like the title of a dystopian science fiction novel but is actually the opposite. Far from being a typical corporate overhaul in which investments are cut, jobs are lost, and goals are shuffled but not reimagined, Schultz and his team “made what many believed to be a controversial decision to invest in our people.” Starbucks put people, environment, and community first.
The strategy worked: Starbucks’ business machine purred back to life. Fast forward to 2013, and the company was reporting $14.9 billion in revenue, up about 12 percent from 2012. Comparable-store sales grew 7 percent that year, and adjusted operating income climbed 23 percent to $2.5 billion (this adjusted figure excludes a $2.8 billion litigation charge). Adjusted operating margin increased 1.5 percentage points to 16 percent.
Investors chased the performance. As of June, Starbucks stock is trading at nearly $77 per share with a trailing price-to-earnings ratio of nearly 400 (read: investors are willing to pay a huge premium for this stock).
So how exactly did Starbucks’ feel-good policies translate into better business performance during a time when most companies were simply trying to keep their heads above water?
1. Competitive employee compensation
If we take Starbucks’ corporate communication at face value (and really, who doesn’t take all corporate communication at face value?), the company doesn’t so much employ people as it does partner with them. At least, this is how Starbucks describes the more than 200,000 people on its payroll around the world: as “partners,” not “employees.”
At almost any other company, an institutional insistence on using the word “partners” instead of “employees” would look like a branding exercise that got way out of hand. Starbucks, though, has gone to great lengths to ensure the merit of its claim, and true to form, the company has invested heavily in its team. These investments have come in the form of equity-based compensation for non-executive partners, 401(k) benefits, comprehensive healthcare benefits for both part- and full-time workers, and even a tuition reimbursement scheme for students.
For some scale, Starbucks reported in 2013 that it “continued to reward and invest in our full- and part-time partners by helping them to realize more than $230 million in value from equity awards, and by retaining industry-leading health care benefits regardless of changes to the U.S. health care laws.”
You may have heard that earlier in June, Starbucks unveiled a refurbished “College Achievement Plan.” Starbucks is partnering with Arizona State University to allow employees who work more than 20 hours a week to work toward a bachelor’s degree with assistance from the company. Employees are able to choose from more than 40 paths of study and degree programs, and those admitted under junior or senior class standing will be able to receive full tuition reimbursement.
While there are some shortfalls and frictions with the system, Starbucks’ overall approach to worker compensation is outstanding because it demonstrates a legitimate interest in the welfare of its partners.
2. Corporate responsibility
Here’s another piece of corporate happy talk: “In 2008 we set a series of ambitious goals where we felt we could use our scale for the greatest good in the areas of ethical sourcing, environmental impact and community improvement,” wrote Starbucks Senior Vice President John Kelly in the company’s 2013 Global Responsibilities Report. “We had a vision that by 2015, we could fundamentally transform the way our company approaches corporate social responsibility and imprint these values into our business.”
Starbucks, in its efforts to be a responsible corporate citizen, is well on its way to completing most of those goals. One of the goals it set was to ethically source 100 percent of its coffee by 2015. In 2012, 93 percent of the coffee Starbucks purchased was ethically sourced, and in 2013, that share edged up to 95 percent. The company believes it is on track to meet its goal.
If this accomplishment sounds like an empty pat on the back for a corporation that is simply trying to fortify its brand value, well, fair enough. It’s healthy to be skeptical of claims of feel-good achievements like “ethically sourced” or “fair trade.” However, most of the world’s coffee comes from places where the standard of living is relatively low, and wage and labor policies are either nonexistent or difficult to enforce. It can be easy to forget that there are real people at every stage of the supply chain and that, yes, the final consumer does bear responsibility for that supply chain.
Just as Starbucks recognizes that the health of its business hinges on the health of those it directly employs, the company also sees that its long-term success depends on the health of its suppliers. The implementation of Coffee and Farmer Equity (CAFE) Practices will help ensure that the farmers at the base of the pyramid are economically sound and can support Starbucks as it continues to grow.
3. Customer experience
“Our mission: to inspire and nurture the human spirit — one person, one cup and one neighborhood at a time,” wrote Starbucks Chief Community Officer (yes, that’s a real thing) Blair Taylor in the company’s 2013 responsibility report (also a real thing).
Once again, it would be easy to write this off as corporate happy talk, but outside of hand-crafted mom-and-pop cafes, there’s no third place like a Starbucks. Perhaps even more so than the coffee itself, Starbucks relies on an accommodative environment to attract and retain customers, and it has gone to enormous lengths to ensure it remains the go-to destination for those looking for a place to hang out between home and work.
Starbucks was among the first to make free wireless Internet a part of its customer experience, and keeping pace with new technology, the coffee chain is becoming one of the first to implement wireless charging technology. The company recently announced a deal with Duracell to make wireless charging mats a standard part of the experience.
“From WiFi and the in-store Starbucks Digital Network to mobile payment and digital music downloads, we have always tried to anticipate our customers’ needs early in the adoption curve and provide a world-class solution. We are thrilled to offer our customers that next level of convenience with Powermat wireless charging. Rather than hunting around for an available power outlet, they can seamlessly charge their device while enjoying their favorite food or beverage offering right in our stores,” said Adam Brotman, chief digital officer at Starbucks, in a press release.
[Editor’s note: This article has been edited to remove an incorrect calculation.]