received federal licenses to produce whiskey. i often think, what have you heard today with this interest in local lore and local food and farmer markets and so forth that there were 77 distilleries in one small location in the mountains of virginia? there will be people flocking there to go on some sort of food to work, food and drink to her. that's what this was. this picture on the front was illegal distillery where people are trying to make a living, 1919 comes along and all those people are suddenly unemployed in this industry that they had found as their livelihood. >> charles thompson is the author. the book is "spirits of just men" and it is published by the university of illinois. >> next on booktv howard schultz, chairman and ceo of starbucks, recounts his return

to his leadership position in the company in 2008 after an eight year absence. mr. schultz explain some of the setbacks the company faced during the economic recession. his thoughts on starbucks deviation from its original concept, and his decisions that return the company to profitability. >> thank you. well, it's not much of an overstatement to say the greater washington is powered by starbucks. that really is the key. w?shared over the years that,moñ well, we are one of the more highly educated regions in the country with all the attainment levels, pretty good on household income because not at the top 15 median household incomes are here. more starbucks per capita in washington, d.c., proper than anyplace in the country. so my shorthand of how i pitch

greater washington is highly educated, highly compensated, highly caffeinated. [laughter] and boy, i tell you, your stores do quite well here and you do quite well for us. we're really honored and pleased to have a choice here this morning. and congratulations. it's a pleasure to welcome you. >> thank you very much. happy to be here. >> it's quite an undertaking to put a book like this together as a but in the room gets to go through it. you were very candid in this book. starbucks in your estimation, and quite a few other critics, lost its way for a period of time. you came back as the ceo to restore that but not just to bring it back to where it was, but onward is the time and onward really is your plan. talk to us all a bit about why you put a book like this together, because you share some insights here that are remarkably valuable to business leaders, but it is kind of peeling back the inner workings of starbucks in a candid way to.

>> sure. thank you for coming this morning, and thanks to the board of trade for hosting this. it's an honor to be here this morning. the book in many ways is a narrative of what we went through the last few years, and i think what i was trying to describe is that starbucks was on this magical carpet ride for about 15 years. we went public in june 1992 and almost everything we did turn to gold. and new cities, new country, new initiatives, and the stock price was almost a 6000% gain for those people who were invested in 1992 and kept the stock. there was a prick of time though from about 2005-2007 where i thought without any claim that the company began to demonstrate the virus inside the company. and that virus i would loosely

categorized as hubris in parliament in believing they were invincible. and what i've described is that growth began to cover up mistakes, and growth became big strategy as opposed to what the core purpose of the company has always been. and that is to focus on the customer and our people. and i wrote this memo in november, actually february of '07, in which i was sharing with the leadership of the company at the time, i wasn't the ceo, i was the chairman, that i was quite concerned even though the stock price was at record levels they were thick that i was kind of smelling, that i felt needed to be examined. i woke up 24 hours after writing that memo and it was leaked. and my world was turned upside down, but it turned out to be a catalyst for conversation here to fast-forward, i returned in january of '08 at a time when

the things that i begin to uncover really began to unveil themselves, coupled with a cataclysmic financial crisis. and all of a sudden, not only the mistakes we've made by the financial crisis can turn everything upside down, and we were literally facing a very desperate situation. >> howard, you allude to things that you said didn't smell right. you really address the details here from the aroma or lack of the aroma when you're not going to copy any longer in the stores, and now it is back. you address things about the machines and the height of the machines, the level of detail as chairman more than subsequent began as ceo that you going to, a lot of people in management will say we set the policy or the direction, but then we will be the details others. at the details -- >> i think is even more than that. if i could rewind the clock a little bit, starbucks set out to

build a different type of business model, and not better than anyone else but it was a very, very different. and that was that we believe very strongly that we're trying to build a business and achieve a balance between rockabilly and the social consciousness. and as result of that we put into unique benefits, 25 years ago. one was comprehensive health insurance for every employ. the other was equity in the form of stock options. we did it even for part-time people. in addition to that there was a fanatical view towards exceeding expectations around the customer experience. and i would say that for 20 years or so that was the foundation of the company. when the company got to thousands of stores and hundreds of thousands of employees, and a p/e and a stock price that was very high, what happened was, and i don't think starbucks is

much different than perhaps other public companies, is that the p/e and the stock price began to in a sense intersect into the strategy of the company. and i think what happened was that there wasn't anyone who said we would do this, but what happened was we became complicit with wall street. >> you say in your it wasn't one cataclysmic event. it was a whole combination of different things, but let's go back a bit on wall street. you change in kind of ticked off a number of the wall street analysts when he said were going to stop looking at her store. is not going to be the cops per store. we are focused on the wrong things in certain respects to talk to us about why that change happened in what came to mind and spirit i think is managers the results we get more often than not is what we measure and what we reward. we were measuring and i believe rewarding the wrong thing. as a public regional company,

wall street has a primary metric which they call comp store sales. and that is year over year sales to demonstrate whether or not existing stores are growing. >> and on the phone call with the music we're going to stop measuring. >> it's not that i was trying passionate we were going to stop measuring paper going to start reporting it. and the reason was that it felt that i needed to remove the albatross of comp store sales off of the stack of retail managers and the operations of the company because it was driving the wrong behavior. >> unit store managers who were selling lots of things outside the court? >> people were driving him as any cost, revenue, sales per hour, transaction. we are not in the transaction business. we're in the business of trying to exceed expectations for our customers. whether we win the register or not. and i think we had to do is press the pause button inside the company and outside. and if you go back into the

book, the first quarter i came back we did something that was very unorthodox and i don't know if anyone has ever done it before. it wasn't that we're trying to be smart or quit the biggest in the world and say the quality of coffee that we are bring in making is not as good as it once was. so we close every store in america and in canada for retraining. >> you have lots of people are walking around just one drink when i going to do for the next three hours? [laughter] you can imagine what the reaction was from the street, competitors, the media, shareholders. there were some terrible headlines. i was one report that said, it was about me, said never given 800-pound gorilla caffeine. and my son saw that and said that, have you seen this headline? it's terrible. what are you doing? and i said listen, we can't worry about what people are going to see. we're going to define the future of a company can not the outside

world. then we did something else which was the beginning of the tournament of the company. and i think it's worth repeating. at the height of the cataclysmic financial crisis when the company in was traveling, we decided that we needed to have a companywide meeting with the most important person which was the retail store bench. we brought 10,000 people in one place. now, every municipality including d.c. wanted this convention because there was no company sending any money. municipalities visited starbucks and made a pitch. distort -- the short story is we decide to go to new orleans. we went to new orleans first and foremost to commit 50,000 hours of community service to help those people who were left behind after katrina. then we had our 10,000 store managers meeting in one place. but what galvanized the company

was the rekindling and reminding of the values and core purpose of the company, which was very, very important. then we had this mean. and 510,000 people what i asked for was two things. one, the great transparency and vulnerability as a leader, i described a situation. our stock price was below $7 a share. we have lost $25 billion in market cap in 18 months.ñ we had negative impression in our stores, the first time in our history. we didn't have enough sales in certain parts of the day per hour to justify labor. we laid it out and people said if you do that, people will get so scared, howard, you can't tell them everything. and i thought the opposite. that this times when you've got to be totally authentic and truthful, and absolutely tell the real story. and once i did that i linked it to what we need from them. individually, we needed primarily a higher level of

personal accountability and responsibility. and for everyone to leave new orleans, not being a bystander and recognizing they have a voice. we left new orleans on fire, and it was the beginning of a turnaround of starbucks. if we fast for the last 12 months, record revenues, record profit, last quarter the strongest profit in our history, and the stock price is three or $4 away from the all time high. >> let me just say in the book, and i got a chance to read through a lot of this, because the times are different, because i imagine you had a lot of people pulling back on your coattails thank me guido tschugg a part in the book, maybe that's not something that we are ready to be as transparent about in your presentation at new orleans, but you really did take risks to lay all out the. i know it was a passion he felt about the direction for the company. when you bring people together and share that can you really do engender and authentic or a

strong bond with the people that they're in a battle with you. it wasn't just using here's how we're going to go comment it was you leading and bringing them all together. i think the results speak volumes. it was funny to see in the book that bono was at the rockstar in new orleans. it was your person on staff that brought in the black laptop, opens it up out of the case and says, now we're going to give every store that technology to do the job that we want you to do. you were outfitting the troops in certain respects. >> well, as leaders i think sometimes especially men, we are in printed with his macho component that we shouldn't show a motion, perhaps we shouldn't cry, and let me say something which i think is important. this book and my relationship with starbucks is about a word that is not used very much, and it is love. i love this company.

i feel a deep responsibility to 220,000 people and their families who are relying on all of us as leaders to preserve the company. when we went to new orleans there was a point where i felt if we don't turn this company around and ask three-six months, we may lose it. we were fighting for our lives. i had to share a higher level of emotion and compassion than ever before. but it wasn't invented. this was real. it was authentic. and i think what the street and perhaps the media at the time underestimated was the resiliency and the emotional connection of the values of four years of these people coming together, recognizing that we have a company that we love and we have to defend and we have to change our behavior. we had to link that with significant changes, operationally, and a high level of innovation. the innovation that came was spectacular. over the last year and a half we

reinvented a category that, for 50 years, was dormant, and when people said they're going into instant coffee that was another point where people said the best days of starbucks are clearly over, this is a desperate hail mary move. it was quite the opposite. great entrepreneurs have to have the courage to see around corners and after the curiosity the curiosity to understand what's coming and what's possible, and then having the courage to execute against it. >> the capitals and the wizard and the friend of your spoke to us andç he said i don't want capitals and the wizards and what we put on the street to be dashed the i wanted to be loved but it's not enough to be needed but you have to be love. not only that you love the company, but the product that you put out there is loved by a lot of people, very passionate. i want to talk about it but let's spend a second on the instant coffee compared to the original working title of

starbucks. >> that's correct or i kind of liked it. that was already trademarked that we couldn't use that. >> may not have been trademarked or anything legal, but okay. [laughter] but you went through the instant coffee, and it didn't cici that people would refer to it as instant. you embrace the term. but how has that gone because it was a big risk for starbucks to get into the equivalent of instant coffee. >> it was a risk when you look at from the outside world. when i looked at, what i saw was a $24 billion global category that had not had any innovation for 50 years. dominated by one company who rightfully or wrongfully hasn't brought much to the category. what i said clearly -- >> internationally? that's -- okay. >> if we could replicate and crack the code of technology of

replicating a cup of starbucks coffee in inches -- instant form, in 18 months once we turn on the team we developed a piece of technology that gave us the ability to do it. about 90% of the people for months and blind test could not tell the difference. then once we realize that we are often run. this is a $250 million business in less than 14 months, and we haven't even begun to take a globally where 84% of the instant $24 billion market is. so we're going to build a billion dollar business, and what did also is galvanize our entire company for them to be reminded about the entrepreneurial dna of the company and the fact that we're going to take the road less traveled once again. >> so you also did that with -- it was interesting to read in your hygiene created a number of your customers who were, you're putting out like a light beer there. that's not the starbucks coffee.

and yet there's a passionate group of people who really think that's the best coffee that you do. talk to us about the role out. if you can backup you need a couple of singles, doubles, triples and maybe even a few home runs. you couldn't stand quite and say we will tinker around here or not with adjustments back some of the learning a person had was, i was looking for a silvero bullet that perhaps could change the landscape of starbucks. more i looked i realized there wasn't a silver bullet that was going to change things they are just like it was one thing that was in this situation. it was another example of appealing to a group of people that perhaps were not come to starbucks because the coffee was too strong and too bold to we created a lighter roast for people and i think a more accessible coffee. i think we realized even though we're serving 60 my customers over we come with less than i% share of all coffee brewed in america.

there's a big market out there and we get to get access to buy. but at the same time we had competitors, small and large that smelled blood and were trying to destroy the mcdonald's and dunkin' donuts on the low income and independents had gone to school on us on the high end. a worse place we could be in the middle, so we had to significantly create innovation and regret the efforts of the equities of the brand so that people were not defining us. we were going to define herself. >> let's talk to some of the people that play in an exposure to the media is overwhelming in your business. but everyone has an opinion. i love the fact that everybody is an expert on your company and any open the door to have them tell you. but here's u.s.a. today's corporate consultants told "usa today" in an article sidebar holding out advice for the spanning of industry experts except for a few i'm the list read like a pager our existing playbook. it smells good again.

embraced wired youth, reward loyalty, get healthy can drop food that doesn't jive with java. kept the clutter, open fewer stores, sell combo meals, and give coffee a way. applying such to our businessmen have been brain surgery but outside this, the nuances of integrating a service-based business, especially a brand as emotion charged as ours, here's the quote, starbucks is not a coffee company that serves people. it is a people company that serves coffee. you go back to putting the focus on the partners in your stores, just the product. talk to us about how important that is to you, and why that focus has sort of gone off. >> sure. if you look at the history of consumer brands are perhaps over the past 50 years, starbucks is really an anomaly in most

consumer brands have been built through traditional advertising and marketing. when we started our company we had no money, and so marketing or advertising was completely out of the question. so if you look at starbucks today, we are a top 20 brands all over the world in terms of recognition and respect. you got to ask yourself, we spend more money on training that we do on advertising, how did you do it? i'm not smarter than anyone else, but it happened in a very unique way, and that is starbucks quintessentially, the brand is built by the experience in our stores. and that experience comes to life from our people. so, we are not a franchise system. we are company owned. the culture, the guys, the guiding principles of the company have been and continue to be a significant competitive advantage we have. that's why it was so important to go back to the heritage and the tradition of starbucks, in

which the person who wears the green apron is the most important. and i think of all the attributes that have built great enduring brands over time, the most important attribute, and it sounds trite, is trust. we can't exceed expectations of our customers if we as a company don't exceed the expectations of our people. and i think we had to go back to reminding people it's not about growth and the next store, it's about you. and i think for us to have transformed the financially and leave our people behind would have been a tragic and very, very shallow result. the transformation of starbucks, why it's so gratifying, and the reason why financially we are so sound right now is because people have been brought along. and i think we've done everything we possibly could, not only to focus on the customer, but to focus on enhancing the experience for people. >> so as you decide to step back, i'd like to go back there

for a minute, you really did get a sense that things were offkilter. and it wasn't one big event. it was a series of different things. it was a cheese being burned in the sandwiches. it was the lack of the coffee smell when you walked in. so as you're going through the process, i won't take you back to the trip to hawaii with michael dell, but he was influential in your transformational agenda, i want to take you back to before you get back to the office and make the announcements to the assembled team, i think we saw the shot in the video, you went back to the original starbucks store. you still have the key to the original starbuck store. apparently fewer the seal of the place you can walking anytime you want. so before you gave a presentation to everybody, you did go back to the roots because he worked there for for a period of time. >> its efforts in the budget of the key to the original store, and the day that he came back i went back to that store in the morning before it opened. and i wanted personally to be

reminded, this was an expression that walk and talk. i worked in a store, i trained in the store. i just wanted to go back to myself, spend some time revisiting what it was like when the company was small and we're fighting for survival. and i remember those days when we couldn't make payroll. i remember those days when we had vendors lined up with sheets of paper which were invoices and we have to decide who to be and who to tell a story to. and i think it's important to understand that there was a process when we're fighting for survival and respect in a very unique way, those days had repeated itself. and i was about to come back. the day that i came back i did something that was very uncharacteristic. i stood in front of the entire company and i apologized. and i apologize for the fact that i believe as leaders we had left the company and let our

people down. now, that apology was also linked to a promise, and that was that i promised that we would restore the glory back to the company, and i wouldn't ask anything of them that i was not going to ask of myself. now, the night before that i had summoned -- that's a bad word. i had asked, invited, come on over a cup of coffee, the direct reports of ceo in the past to come to my home to literally tell them on a sunday night that i was coming back. and i think that's an important moment as well. when you're trying to transform a business against the worst cataclysmic financial crisis known to mankind, the rules of engagement are going to change completely and you are not going to have the tools for resources that you once had. and it's going to require just an unbelievable monumental effort of everyone.

and when i asked the team in the privacy of my home was, i want you to understand that what we are about to do is going to be a climb like no other claim we have ever had and it's going to be great, resistance and great challenges. >> and you have to ask yourself whether or not you are up to this. i was told by an and the ceo back that that team would be gone in six months. and i said, no, that's not possible. the truth was that i had to replace nine of the 11 directors that i inherited that sunday night. because the truth was they did not believe in the future of the company. they had lost their passion. and i think a lot of them didn't believe in me. and i just think sometimes as leaders we overlook something that's quite important and that is, we convince ourselves that we can change people. i can count on one hand how many

people i have seen change. but we convince ourselves we can do that and we wait six months, a year, and all of a sudden went to make a very tough decision. we have lost a year, perhaps they have left their own legacy which is bad and then have to hire somebody else. i think the most important thing that i can say during the crisis was they need to be decisive. on every action. even when you don't have perfect information. the last thing is, you must have people with like-minded values. who have a skill base and experience beyond you. but if they don't have like-minded values that are consistent with the culture of the company, it's not going to work. second because you assemble these people. you invite him over for this discussion in the house. after you've spoken at that point ceo, and so he has now been told personally that i think demonstrates the real level of respect by you, it's not easy hearing it from wall street are getting a call from a

reporter, but you had a leaked memo that burned you pretty bad. and then you assemble the people on a sunday and stayed up and said i will share things with you that we are not ready for prime time tomorrow, we will share this with everybody but when you sneeze, wall street there certain things you're not allowed to share, or rollout carefully. i was stunned and impressed by the level of detail in this book about how you and the different groups and experts that worked that you just laid it out for the level of detail, but it was impressive about how you reach rested his team. because probably some in 19 was the person who leaked the original memo. >> the truth is i had about a month and a half to both mentally prepare for coming spent time with michael dell and he shared with me what he had done when he came back. so i had a script already in

mind that was really well documented so that i could hit the ground when. the plan was going to be. i had a battle plan from day one. .com as a public company, once again play the first card, we have to be ready to go. so telling jim in the afternoon, telling the team that night, everything was completely ready before the market opened monday morning, to tell the world. and i should say something which i think is really important. the person who ran the company was a great leader, great person, but for whatever reason this wasn't working. but he wasn't to blame. there was a whole host of people, and me included, and even though i wasn't the ceo i was as culpable as if it is because i was not paying attention, i was often other things. what i said to the group that day and what i said in months subsequent to that is we are not looking back, we're not placing blame. this is about today and the future and all of us.

and we are going to right the ship. >> when you came back, i imagined it was pretty good amount of discussion in your head and within the family about okay, you apologize to that. to come back. new team, coach of overseeing that? you're passionate about it talk to us about not why you ceo of starbucks. and but then i go back to my passion for the company and what i felt was my responsibility. a new person coming into the company would have had to learn so much. i knew where the bones were buried. i knew the people.

i knew the issues, and i also felt that i would be given a license from the street to do certain things that would give me time, because of the relationships i had with them as the founder of the company. and it turned out well. there were many people who thought this was a disaster, it should be shot. he was part of the problem. but it turned out pretty well. >> so far so good. let's talk, as you come back, part of my question was did you do things too fast. and then i came to this page on 144 where it says that you would eventually concluded that the product is the way we brought to market, three critical criteria for success of starbucks. it was right for education are parts but it was like four and met the needs of our customers and it was right for the business. fortunately, i did not realize,

i didn't realize that not everything the government was trying to do that season that has three very important standards. at the end of 2008 april 2008 we face of starbucks second quarter earnings, the numbers told a disturbing story. use the word disputing. i imagine it was a real unable to you because all of the into, all of the drive, all of the passion was exciting. and then the numbers came through. how do you rebound from that because i have to pick everybody up and get them fired up yet again? >> i think -- we were introducing new initiatives in trying to create relevancy with our customers and faith and confidence with our people. but the cloud over the economy, the anxiety over the consumer was so great that it was very, very difficult to break through. and starbucks, if you remember, became kind of a poster child.

mcdonald's had billboards all over america has had $4. so the crisis made a very, very difficult, and i think the question that i was asking of myself is how long is this going to take. and if anything confidence that you had to have in the brain and the resiliency of our people believing that there was a point when this was going to break through. and again, we had these meetings with the board where we had eight and 9% negative, store sales. and the board asked us the model, if they got to negative 15 our negative 20. and i was talking to other retailers from all over the country, a friend of mine at the limited, mickey drexler at j. crew, and my friends at college and all these other great weekend come and they were seeing me double digit negative comps come and we've not gotten

there yet but if it got to negative 15 at starbucks, we probably were going to be in a situation we are going run out of money. no one really knew how bad it was, it was going to get. but the truth is it never got worse than negative nine. then all of a sudden the initiatives and all the things we are doing began to resonate with the customer. and there was one thing it did kind of crack the code, which was the loyalty program. and i brought jim, the fat of cosco in to talk to us because he's an expert on the card business. he gave us some great advice. one of the things he said was, during this period of time the thing that you must do is focus on your core customers am not trying to attract new ones. we were doing the opposite. and he said that because the cost of losing your coat -- core customers and try to get the mac is going to be much greater than the cost of losing them. and so, we shifted the focus of

the company in terms of loyalty and rewards on our core customers and we created this loyalty card. and that loyalty card had a life of its own. and today, the card business of starbucks is 20% of transaction. that have a significant affect on beginning to kind of put our feet in issues of our customers them value for the starbucks without losing the equity of the brain. again, it wasn't one thing, but over time the connective tissue of relative information, and high degree of expertise, and initiative on operations making the perfect shot of espresso, returning a people, redesigning stores, closing stores that were not performing, and all of a sudden we begin to get not the wind at our back but a little bit of breeze where we thought i think it's going to happen. >> you have some big splash events. you didn't close the stores, you stores, but the three hours to

retrain. there were some pretty big hits but you did it to retrain.?çç let me ask a couple of questions and i've one observation to begin with. on page 140, you say rarely get to sleep more than four hours a night. act on page 89 in the midst of the christ utah you didn't didn't get any sleep. i was just one, did you ever think it could've been the caffeine? [laughter] i didn't know if -- so now we get into here's the issue, and there's two places that youk address. you go into the stores and you heard from people what the problems were. i mean, they were laying out on a regular basis. so here's section 149 said cliff realize starbucks field operations were inadequate. what many of our people had instead they lacked in business tools. is not uncommon for a managed to report that his or her store was doing exceptionally well when in reality it was missing revenue

opportunities, barely breaking even or even losing money. we also observed too much ways, inordinate amount of coffee was being thrown out, pastries were out of stock or overstock resulting in loss of sales. weekly labor schedules, coordinating availability with store traffic patterns took managers hours, yet still stores were often understaffed or partners underutilized. then later in the book you talk about the toppings for the oatmeal were not being delivered, that there were shortages in different stores. it really was a return to basics that need to be addressed for starbucks to restore the credibility and expectations of your customers. that must've been a herculean effort to undertake all about. >> i think what you just outlined is in essence what i said earlier, and that is when you are growing at the rate we were growing at, and the new store met expectation, every new country opened with great fanfare.

and revenue and profit as a corporation exceeded expectation. the stock prices had a life of its own. it covered up the fact that the underbelly of the company was not very healthy. and we did not address these things because success overpowered all of it. and the music and so what was going to stop playing, and it. and i think the crisis in many ways, not that anyone would want to manage through this, but it gave us an opportunity to address all these things. and innocent the muscle memory and the discipline that we put in place the last 18 months do not only examined all this, but check every box and fix all these things once and for all produced such a healthy environment that now the revenue has come back and construct a copy at all the things which is described have been taken care. so that is why we are now at a place with record revenue. but anyone who's been in the retail business knows there's an old adage in retail, and that is

retail is a detailed. we were not paying close attention to the details of the business. we are focusing on things that didn't matter to we were driving towards metrics that nothing to do with what was most important. what was satisfied, exceeding expectations and customer and the back of house was in a very, very bad order. and we fix all fat and people -- >> your clients, your customers told you and you invited that. talk to us about when you open up the e-mail and you said okay, fire off your comments to me, 5400 comments came in in a matter of a couple of days. there was no shortage of we like this, we don't like this. now i'm talking about the problems. i'm going to talk about the store closing and the passion people have about their neighborhood starbucks. >> one of the things i didn't first few months when he came back, i went around the country and i have these open forums for

customers. and we are close the store from about seven-nine and have listened to for customers customers were invited in. i did that in about 10 markets in the u.s. and to markets overseas. and i walked in and i felt these people hate me. and what struck me disputed high expectations walking in. >> i didn't know what to expect, but underneath it all was this high level of emotion where people feel so passionate about starbucks. the passion was don't even think about closing the store. because this is my store. and by the way, the music is too loud, and the muffins are still, the coffee is nearly hard enough. we are hearing all this and we'll put it all on the u.k. and we got permission from every customer to share that. we would go back to seattle and then we would have an open forum meeting with our own people, and we would show the tape, and people couldn't believe that

this was our customers. first off, why were they so customers? because they love the brand. but the feedback was so positive in terms of our ability to take that and start refining. we did this all of the country, and it began to give us a connective tissue as what to do in. >> during the recession, people didn't stop going to starbucks, they just came less often. it's not like we're going to turn their backs on our company, we are just not going to be there as often. part of that, of course, was the economy, but part of that is are giving them enough reason reasons to be engaged because the sense of community that one gives that you pushed very hard to accommodate. that was pretty telling. now, you're also probably the worst customer to ever walk into a starbucks because you know how long the milk should be steamed and should be sitting there. you go back to the competency we

are leading the steamed milk sitting around too long and after that sugar breaks down. i've learned stuff i learned in this book you can imagine. but this is your life. you really applied that level of attention to what's going on in the stores and listened to your clients. it's a lesson in here that is just a wonderful business lesson for everybody. i commend you for doing that. really making some substantial changes in the store, and then i was just -- twisted around by saying clearly not everything works. can you get to that speakers i'll get to a few bunch of a brown a brown bottle on your desk. >> you have. >> i will get to the quote real quick and then ask you about that. will its mazza kron. >> thank you. the name is printed across the ball and why capital letter but the product was imprinted on my psyche. celebrate, learn from and do not hide from mistakes.

a cold effervescent beverage infused with starbucks coffee had been my first attempt in collaboration with the boardmember to extend starbucks coffee outside of our stores in an unfamiliar form. i have to say, i read a lot of different business books. that seem be a lesson you got a model on your desk to remind you of. >> it is a great reminder, but the flipside of the story isn't turned into a $2 billion business. i've got to tell the linkage. so, when we develop for pacino in our stores, we develop a sub brand which is the splendid beverage. but before strategy to win an idea to create a ready to drink bottled beverage, carbonated coffee. it was my idea. i thought is a great idea and it was the starbucks, just the brutal disaster however,

frappuccino was doing so well, and i went back and said i think we have -- where the idea right but didn't need to be carbonated. pepsi look at frappuccino and said let's sub leverage in our stores into the grocery channel, frappuccino is now a $2 billion brand with bottled beverages in many parts of the world. and that gave us i think the impetus to realize that perhaps we can be the first consumer brand that retail stores and leverage it into the grocery channel. so we have a 500 million-dollar roasted ground business which we just got control over from craft on march 1. so the future of the company is going to be to introduce brands and products in our stores, leverage it in groceries and do it that perhaps have not been done before. >> two things. you have cards onto tables, if you'd like to submit a question we will open up for about 10 minutes for questions, if you

have a starbucks card in your wallet or your purse, please take them out because i'll have a question for you in a second on that. so, now i want it to other topics before we open up for questions and answers. the store closings. it was like taking a ripped from some people with a passion that people have about starbucks stores. .. >> i imagine elsewhere that it wasn't just closing stores. now you're talking about the partners. so talk to us a little bit about

what led to the decision, though it's all laid out in the book. >> right. >> and then what that was like for you. >> well, i think in the history of starbucks we never had any situation where we closed stores because they were nonperforming. we probably closed 20 stores in 40 years. that was the track record that we had as a company. however, when i did come back, i began to financially examine the stores that were opened the last two years. and at the height of the subprime mortgage crisis, we had a lot of stores that were linked to these areas all over america, especially california and florida. not only were they nonperforming, these were 10 and 15-year leases, and there was no way these stores were ever going to make it from an economic level. the tragedy was we were closing stores that primarily had been open less than 18 months. >> okay. >> it ended up being we thought

we were going to close 200, then it became 400. the board and i looked at it again, we ended up closing close to 800 stores across america and, of course, that had impact in terms of the support structure. and, you know, the challenge i had personally which was very emotional is how are we trying to restore trust and confidence in the company around the culture of starbucks and at the same time we're going to close all these stores? and i remember the night before looking at the list of stores, and i wanted to see every single starbucks' partner's name who was going to be asked to leaf the company -- leave the company in our stores and in our office so i could be sure there was not going to be any politicizing. and i knew a lot of these people personally. this was the hardest dig we had to -- decision we had to make as a company, but we were trying to save the corporation. and in order to do that, we had to close stores and ask people to leave the company. in that tape you saw he stand up

and say i apologize if actions of today has fractured the core values of the company, but we had no choice. >> it was like, you know, being in high school, and you go look at the list when it came out in "the washington post" to see if you were cut from the team. i don't mean the staff -- >> oh, sure. >> in washington you're like, did we lose any? and we did. we lost one over at 21st street so now i have to walk two more blocks to get to my starbucks. [laughter] but it was an interesting wave of pub lis try -- publicity, good and bad -- >> it was bad. >> but i guess on the good side it was yet another opportunity for people to demonstrate to you their emotional connection. people don't get worked up about a whole lot of things closing in the world. starbucks was like, you can't do that to he? >> i think what we built over the years was we created something in america that previously did not exist, and we loosely and within starbucks call it the third place between home and work.

but at a time in america where there's such a lack of human connection and humanity and the sense of community that starbucks stores have created, people look to starbucks and its place as a respite, as an oasis. and it meant a great deal to lose that in the neighborhood. and also i think there are times when a starbucks arrival in a neighborhood is kind of a badge of honor, and if you're losing it, what does that mean? >> it's true. i will tell you it's, it may have been the place between home and work, my concern is when it becomes the place between work and work. [laughter] >> yeah. >> you should close your stores between, like, nine and five. that's just my recommendation for work force productivity. now we're going to talk a little bit about some of the companies and the efforts moving forward. >> sure. >> talk to us a little about seattle's best coffee, talk to us about green mountain and, ooh, you couldn't call 'em

ipods, you can't get that one, but the little k cups because i was astounded how big that market is for starbucks into the future. >> well, first off, we are witnessing a seismic change in consumer behavior. primarily because of two factors. one is the pressure on the consumer for a lack of disposable income is real, consumer confidence is low, unemployment is still high, small businesses have, are still having trouble getting credit. and as a result of that, people are making buying decisions on products and services very different than they did in the past. the second thing is that as a result of social and be digital media, the consumer has access to information so quickly and in a very unique way that the rules of engagement and marketing and building a brand are very different. so having said that, we want to be able to embrace technology in a unique way, and i'll get back to that. but the truth is we believe that we can create multiple billion

dollar brands for starbucks that don't have to live inside starbucks stores. so seattle's best coffee is a brand that is underneath starbucks that we think appeals to a broader audience because starbucks is not for everyone both in price and in taste. and so that's sbc. green mountain, you know, we announced that deal two-and-a-half weeks ago, and our market cap went up $2.5 billion in one day as a result of the fact that 80% of starbucks' customers do not have a green mountain machine because we're not on the system. so once we announced we were going on the system and we would be exclusive in terms of premium coffee, there's a whole big market for that. there'll be a billion dollar business in a number of years. >> and from the numbers i read on the rollout, the upside of that, it really is an unbelievable number -- >> it'll be -- >> people who have machines, the number of people who don't have access then to starbucks and that delivery mechanism. and the growth. the upside.

>> yes. and the whole area of single serve, so we have courtesies who will be in 500,000 motels, this is a whole big market for us. just going back to technology for a moment, over the last 18 months we have invested heavily in social and digital media. starbucks is the number one consumer brand on facebook, twitter and four square. what this has done is two things. it has lowered our cost of customer acquisition, lowered our cost of advertising, but most importantly, given us the ability to emotionally engage with our customers in a very, very unique way. the other thing is what's going on in our stores with regard to mobile payment. if you examine what's happening in korea and in china and in japan, for that matter, is what's coming into america is that the digital wallet is going to be on your phone in 18-24 months max. and the amount of transactions that we as americans are going to do in terms of using smartphones as a wallet is going

to be ubiquitous. we turn that on -- we turned that on 82 days ago, and in 82 days we have become the number one brand in america in terms of mobile payment, in the terms of transactions in dollars. and this is just the beginning of what's going to happen. you're going to get coupons, offers, you're going to get all kinds of things from many, many companies, but most importantly, the smartphone is going to be the primary way in which we as americans are going to pay for things over the years. >> i agree. and here for the metro system when you're getting on the train or on the bus into the future, you'll be able to use that mobile device. >> yeah. >> will that expand to, also, how i order my beverage at starbucks? >> it probably will. and i think it speaks to a broader macro issue, and that is whatever business we are in, small or large, embracing the status quo as an operating principle today is a, is not going to have a good result.

every company must push for self-renewal and reinvention while preserving the core values. but technology and seismic change and be consumer behavior has left the station, and every company is going to have to embrace it. >> be you, you have the ability for customization already. now with the technology, but here's the quote, so i appreciate that you wrote this out so i could follow it. page 134, i'd like an iced grande lastty with ice milk to the bottom line only with a super stiff foam with a lid. brett in bellevue was committed to double cup vendi breve? wow. i feel like a piker with my pike place grande every morning. but the level of customization, it is part of the starbucks experience. and it is the bries that, it is the receipt of that and the

technology to get it right. you've got the sign up there, if it's not right, we'll make it right. technology is one part on making that happen, but talk to us a little bit about the recommendations that come in from people. you, every time you meet somebody, they go, hey, howard, i've got a great idea. or if somebody knows someone who works at starbucks in management or elsewhere, i've got an idea, you solicit those ideas. >> yes. >> comment cards, technology on the web and more. >> right. >> boy, that's exposing yourself to quite a bit of -- >> well, you bring up, first off, there's 87,000 different types of concoctions that people can order at starbucks. because there's less in the tax code, just so you know. [laughter] and that is a competitive advantage but, also, puts tremendous pressure on our people. but customization is a big area, i think, of building a competitive difference between us and everyone else.

but the other issue is that we have to be in a position where we're not just pushing information at our customers. so when i did return, michael dell gave me this great idea which was put up a web site, and we named it mystarbucksideas.com. and, again, there was great resistance from the senior people at starbucks because they were afraid we were going to get complaints. and it was okay to get complaints because we wanted to hear from customers. but the ideas that started coming in were ideas that were generally authentic and real from our customers. and, again, it gave us this loop of being able to interact with our customers in a unique way. and that sits today. and then we created one internally from our own people. so there's two kind of floods of information all day long between customers and our partners. >> but there's a part of damned if you do, damned if you don't. so then the decision's made to change the logo, and you get it

from both barrels, what are you, prince now and it's just a symbol and there's no more starbucks on it or no more coffee? [laughter] >> you're pretty funny, you know that? [laughter] you should be doing stand-up. with the logo, we just celebrated our 40th anniversary, but it's not about that. i mentioned the central to go beyond our retail stores with food and beverage that, perhaps, won't have coffee in it. so the logo change, removing coffee and the name starbucks, gives us the autonomy and freedom to develop products that perhaps won't have coffee associated with it because we're going to build a significant consumer products business in grocery that probably will have a lot of products not associated with coffee. >> i won't ask, because the answer will be we're not ready to announce it yet, so i'll pass. here's a couple of questions. my daughter asked not to change the caramel latte okay, that was just a comment.

most employees are still this, i see a smile, they know my usual grande bold, what drives this high level of corporate culture? >> i think the enduring nature of the competitive advantage that we've always had has not been the coffee or the real estate or design or marketing. it has been our relationship with our people. you know, for 25 years or so we've had a unique meeting at starbucks on a quarterly basis in every region around the world. and, in fact, we're going to have one this afternoon because i'm in d.c. and that meeting is an open forum. and it's like a town hall meeting. and we bring our people together, we spend about five minutes only on the results of the quarter and what we're going to try and do next quarter. that's it. and then we have an open mic. and the open mic is tell us what you're feeling about how we're doing, and tell us anything you want about the concerns and even the complaints you have. >> and do they all cover their

name badge when they're asking you questions and criticizing you? >> no. >> all right, just checking. >> but for 25 years we've had these meetings where there hasn't been any retribution, any cause and effect other than we want to hear from you, and we want to improve. now, during the years when we were doing so well and perhaps some of these things were not being addressed, i don't think we were at our best. but i think we've renewed this high level of sensibility within the company that people understand they have a voice, they have a future, and the most important person in all of starbucks is wearing a green apron. and we want to value and respect our people. >> howard, it says you de-emphasized growth for a time to focus on quality, customer relations and your people. how is your approach to growth now different now than it once was? >> well, we pressed the pause button for about 18 months. there was no growth whatsoever. and i think we now feel that we can return the company to being

a growth company at about double-digit level. so, you know, i would hope that over time we get back to 10%, 11% growth. we'll grow at 7 or 8% this year. if you're not a growth company in the industry that we are in, it's very, very difficult to attract and retain great people. and since all our people participate in the equity of the stock, we want to create liquidity for them, returns for them, and so we are going back to being a growth company, but not the kind of growth company that is hell bent on growing the company far growth's sake. -- for growth's sake. it's disciplined, profitable and crock, sam walton and others do a version of what you're doing of the town hall meetings, of the sitting down with associates and partners and others. who are the people you emulate, who are the people you look to as real innovative leaders over the years in retail? you've, by the way, in the book you use the word "merchant" a

number of times with a real source of pride. you don't shrink from that at all. it's what you are, what starbucks is and what you do. >> right. >> how, when you look at the other successful merchants around the country, who do you emulate, how did you look to? >> you know, i view myself as a merchant, and i think being a merchant is a lost art in america. i think mickey drexler is the great american her chant today. he, basically, left the gap and just reinvented j. crew. i mentioned les wexler who has done extraordinary things at the limited, i think jim senegal is an unbelievable merchant in the business he's created. i talk in the book about two situations that happened to me, one at the anal of 10 when -- age of 10 when my aunt took me to new york city for the first time. we went to radio city music hall, and after that she took me to the restaurant, and it was a very strange restaurant. and for those of you who are

probably 50 or over, it was an automat. and i walked into an automat, and you put five cents or ten cents or at the time a quarter in the window, and the food came out. and i said to my aunt, how did that happen? she convinced me there was a magician behind the wall. [laughter] and i, you know, i remember that day as if it was right now, and that was the kind of the catalyst for me believing that the emotional connection of discovery and telling a story and demonstrating something is quite unique. and then i had an experience with this very unique merchant in italy that has one store and for 85 years has built this cutlery store. i sat down with him, and he said to me, how many stores do you have? and we had an interpreter, and i was embarrassed to say it, and i whispered, 16,000. and the translator gave him 16,000, and he said, what? 16,000 coffee stores? boy, america, what a place. [laughter]

>> when, when you get a chance to go through the smithsonian, you'll actually see an exhibit of the old hornet automat. anything from starbucks in the smithsonian yet? >> not yet. >> all right. anybody here from the smithsonian? [laughter] one or two people. it'll be eventual. you'll just have to decide whether it's that brown soda bottle or -- all right, we can think about that. when soliciting associates' feedback, how do you decipher between whining and credible feedback? >> well, i think if people are whining, i don't like that word, but if people are concerned about something, generally there's a reason and there's validity to it. you know, we're not perfect. we have made mistakes, we will make more mistakes. the human condition and human behavior is very fragile, and i think sometimes we don't get it right. i don't think there's a terrible, big difference between

the people who are concerned about things and the people who are suggesting. it's real, and it's authentic, and we need to take it seriously. >> on a personal level, what keeps you grounded? >> my wife continues to take, tell me to take the garbage out. [laughter] >> how does starbucks continue going onward when howard schultz leaves for good? >> you know, i got asked that question in new york yesterday. you know, because of the turn around i'm probably getting more credit than i deserve. there's an extraordinary level of talented people within the company. i'm here for the long term. it's really not about me, and i didn't get succession too right the last time, but i understand it better today. and when it comes, and it's not in the short term, the company will seamlessly carry on. it's never been about one person, t not about me. >> howard, starbucks is well known for its focus on social/corporate responsibility. as the company moves onward, how much more will the soul of

starbucks continue to pioneer social/corporate initiatives like stewardship and the rest? >> i've said some thingses in the last few weeks publicly about the respondent of corporations in -- responsibility of corporations in america. let me say it this way. we all have parity in the marketplace in terms of product organizations, things that we do, and i feel very strongly that the consumer today has begun to make buying decisions not only on features and benefits of product or what of what companies stand for and whether those values are consistent with their own. so first and foremost, t very good business -- it's very good business to embrace the social conscious of what a company needs to stand for. what i said publicly was if i look at wisconsin, and if i look at ohio and about what's going

on there, i think one thing that's evident to me is that we're living at a time when these states are having significant challenges with their operating budget. i'm told that the state of c might be $50 billion in debt concern the state of california might be $50 billion in debt. as a result of that, it's possible states aren't going to be able to do things they've done in the past. and i think that corporations in america are going to be asked to and are going to be required to do more. and i think the responsibility that i feel to our people, the communities we serve, to the areas in which we buy coffee is that we have to demonstrate that the balance of building a great, enduring company is not just making money, it's a pretty shallow goal. that making money and giving back is what we should be about. and as a result of that we will be a better company and probably do better in terms of our profitability. >> there's a very good chapter in the book and more than just

one, but benevolence is the one that comes to mind. but, also, to two funds within company. >> starbucks has had a corporate foundation is focused on a number of things. about people that are being left behind domestically and internationally and things that we want to do that we feel deeply about. the other thing is we've had an emergency fund in our company for over a decade which we call the cup fund. it's managed by a group of starbucks people, not by senior leaders, and that cup fund is designed to help those people in need both in term of their personal crisis or things that happen has a result of things that are out of their control. a good example of that is the cup fund's contribution we just made to the people of japan,

especially those people who are affected who are wearing the green apron. and the situation in japan is dire, and it's going to be a long time before the people of japan be can respond to that catastrophe. >> and so the cup fund provides some assistance. >> exactly. >> as well as the other bigger foundation -- >> and both have made significant contributions back to japan. >> thank you very much for that. >> you're welcome. other leaders can solidify yourselves as ceo and make sweeping changes partly due to your innate connection within the company. how would your strategy have changed or what advice would you give to a less tenured leader attempting such language strategic -- large strategic shifts? >> that's a big question. >> yep. [laughter] >> i think at the height of the crisis, and i mentioned in the book i wasn't sleeping, and i was quite concerned.

there were points, actually, where i was quite depressed. it's hard to isolate yourself from the outside world that is constantly beating the drum saying starbucks is done, you know? the bloom is off the rose, the best days are over. i think the leader today must provide vision and be hope and aspiration for the organization, and people need to understand what their role and responsibility is. and then i think you have to answer a rhetorical question in the affirmative, and that is what is in it for you. people node to understand that you're -- need to understand you're not doing this for the corporation, you're doing this for one another. and i think you've got to reduce it down to the lowest common denominator and insure the fact that people understand when you do this action, when you make this change, that we collectively are going to participate in the success of the company, and that the finish line of success is not going to occur for a select few.

and when i think about the company, i think about the discipline in starbucks of marketing, manufacturing, real estate, design. the most important discipline in the entire company and a person who must have a seat at the table without -- with all of the strategic issues is human resources. >> well, so yesterday i'm with a corporate exec here and going through some difficult times. and his question was with, or maybe his observation, i'm not sure if i'm making the changes fast enough or too fast. when you look back using that 20/20 hindsight, did you move too fast, or did you not move fast enough, or were you right where you needed to be? >> i don't think all the decisions are equal. i think people within the company during a crisis need a decisive leader. but not everything can be made in a decisive fashion. but if you're not making a, if you're not making a decision

quickly, i think you have to explain to the organization why it's taking long and what the issues are. i think one of the things i did do in the first year is i heavily communicated to the organization both in as much physical meetings like this one as well as in small groups, and i was writing a weekly e-mail to the entire company in terms of the progress reports and the issues at hand. and i entitled them, transformation number one, two, three, and it went all the way up. and people started looking for that memo as kind of a litmus test about how we're doing. and also i was pouring my heart out to explain exactly what i was feeling and what the issues were. now, the people on the outside read some of these things, and i think they were skeptical that it was too touchy feely and why is he doing that, but i wasn't writing it for the outside world. i was writing it for the person in the company who perhaps is working 30 hours a week in this our store and needs to understand what it is we're

trying to do and why and be able to explain it whens asked to the -- when asked to the customer. >> when you look for talent within the company, upper levels, right on through all of the stores, how is who you're finding changing over the years? are you getting more qualified people? are you having to do more intensive training of the people? where, where do you see the work force in america going? >> the senior team that was developed in the last year and a half, the majority of the nine people who replaced the nine that left came from the outside. but i needed a skill base and an experience well beyond the size of the company, and i also needed people with like-minded values. but we can't preserve is and enhance the culture of the company by keep taking outside talent. so there has been and continues to be a high level of understanding, of identifying young, emerging talent in the company and then creating career

development for them. and i think we've become very, very good at that, we've had to insure the values of the company are being imprinted in geographies and areas of the world that are very different than america. >> when -- it's unreasonable to expect that the local starbucks could be involved in the chambers of commerce and business organizations and the rest, but talk to us a little bit about the role and importance that you place and the company places on being involved in business organizations. >> i think that if starbucks is not locally relevant in every community that we serve, then we will become a faceless corporation of a chain of stores where the ubiquity will be the brand. we don't want that. so we have tried in every community where the manager and the district manager has the authority and the responsibility to engage locally,

philanthropically and organizationally. and i think we've done a very good job of that over the years. >> howard, you're in day two of the book tour that's going to take you around the world. you, you really shared candidly quite a bit of what was going on during some very difficult times in the company, a company that everyone in this room and millions of people around the country and around the world have a connection to, an emotional attachment to. they care about your company. it must be very rewarding for you. it strikes me as i was going through this that whoever it was that leaked the memo probably did it to try and stick it to you. but in some bizarre twist it may have been the greatest thing that ever happened to starbucks by giving you that push to say, well, now the word's out. maybe now i have to personally back it up by getting revolved. and i will tell you personally, we're thrilled to have had you here, and i'm very glad y