Putting People Before Profits

The following is an abridged version of an interview by Hamish Douglass of Magellan Asset Management with Kevin Johnson, President & CEO of Starbucks discussing how they have fared so far in 2020. (Magellan run the SJP International Equity fund and is a major shareholder of Starbucks.)

Kevin Johnson joined Starbucks after years at Microsoft and today applies lessons from the tech industry to drive innovation at the world’s largest coffee house chain. This focus on innovation, twinned with an enduring dedication to company culture and shared values has helped to gain Starbucks 400,000 staff in 82 counties and successfully steer the business through this COVID crisis.

“Kevin, can you give us a little background into how you became involved with Starbucks?” (HD)

‘In undergraduate school I learned to write computer software and I just fell in love with writing computer software. I could make computers do amazing things that when graphical user interfaces were showing up I could make all sorts of clever things happen on computers and show my friends, it was a way for me to express myself and so I started my career as a software developer and basically spent 32 years in the tech industry. I had some wonderful experiences, worked at IBM for a number of years and then joined, as the personal computer revolution began, a very small company at the time named Microsoft.

I remember coming home to tell my wife I was leaving IBM to go work for this company called Microsoft and she looked at me and said, “Microsoft, I have never heard of that, what do they do?”, so I had to explain to her what they did, software for PCs, and she says, “Well are they going to pay you?”, I said yes they are going to pay me, kind of about what they pay me at IBM but they give me these things called stock options and she says, “Well what are they?”. So I explain what they are and she looks at me in the face and says, "I count stock options as zero", and we laugh about that to this day!

So I had a wonderful journey at Microsoft and a great experience and eventually it worked that I was on the Senior Leadership team at the time with Steve Ballmer who was the CEO and  Bill Gates who was the chief software architect – great, talented people, just a wonderful experience. I spent 32 years in the tech industry and I had transitioned from Microsoft to go be the CEO of a company in Silicon Valley called ‘Juniper Networks’, and when I was at Juniper I also joined the Starbucks board so my Starbucks journey actually began about 12 years ago when I joined the board of Directors. Howard Schultz invited me to join the Board when he stepped back in as CEO because he was looking for some technology expertise on the Board and that was how I got connected to Starbucks.’

“Digital engagement must be incredibly important in the journey going forward?” (HD)

‘If you think about the two transformative elements of modern day retail, the first one is that you have to create an experience in your brick and mortar store that makes it a destination for the customer and then you have to extend that experience to a digital mobile relationship. So the whole world of the digital/customer relationship is really key to what I think is building long-term loyalty and long-term customer relationships for any retailer. Over the last three and half years, since I have been CEO, one of the things that I have been able to do is I have taken everything I learned about driving innovation in the tech industry and figured out how to apply some of the most important principles as to how we drive innovation at Starbucks. By doing that, we have dramatically accelerated the pace of innovation that is coming out of Starbucks which is relevant to our customers, is inspiring to our partners, and meaningful to our business.’

“How are the teams coping through the current crisis?” (HD)

‘When this started happening in China in January, working with Belinda Wong (CEO of Starbucks, China) I immediately realised I needed to define the principles by which we were going to make decisions on how to navigate this situation and the three principles that I landed on that very first day that this started happening in China were; 1) We were going to prioritise the health and wellbeing of our Starbucks partners and the customers we serve, 2) We were going to support local health officials as they work to contain and mitigate this virus and 3) We were going to show up in a positive and responsible way in every community that we are a part of . We used them in 82 markets around the world as we had to go through closing stores and we used those same three principles as we decided how to reopen stores. Those three principles have guided the entire company and this transparency and the principle based decision making has just served us incredibly well through this entire period.’

“Starbucks went from firing on all cylinders to closing the whole business down – how did you deal with that?” (HD)

‘From outset we were connected to Belinda and the decisions she had to make and at some point we realised we were going to have to close nearly 90% of our stores in China, that this was a major event and how long would this go on for?

So we focussed on how we helped our team in China navigate this. When all of a sudden the first case popped up in Kirkland, Washington, just down the street from us here. The first Covid-19 confirmed case in the United States. All of a sudden Seattle, is now the epicentre of outbreaks here in the United States and the realisation that this now is something that is going to be a global event. By then we had already realised, let’s take all that we are learning in China and let’s now take those store protocols, those same three principles and let’s now start adapting those to the US and to the 82 markets around the world that we run businesses in and those three principles and those store protocols basically became the blue print for how we navigated this.

The most important thing that I think helped Starbucks is the fact that Starbucks partners have an emotional connection to our mission and we live our values, we were grounded together in our mission and values. How many other companies have a mission statement that begins with the words ‘to inspire and nurture the human spirit, one person, one cup, one neighbourhood at a time’ and the values that we stand for – when it gets hard we put people over profit and we are going to do the right thing because we are playing the long game and the mission and the values were at the core of everything that we did, the three principles guided us and it pulled us together as a company. As a leadership team it pulled us together immediately, here is the morning call, here is the evening call, here are the decisions that we have to make today and here are the decisions that we have to communicate tomorrow. So we just immediately went into – we are going to work as a team and we are going to navigate this. We became a very agile company, very quickly, as we navigated our response to this, we did it in a principled way and I am very proud of the Starbucks partners around the world, 400,000 Starbucks partners who proudly wear the green apron and they showed up. We stood behind them and that is why when we closed stores we said look, we are going to close stores but we are going to provide you economic stability.

We are going to look back and realise this will be one of the greatest brand investments that you could have ever made which was at a time when there were 30-40 million people being laid off and out of work. Starbucks put people over profit and my job was to make sure we understood all the implications and that we had enough liquidity. We knew we could navigate this, we have a strong balance sheet and yes we had to take on a little extra debt, we knew what our cashflow was but we also knew that when we start to re-open those stores, those partners are going to be there and that at the end of the day that has served us very well and I think we are just beginning to see the great benefit of what it means to put people over profit at a time of need.’

“How are you weighing up what’s just temporary changes to more permanent changes as a result of customer attitudes following the pandemic” (HD)

‘Customers are looking for something that is safe, familiar and convenient. We are accelerating digital, accelerating the store formats and really amplifying the needs states of convenience, knowing that it is safe, familiar and convenient for a customer. Those are things that are for the near-term. Now, what is not going away, the fact that as human beings we have a drive to be with other human beings and to share personal connections with others. It is how we get energy from being human and it is how we overcome adversity. It is how we share our joys and successes; it is interacting with others. Today, we may not have a lot of people gathering to be seated in that third place at Starbucks but I guarantee you by isolation and social distancing all it is doing is building up more and more demand for us as human beings to be a part of the community and to be with other human beings and I predict this is going to unleash a massive wave. When there is a vaccine, and we can get to a point where there is a vaccine and enough immunity with limited spreading, people are going to want to crave being a part of a community and that third place experience will be more popular that it has been in the fifty years since Starbucks was founded.’

“How will Starbucks adapt to a more flexible working environment?” (HD)

‘I do think a more flexible work environment is going to be an outcome of this pandemic. But I also realise that as people are working from home they have just adapted their pattern of when they visit Starbucks and so maybe they come in 30 minutes to an hour later than before because they are not having to commute as far and maybe when they come in they buy more beverages because they are buying for their family or a larger group. But even in a flexible work environment we are seeing a recovery and it is progressing ahead of how we had planned so when it comes to how I think about the future of work, there are certain things that require that face to face work environment. Like when we hire new Starbucks partners, how do we immerse new partners, how do they learn the culture? How do you propagate culture when you have partners early in their career, how do you have more senior partners train them or transfer skills and knowledge to them and mentor them? How do you co-create when you have innovators that are working on ideation of investing new things – how do you do that? Many of those things require face to face interaction and so I do not see a future where companies go to a completely work from home model or work remote model.

Let’s just suppose that here at Starbucks in our support centre in Seattle lets assume we are roughly 400 Starbucks partners working in this building. Nine floors, 4000 partners. I would expect that 2000 of those partners would need to be in the office 4-5 days per week and maybe one day per week or so they might work remotely. The other 50% of those partners, so another 2000 partners, they might work two to three days per week from the office and the other days from home. So you can say there might be 25% fewer partners in the office at any one time which means we might have some excess space which might mean we have to renovate the way we create the physical space to accommodate this new more flexible work environment and optimise around the things that we need. I do think that there will be some lasting changes in how businesses operate with a more flexible environment. So, you can do it in a highly remote, work from home, flexible environment but the things that you lose, culture propagation, immersing new partners, the co-creating processes are things that are very important so I see that we are going to balance those two things and I would suspect that other business are going to do the same. I have had this conversation with other CEOs of tech companies, large financial institutions, pharma/healthcare companies and I think there is a balance that each business can strike that would be right for their industry and right for their company.’

“How do you manage your brand in light of the political tensions between China and the US”? (HD)

‘Well clearly we operate in 82 markets around the world so we are constantly aware of and dealing with geo-political situations that unfold, but lets be specific in China. Starbucks has been in China for over twenty years now and I like to characterize our approach in China as we built Starbucks in China, for China. What does that mean?

That means that our leadership team and Starbucks team in China have everything contained in China to decide what real estate they want to build stores in, the store designers are based in China, they hire local Chinese contractors to build those stores. We bring in Chinese artwork to show respect for the culture and we build stores that we think are culturally appropriate and reflect the Starbucks brand but do it in a way that reflect Starbucks in China. We do our own food and beverage R&D in China for China, we work with coffee farmers in China. We are building a roasting plant in China, our China team is completely self-contained. They are connected to the mission and the values, they understand the brand promise and what the experience we create for customers is. They know how to bring the Starbucks brand to life and we do that in a way that we think shows the respect to the Chinese culture and respect to our Chinese Starbucks partners and respect to our customers in China. That has served us very well.

In addition, I spend a lot of my time with our team in China ensuring that we have good relationships with government leaders, an open dialogue about what we are doing and that we are playing in a positive role in society in China and that our social impact agenda and the work that we do in China is intended to do good in that community. All of those things have served us well for over twenty years and it is one of our targeted long-term growth markets. China and the US are the two markets, I think about all markets, but those two are the two lead bikes in a peloton and every other market is grafting right behind the innovation that we do in the US and China. We are not immune to geo-political, but I feel we have a good foundation of trust and respect both in the US and China and how we operate and we work to do good in the communities that we are part of.

We have over 55,000 Chinese partners in China who probably wear the green apron and so we are creating jobs and creating opportunities for them. We even create unique benefits for our partners in China. We asked our Starbucks partners in China what was most important to them and many times they would say the most important thing to me is that I can care for my ageing parents and so we went and created one of a kind healthcare insurance that was for their parents for catastrophic coverage for catastrophic health events and we give that to our partners in China. Not only can they be proud and wear the green apron and have a career at Starbucks but they can also do it and care for their parents. So it is things like that that matter.’

“What are you most optimistic about looking forward?” (HD)

‘I am optimistic moving forwards about humanity, you look at how we have just been through this shared experience around the world, navigating a global pandemic. I characterise this as we are no longer in crisis, but we still have a global pandemic. Humanity has come together to try and figure out ways to contain the spread of the virus, there are people innovating on vaccines and therapeutics. There are people figuring out how can we care for those who are in need at this time and there is a lot of divisiveness for sure but there are also a lot of positive things that are happening in the world where people show that they care about other human beings and a lot of times through adversity this is something that can unite people and bring them together towards common cause. So I am just optimistic that the world has gone through something, this is my first global pandemic, so we are all going through this together and we are figuring it out and I am optimistic for humanity that we will get through this and be stronger because of it and more resilient.’

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