Starbucks – investing in
people as a route to
profit and growth
becoming the dominant speciality coffee
retailers and brand in North America. In the
months after Starbucks went public, the stock
climbed 82 per cent. Employee attrition,
which typically hovers in the triple digits for
food retailers, is less than 50 per cent. The
company is posting higher profit margins
every year, and the company’s health care
During the 1970s, Starbucks was a local,
costs, despite the extensive coverage, are well
small-scale coffee bean roasting and sales
operation in Seattle’s Pike Place fish market in within the national average. Schultz says he
Washington state. Today it has more than 700 needs no further proof that employee benefits
are the key to competitiveness and growth. He
outlets in North America, sales of $630
is convinced his employees are working
million
harder
(in 1995) and an ambition to reach 2,000
and smarter because they have a stake in the
coffee shops worldwide by the millennium.
outcome.
Howard Schultz transformed the local coffee
manufacturer into a profitable national retailer From the beginning, Schultz saw a symbiotic
link between the firm’s growth curve and
with a simple, if radical, growth strategy:
investing in employees. “Our only sustainable his ambitious benefits plan, gambling that
competitive advantage”, explains Schultz, “is revenues would outrun spending for expansion.
the quality of our workforce. We’re building a At first, the company’s losses almost
national retail company by creating pride in – doubled, to $1.2 million from fiscal 1989 to
and providing a stake in – the outcome of our 1990, as overhead and operating expenses
ballooned to $18.4 million on $19.2 million in
labour”.
sales. But in 1991 sales shot up 84 per cent,
The centrepiece of Schultz’s vision is a
dramatically outpacing expenses, and the
generous and comprehensive employee
company broke into the black. Although the
benefits
company already had an adequate benefits
package encompassing health care, stock
package in place and had been covering
options, training programmes, career
parttimers
counselling
since 1971, Schultz began to beef up
and product discounts for all workers,
full-time and part-time. According to Schultz: offerings substantially. He added a heavy
emphasis on preventive health care, as well as
“The desire to scrimp on these essentials
similar encouragement for regular dental
helps reinforce the sense of mediocrity that
visits. He also introduced eye care, and the
seeps into many companies. Without them,
people don’t feel financially or spiritually tied company picks up the total tab for disability
and life insurance as well.
to their jobs”. Emily Ericsen, head of human
resources, puts it another way: “We are in the All that, however, did not make it easy to
people-development business almost as much persuade the insurance companies to sign
Starbucks up. The biggest problem was
as the coffee business”.
covering
Although the connection between such an
aggressive employee benefits package and the part-timers. A handful of retailers provide
benefits to people who work 30 hours a week
bottom line is often difficult to show
but not to those who work only 20. At
conclusively,
Starbucks
the circumstantial evidence is compelling.
at least two-thirds of the workers are
The company is clearly on its way to
clocking fewer than 40 hours. Schultz outlines
his reasoning: “More than half of our retail
salesforce is made up of part-timers. That tells
me that the majority of our customers are
coming into contact with part-time workers.
How we treat our people is directly related to
how we treat our customers and to the quality
of our product. It is inarguable that our
parttimers
are key to the company’s success”.
The success of the strategy has depended,
in part, on the relative youth of most of the
employees. Schultz himself is only in his early
40s, and half his management team is under
50. In general, the company appeals to young
people who have a more healthy lifestyle, and
that leads to lower insurance rates.
Already, Ericsen is considering offering
workers a cafeteria-style benefits
programmethat lets them select different
degrees of coverage.
Under such a plan, monthly benefits
costs could rise from $200 to $240, but these
are costs the company is willing to absorb.
Schultz understands that the first point of
contact with customers is his workers, and he
is determined to have them recite in their
sleep how to make a mocha latte, and to know
the difference between espresso machiato and
espresso ristretto. Each is given 25 hours of
training before starting work behind the
counter. Management trainees attend eight to
12 weeks of classes with titles like “Coffee
Knowledge 101”.
Although the company spends, by his
estimate, $1,000 to train each new worker,
this overhead is dropping as a percentage of
sales, even as the number of stores climb.
The figure fell from 12.3 per cent in 1989
to a scant 8 per cent just three years later.
In addition to the reduced attrition and
shrinkage, Schultz points to yet another
benefit
of maintaining a superior and involved
workforce – ideas. Executives from Seattle fan
out to a dozen cities each quarter to conduct
open forums and gather ideas, which run the
gamut from addressing environmental
concerns
to marketing. Schultz says: “In a series
of open forums, we heard our people asking
for what I call a new paradigm; an incentive
not only to stay with the company but also to
have a stake in its success”. As the centrepiece
of that new paradigm, Schultz and Orin Smith
came up with Bean Stock – stock options –
structured to achieve both employee and
corporate goals. The company has set up a
vesting period of five years which starts one
year after the option is granted, then vests the
employee at 20 per cent every year. In
addition,
every employee receives a new stock
option award every year, and a new vesting
period begins. The percentage of the grant is
tied to the profitability of the company.
The first year that Bean Stock was offered,
the company overshot its profit goal by 20 per
cent, and the board responded by nudging up
the percentage of salaries for stock options to
12 per cent from 10 per cent.
The way Schultz describes it, the stock
options and the complete benefits package act
as the glue that binds workers to the company,
forging loyalty and, above all, encouraging
attentive service to the customer. “It’s
reduced attrition, and we’ve literally changed
the level of communication. You can’t
imagine
how excited our workers were when we
started unveiling our new benefits package
and explaining Bean Stock. All kinds of
people
started coming up with ways to save money
and improve productivity. Now they are
invested in our future. The future of Starbucks
lies in increasing shareholder value –
and increasing employee value will directly
increase shareholder value.”