Howard Schultz: What Next, Starbucks?

• 

• WEEKEND CONFIDENTIAL
• September 27, 2013, 8:24 p.m. ET

The coffee CEO on the future of the company, from modern drive-thrus to wine and kale

By 
• ALEXANDRA WOLFE

Starbucks CEO Howard Schultz says he's never been a "coffee person." Sitting in his sprawling Seattle office overlooking Puget Sound, he says that what he's always been is a merchant. It's a title he is particularly comfortable with one morning earlier this month. A few hours before, his company's stock price reached $76.24 a share, the highest it had been in its 42-year history.

It is Mr. Schultz's second stint as CEO of Starbucks, a company he has led since he bought it in 1987. He took an eight-year hiatus as chief executive from 2000 to 2008 to become chairman, and by the end of that time the company's stock plunged 43% in a single year. Since 2008, Mr. Schultz has been focused on turning the company around, a feat that has finally started to bear fruit—and, lately, juice, yogurt and pastries.

John Keatley for The Wall Street Journal, Grooming by Cara Aeschliman

Starbucks CEO, Howard Schultz, said that, in the past, "growth covered up a lot of mistakes."

Under Mr. Schultz's leadership, Starbucks has become a global consumer brand that isn't only a coffee shop but increasingly an all-day restaurant, design concept and health-food conglomerate. Mr. Schultz is the first to admit that rapid growth caused the company's crash a few years ago. He's determined not to let that happen again. "In 2006 and 2007, I think growth covered up a lot of mistakes," he says. "Hubris and a sense of entitlement set in."

Today Starbucks has more than 19,000 stores world-wide, including over 11,000 in the U.S. Thousands more are planned in Latin America and Asia combined. But Mr. Schultz is set on expanding their scope. "We cannot be content with the status quo," he says. "Any business today that embraces the status quo as an operating principle is going to be on a death march."

For one, Starbucks will be rolling out a series of new offerings in an effort to turn what used to be primarily a morning business into an all-day cafe. Some stores serve wine and many have started selling dishes with healthy fare like quinoa and kale.

The company plans to introduce some new design concepts, including a modern, modular drive-through made from reconfigured shipping containers. A drive-through window will be a part of 60% of the 1,500 new U.S. stores that are planned for the next five years. There will also be new "coffee tribute" locations, such as the recently opened Kerry Center flagship in Beijing, a two-story store with coffee bars, contemporary furniture, locally sourced Chinese artifacts and a series of coffee workshops. And last week the company announced the opening of a store within the Parisian shopping center Galeries Lafayette, as part of a planned move into more retail spaces.

They are all part of Starbucks' recent efforts to extend its reach beyond coffee. In 2011, it bought the juice company Evolution Fresh for $30 million, and together they recently rolled out a new food and beverage line. Since then, Starbucks bought the San Francisco-based patisserie La Boulange for $100 million and the tea company Teavana for $620 million. And it has joined with the French corporation Groupe Danone to launch a line of Greek yogurt products.

Mr. Schultz doesn't think this kind of growth will result in the same problems as the company's past spurt did. "These are all businesses we are already in, and these acquisitions will enhance our position as long as there is a heavy level of discipline and rigor attached to decisions," he says. In the near term, he says that he isn't planning to make any more acquisitions. However, he says, "I think there will be more strategic partnerships."

Starbucks also has expanded into digital and social media, including a partnership with the mobile payments company Square, and is now processing four million mobile transactions a week. Starbucks' annual revenue of over $13 billion comes mostly from single sales that average $5—so "because of the frequency of people coming to Starbucks," Mr. Schultz says, "we had the opportunity to crack the code on mobile transactions."

Born in a housing project in Brooklyn, New York, Mr. Schultz, 60, looks nothing like the hipster baristas who now populate his former borough. Today he is wearing a dark tailored suit and tie, and speaking in careful C-suite sound bites.

He stands up to show me the early inspiration for what became Starbucks—a framed picture of a piece of pie behind a screen in an old Horn & Hardart automat in New York. When his aunt took him there as a 10-year- old, he asked her how one piece of pie after another suddenly appeared in the vending machine. "My aunt convinced me there was a magician behind the counter," he says. "That was the beginning of understanding how to romance a customer."

The son of a former U.S. Army sergeant, Mr. Schultz was the first in his family to go to college. After attending Northern Michigan University on an athletic scholarship, he got a job working as a salesman for Xerox Corporation. He joined what was then called the Starbucks Coffee Company in 1982 as director of marketing. Back then, the company only sold coffee beans, tea and spices.

While on a trip to Milan during his early days at Starbucks, Mr. Schultz saw what it could become in the atmosphere of Italian cafes: a "third place," after home and work, that would sell a new menu of cappuccinos and lattes for the masses. His bosses didn't go for the idea, so Mr. Schultz started his own company; in 1987, he bought Starbucks for nearly $4 million and kept the name for his new concept based on Italian cafes. "What we saw in Italy was this unique relationship that coffee bars had to the community and people," he says.

Today, Mr. Schultz says that he doesn't see the spate of high-quality coffee concerns such as Stumptown and Intelligentsia as competition. Still, Starbucks (traditionally known and at times criticized for its darker roasts) released a new lighter-roasted coffee called Blonde to appeal to the same customers. "I think there's a really important role for these independent coffee stores," he adds. "It creates jobs for people, and I think it raises the quality of coffee for the most part in America…and the more people who are exposed to better quality coffee is good for Starbucks."

One issue that has been more of a headache is gun control. Earlier this month, Mr. Schultz wrote an open letter to customers asking them not to bring guns into its U.S. stores. The company's guidelines on guns used to vary in accordance with state laws, leading to demonstrations in its stores by both sides of the debate. "We're not pro- or antigun, but we do believe our customers and people would be more comfortable if guns were not part of our store experience," he explains.

Outside the U.S., Starbucks is now in 62 countries. "The biggest opportunity we have is clearly in Asia," he says. So far, there are 1,000 stores in both China and Japan, 16 in India and one in Vietnam. Mr. Schultz hopes to open thousands more in China.

"We've been in China now for over a decade," he says. "The most gratifying thing is, when we first got there, most of our customers were tourists and expats, and now they're Chinese nationals."

He's still mindful of keeping growth from turning into a bad sequel. He is drafting a year-end memo tentatively called "Playing the Long Game."

"I'm making sure that we don't get seduced or intoxicated with either short-term results or short-term wins and that we're in this to build a great, enduring company," he says.

Write to Alexandra Wolfe at alexandra.wolfe@wsj.com

A version of this article appeared September 28, 2013, on page C11 in the U.S. edition of The Wall Street Journal, with the headline: Weekend Confidential: Alexandra Wolfe.