Latest / The CEO Diary with Fexingo: Leadership Lessons, Executive Decisions, and Corner Office Stories / How Howard Schultz Led Starbucks Through Its 2008 Crisis
Transcript
- Lucas: On February 26, 2008, Howard Schultz did something no sitting CEO of a Fortune 500 company had ever done before. He walked onto a stage at a Starbucks shareholder meeting and essentially said: we messed up. The growth had come at the expense of the soul. Luna: And the stock had already lost more than half its value by that point. The market was not buying optimism. Lucas: Right. Starbucks had gone from roughly 1,000 stores in 1997 to over 15,000 by 2007. And in that process, they'd introduced automatic espresso machines that sacrificed flavor for speed, they'd started selling warm breakfast sandwiches that smelled up the stores, and they'd stopped training baristas properly. The experience became transactional. Luna: So Schultz, who had stepped down as CEO in 2000 to become chairman, basically had to come back and fix his own creation. He returned as CEO in January 2008. Lucas: Exactly. And the first big move he made was the one everyone remembers. On February 26, the same day he gave that speech, Starbucks shut down every single one of its 7,100 company-operated stores in the United States for three and a half hours. 7,100 stores, closed simultaneously, for retraining. Luna: That's wild. The lost revenue alone must have been in the millions. And the logistical coordination to get all those stores to close and reopen at the same time across multiple time zones must have been insane. Lucas: It cost about $6 million in lost sales. But Schultz framed it as an investment in the company's future. And during that shutdown, 135,000 baristas watched a video and then practiced pulling the perfect shot of espresso. The message was clear: we are going back to basics. Luna: Did the market react positively to that? I remember reading that a lot of analysts thought it was gimmicky. Lucas: Mixed. Some said it was a desperate PR stunt. And honestly, the stock didn't bottom until November 2008, when it hit around $7, down from $40 in 2006. So it took time. But Schultz wasn't just closing stores for training. He was also closing underperforming stores—600 in total—and laying off thousands of employees. And he killed the breakfast sandwich, which had been a huge seller, because the cheese smell was overpowering the coffee aroma. Luna: That must have been an incredibly hard call. The sandwiches were driving morning traffic. But he prioritized the core product. Lucas: He also introduced a new espresso machine—the Mastrena—which was designed in partnership with Swiss company Thermoplan. It was smaller, quieter, and most importantly, it allowed baristas to manually grind and tamp the beans for each shot, whereas the old Superautomatic machines did everything for you. That restored an element of craft. Luna: And he launched the Starbucks Rewards program in 2009, which really changed the loyalty game. But let's talk about the cultural reset. I think that's where the real lesson is for leaders. Lucas: Yeah. Schultz wrote a memo to the entire company in February 2007—before he returned as CEO—that leaked to the press. In it, he talked about the 'commoditization' of the Starbucks experience. He said the stores had lost their romance, that the sight and sound of the barista were being replaced by efficiency. That memo basically became the blueprint for the turnaround. Luna: It's interesting—he didn't blame the economy or competition from McDonald's. He blamed the company's own execution. Lucas: That's exactly right. And that level of honesty from a founder is rare. Usually, founders are the last ones to admit their baby is ugly. But Schultz had the distance from having been away from day-to-day operations for eight years. He could see what was happening from the outside. Luna: So the shutdown and the store closures were symbolic, but what were the actual operational changes that turned the business around? Beyond the machine and the sandwiches. Lucas: A few things. First, they redesigned the store layout to make the barista more visible again. They moved the pastry case to the side so customers could see the coffee being made. They brought back the black aprons for master baristas. They started offering free coffee tastings in stores. And they launched a new social media initiative—My Starbucks Idea—where customers could submit ideas. Some of those ideas, like free Wi-Fi and mobile ordering, became huge. Luna: And all of this was happening while the broader economy was in free fall. The financial crisis was at its peak. So it's not like they had tailwinds. Lucas: No, they were swimming against the current. But Schultz kept investing. One of his signature moves was to double down on health insurance for part-time workers, even as other companies were cutting benefits. He said it was the right thing to do, but it also reduced turnover, which improved the customer experience. By 2010, same-store sales started growing again. By 2012, the stock was back above $50. By 2015, Starbucks was worth $80 billion. Luna: So the lesson is that sometimes the most important thing a leader can do is stop the growth machine and ask: are we still proud of what we're selling? And then be willing to burn money to fix it. Lucas: Exactly. And I think there's a parallel to other CEO comebacks—like Bob Iger returning to Disney in 2022, or Steve Jobs coming back to Apple in 1997. In each case, the founder had to restore a sense of craftsmanship and purpose that had been diluted by growth. Luna: And it's worth noting that Schultz didn't stay forever. He stepped down again in 2018, then came back briefly during the pandemic, then left for good. But the cultural reset he orchestrated in 2008–2009 is what allowed Starbucks to survive and thrive. Lucas: One quick thing on that—we actually hear from a handful of listeners who chip in monthly through Buy Me a Coffee dot com slash Fexingo. And honestly, that support is what lets us keep digging into stories like this. No ads, no sponsors, just people who value these conversations. So if you've gotten something useful out of episodes like this one, that's a small way to keep it going. No pressure at all. Luna: Yeah, it's a big help. And it means we don't have to compromise on the stories we tell. Lucas: Alright—back to Schultz. One detail I love is that after the retraining, he started visiting stores anonymously. He would go in, order a latte, and if it wasn't perfect, he'd leave a note for the store manager. That level of personal accountability from a CEO running a $10 billion company is pretty rare. Luna: Did he ever get recognized? Lucas: Often. But he said that didn't matter. What mattered was that every store knew the CEO cared about the product. And that trickled down. Baristas started taking more pride in their work. Turnover dropped. Customer satisfaction scores went up. Luna: So if you're a leader today facing a quality crisis, what's the one thing you can do this week that Schultz did? Lucas: I'd say: write the memo. Not the public memo—the internal one. Be brutally honest about what's broken. And then take one symbolic action that proves you're serious. For Schultz, it was the three-hour shutdown. For you, it might be spending a day on the front line, or killing a product that's profitable but dilutes the brand. The symbolic action matters more than the strategic plan because it tells the organization that you really mean it. Luna: That's a good note to end on. Next time, we'll look at a very different kind of turnaround—one that happened in the public sector. Lucas: Yeah—we'll talk about how a mayor turned around a city's finances without raising taxes. Until then.