Preserving the Starbucks Counter Culture

    As president of Starbucks North America, he contacts five of the 550 Starbucks district managers in North America, each of whom oversees 10 stores, to check in for a minute or two. Then he dials three Starbucks stores at random to say thank you to employees and ask for feedback.

    But as the Seattle-based coffee giant grows globally by more than four stores and 200 employees every day, the surprise phone calls from the top brass are also a calculated strategy for maintaining the small-company atmosphere that Starbucks hopes to retain despite its explosive rate of expansion.

    Donald, who will replace outgoing CEO Orin Smith on March 31, says that keeping the feel of the company small while it mushrooms in size requires a mindset that must start at the highest levels.

    "We (are) going 100 miles an hour," says Donald, the former head of supermarket giant Pathmark Stores Inc. who joined Starbucks in 2002. "We’re growing at 20 percent a year. We’ve got to be able to reach into this organization and say, ‘How’s it going?’ and ‘Good job!’ If any company doesn’t have the time to talk to people on the front lines, then you might as well close it up, because it’s not going anywhere."

    Starbucks, of course, is going everywhere. But even if there are enough customers in the world willing to pay as much as $5 for a cup of coffee to fuel Starbucks’ aggressive expansion, questions about its ability to successfully recruit and staff its workforce remain. Can a company so dependent upon the personalities of its employees possibly find enough qualified and desirable candidates to greatly increase its current workforce of 85,000 in the coming years and still maintain its brand? How can it maintain its reputation for high-quality customer service and the unique feel that made it successful in the first place?

    Despite its legions of well-trained, friendly employees and the undeniable popularity of the whole Starbucks coffee experience, there are those who don’t think the company can continue to grow indefinitely. H.D. Brous & Co. analyst Barry Sine says that while Starbucks touts its customer service as exceptional, he doesn’t believe the consumer experience is very different from other high-end retailers.

    Nor does he think it’s enough to carry what he believes is an unsustainable rate of growth as the company continues to expand beyond highly concentrated big-city hubs and into more rural areas where premium prices might not be as well-received. Despite Starbucks’ popular brand and its good employee benefits package, Sine thinks that staffing could become more difficult as unemployment declines and competition for good employees increases.

    "In a recession you can always find people," Sine says. "But now with the economy booming again, that will make it more difficult to find the right people."

    Even Donald, who has experienced rapid expansion as a former Wal-Mart executive, says that finding enough good people to fill the swiftly growing number of positions is a genuine concern.

    "My biggest fear isn’t the competition, although I respect it," he says. "It’s having a robust pipeline of people to open and manage the stores who will also be able to take their next steps with the company."

    Currently, there are more than 8,900 stores in 35 countries, and in October, the company raised its total eventual worldwide retail target from 25,000 stores to 30,000, which will include 15,000 stores in the United States alone. And its eye-popping growth rate--1,344 new stores in fiscal 2004 and a target of 1,500 new stores for fiscal 2005--is boosting the bottom line.

    Revenues grew 30 percent from $4.1 billion in fiscal 2003 to $5.3 billion for fiscal 2004, which ended in October. When calculated on a comparable 52-week basis for both years, the company reports a 27 percent increase in revenues. While new store openings are certainly the source of much of that increase, even existing-store sales jumped more than 13 percent and 8 percent in November and December, respectively, of fiscal 2005.

Building the Starbucks experience
    Ask Starbucks executive about the company’s recipes for success, and they will tell you unequivocally that it’s the people, or "partners," as Starbucks calls its employees. They will tell you that Starbucks doesn’t just sell coffee, it sells an experience. And that experience, they will say, is completely dependent upon the attitudes and abilities of the partners on the front lines who greet and serve more than 30 million customers globally every week.

    The most loyal of its regulars return for their lattes and Frappuccinos 18 times a month. By providing consistent, positive customer interactions between partners and customers, Starbucks has become part of a daily routine for millions of customers.

    "It’s definitely a profitable strategy," says Dave Pace, the company’s executive vice president of partner resources. "When a customer comes in and the person behind the counter says hello and maybe greets you by name, you feel a connection you don’t find with most retailers anymore. It makes you feel welcome, and it makes you want to come back."

    This strategy of selling an entire Starbucks experience has made the company one of the great growth stories of the last 15 years. In 1990, there were just 84 Starbucks stores. Now there are more than 100 times that number. Since 1992, when the company went public at $17 a share, there have been four stock splits. The stock ended trading in mid-January at $56 a share for a market cap of $22.7 billion.

    Sharon Zackfia, an analyst at William Blair & Co. in Chicago who follows Starbucks, doesn’t think the company will have trouble with staffing even if it continues to grow at its current rate. She says that despite the huge number of employees that must be hired in the coming years to sustain the expansion, the growth rate hasn’t changed much from previous years: 1,339 new stores in 2003, 1,177 new stores in 2002 and 1,208 in 2001.

    "They’ve already passed the risk point," she says. "It’s always a challenge to find good people, but Starbucks isn’t ramping up any faster than they were, and they’ve always been successful in hiring--because they pay for it."

    The staffing strategy at Starbucks is simple, says Sheri Southern, vice president of partner resources for Starbucks North America: "To have the right people hiring the right people." And because Starbucks has garnered a reputation as a good employer--(it was ranked 11th overall on the just-released 2005 list of Fortune’s Best Places to Work and was No. 2 among large companies on the same list), "it’s not hard to recruit at this company," Southern says. "People want to work here. We’re very fortunate that way."

    Experienced store managers--typically even at new stores--make initial contact with potential employees through job fairs, in-store advertisements, the company Web site and word-of-mouth. When a store is about to open in a new community, an informal meeting is often held in a town library or similar central location and serves as an opportunity for the new manager to introduce the company and notify locals about job opportunities, Southern says.

    In large markets, the fairs are more organized and held more frequently. Last year, for example, there was a hiring fair every Wednesday afternoon for two hours in a Mill Valley, California, store, and a similar fair on the first Wednesday of every month at a store in San Diego. All job fairs are posted on the company’s Web site.

    Starbucks also supplies interview guidelines to hiring managers to help them ask questions that reveal whether or not candidates have the core skills necessary for the job. The guidelines provide lists of behaviors that outline the ideal employee for each position.

    By using software developed by Taleo, an enterprise staffing management technology company, Starbucks has the ability to maintain a database of hundreds of thousands of candidates who have applied for jobs online and answered a variety of basic informational and skills-based questions, says Diane Pardee, senior vice president of corporate marketing and communications at Taleo.

    With this technology, Starbucks has a swift and systematic way to both screen out candidates and staff up stores quickly. The Starbucks brand is well-known enough for applicants to self-select to some degree, Southern says, but the company encourages this self-selection by stating upfront on its Web site and in its hiring advertisements what kind of employees are wanted: people who are adaptable, dependable, passionate team players.

Getting them, keeping them
    Pace says that what draws people to work at Starbucks locations around the world from Portland to Paris--and what keeps them there once they are hired--are the practices and the culture the company has developed as a result of an intentionally strong mission and values statement that emphasizes creating a respectful and positive work environment.

    Pace, who held executive positions at Pepsico Inc., Tricon Global Restaurants and i2 Technologies before joining Starbucks, says that the company is well aware that having satisfied employees translates into greater profits in the long run.

    Starbucks works hard to select the right employees at the outset, to keep lines of communication open throughout the organization, and to reward and retain employees with an above-minimum-wage salary. Its comprehensive health benefits for full and part-time employees and their same-sex or opposite-sex partners includes medical (hypnotherapy and naturopathy are covered), dental and vision coverage, tuition reimbursement, stock options, vacation and a 401(k) plan.

    In 1987, Starbucks became one of the first retail companies to offer part-time employees the same benefits package that full-timers are offered. And while Starbucks does not disclose the cost of various line items, with a workforce that is 64 percent part-time, the cost of this policy is significant.

    In fact, chairman and chief global strategist Howard Schultz told BusinessWeek Online in October that in the next two years, Starbucks will spend more on employee health care costs than it does on coffee.

    Currently, the company covers about 75 percent of the costs of health care coverage for its U.S. employees, and Schultz cites these costs as one of the reasons for the 11-cent price increase on beverages launched in October. Starbucks pays an average of $1.20 for each pound of the 200 million pounds of coffee the company roasted in fiscal 2004. Given this equation, Starbucks will most likely spend well over $200 million in employee health costs in the coming years.

    Starbucks won’t release information about what it pays its employees, but a spokesman for the company says that salaries and hourly wages are above minimum wage and that they vary regionally across markets. Fortune reported in January that Starbucks pays the most common hourly job, "coordinator," $35,294 a year; the most common salaried position, store manager, receives $44,790 a year.

    A randomly selected partner at a Starbucks in a suburb of Boston says she was recently hired at a rate of $8 per hour, which is $1.75 above that state’s minimum wage, and a partner at a Starbucks store in the Pacific Heights section of San Francisco says the starting salary at his location is $8.62 an hour, which is slightly above the city’s minimum wage of $8.50 per hour.

    But even this company, one that touts its commitment to being an employer of choice and prints its mission statement on the back of business cards, doesn’t spend money on employees out of the goodness of its corporate heart. Offering competitive wages and good benefits, coupled with an intense training program, is a calculated strategy designed to fuel company expansion and generate greater profits in the long run by maximizing the potential of its frontline employees.

    And Pace says that even if the company were to hit hard times, this strategy of above-average investment in training and rewarding employees isn’t going to change.

    "We’re not giving these benefits to our employees because we’re a successful company," he says. "We’re successful because we’re giving to our people. We believe it’s a fundamental way to run our business. We’re in business and we need to deliver to our shareholders. The difficult decision is, Do I spend money and risk profitability, or do I make cuts? We go with what’s best for the long-term health of the organization.

    "What’s different about us is that we round on the side of the partner."

    Donald adds that the company’s most important investment is its partner base. "And that investment is returned in stability. In order to sustain growth, you have to have a stable base. There is a direct correlation between the success of Starbucks and the stability and tenure of our employees. Without partner stability, we couldn’t grow so fast."

    The strategy is working. Donald says the turnover rate for Starbucks store managers is about 20 percent and that the turnover rate for partners is about 80 percent. Analysts put the average turnover rate for employees in the quick-service restaurant business at about 200 percent.

    A 2003 Starbucks Partner View Survey conducted by the company found that of the majority of partners polled, 82 percent stated they were satisfied or very satisfied with Starbucks.

    "Starbucks has always understood that human resources is a fundamental cog in their business, and if they’re going to sell a premium product, they need to offer premium service as well," analyst Zackfia says. "They’ve invested in their workforce time and time again, and it’s been critical to their success as a company."

    Starbucks doesn’t release numbers on how much it spends on employee training, but the company does say that it spends more on partner recruitment and development than it does on advertising, which cost the company $68.3 million in fiscal 2004.

    Every new store employee in North America starts work with a 24-hour paid training module called "First Impressions." This is a standardized curriculum taught primarily by store managers. It focuses on coffee knowledge and how to create a positive customer experience. A team of 32 training specialists constantly updates the curriculum and works with store managers to ensure consistent and effective training throughout North America, Southern says.

    Managers and assistant store managers take a 10-week retail management course. Computer, leadership and coffee knowledge classes, as well as diversity training, also are available to partners. At the corporate level, many new employees start their Starbucks careers with immersion training.

    These programs, which require employees to work in a Starbucks store to learn the business, vary in length depending upon the position, and are designed to give non-frontline partners a true experience making beverages and interacting with customers. One media relations manager at corporate headquarters started his job at Starbucks recently with six weeks of classroom and in-store training, and he says the investment in him by the company was the best thing that could have been done to prepare him for his new job.

    Corporate employees are encouraged, but not required, to work a shift in a store at the holidays to help them stay in touch with the front lines of the business.

    This kind of flow of communication among different segments of the company is just what staying small is all about, Starbucks executives say. And as long as it can retain the consistency of that feel, the sky just may be the limit for the specialty coffee chain.

    John Pearce, professor of strategic management and entrepreneurship at Villanova University, says that it’s the millions of little personal interactions every day that keep the company successful. By rewarding its employees well, with a package that includes health insurance, stock options and a free pound of java a week, Starbucks ensures that each partner has a vested financial interest in the success of the company every day, motivating them to make those little customer interactions all the more positive.

    Can Starbucks triple in size, spread farther around the globe and still retain its identity? The answer may come down to how much human beings continue their love affair with coffee. But with the number of stores, sales and job applicants growing every day, the value the company places on investing in people is not in question.