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Photo Gallery: 'Speculators Were Driving the Price of Coffee'

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Interview with Starbucks CEO Howard Schultz 'We're Going To Build a Multibillion Dollar Grocery Business'

In a SPIEGEL interview, Starbucks CEO Howard Schultz discusses his anger towards American politicians, the role of speculators in the coffee business, his expansion plans for Germany and the Seattle-based company's plan to transform itself into a player in the grocery business.

SPIEGEL: Mr. Schultz, you recently published a highly unusual open letter in the United States. In it, you vented your frustration with political leaders and voiced strong dismay at the economic and fiscal direction the US is taking, saying: "Our country is better than this." You even asked fellow business leaders to stop contributing to political campaigns. What are you so angry about?

Schultz: This is a crisis of leadership and, in my own way, I'm trying to capture the voice of people who perhaps don't have the platform I have or, for whatever reason, don't have the courage to speak out. Elected officials from both parties have chosen to put partisan and ideological purity over the well-being of the people. They have undermined the full faith and credit of the United States.

SPIEGEL: In your biography, you describe how growing up in the projects of Brooklyn made you see the shattering of the American Dream. Is this what we are witnessing again right now, but only on a broader scale?

Schultz: There's no question about it. I think the experiences I had myself as a young child made me much more sensitive to the pressure and anxieties people are under right now. Since we have stores in every city and every community in America, we have a close relationship with the American consumer. There's a dialogue we have with people every day, and I can sense the problems we're having.

SPIEGEL: This has led you to pledge to be a good example by significantly boosting hiring despite the downturn. Over the next six to 12 months, you plan to create 70,000 jobs …

Schultz: … because our economy is frozen in a cycle of fear and uncertainty. Companies are afraid to hire; consumers are afraid to spend. The only way to get the country's economic circulatory system going again is to start pumping lifeblood through it.

SPIEGEL: Even so, don't you think that one of the first things people will be cutting back on in these tough economic times is a luxury like a $4 (€2.90) latte? Aren't you worried that you might be biting off more than you can chew?

Schultz: You would assume that the downturn in consumer confidence would perhaps spill out into Starbucks, but that isn't the case. In fact, we're having the strongest financial year in our history. In the last few years, our stores have in many ways become a respite for people seeking refuge, especially during bad times. In this sense, we've created something of an affordable luxury. But I also don't think this is an entitlement; success is something that has to be earned every day.

SPIEGEL: Company sales recently climbed 9 percent to reach $11 billion. But things weren't looking so good a while back before you took back the reins of the company as CEO in early 2008 to "save its soul," as you put it.

Schultz: You lose that soul by allowing entitlement and hubris to become a driving force and by allowing growth to become a strategy as opposed to an outcome.

SPIEGEL: At one point, you said the company was in danger of becoming too efficient. Can that really be a bad thing?

Schultz: Great companies find a balance between discipline and creativity. There came a point when efficiency became the reason for being and we lost the soul of the experience because we were measuring and rewarding the wrong things, such as speed of service. We have to make sure we understand that it's about creating theater and romance and storytelling in our stores while at the same time being efficient.

SPIEGEL: Don't you first have to try to remain cool to young consumers to avoid being squeezed out by booming, cheap coffee providers like McDonald's, on the one side, and gourmet coffee shops, on the other?

Schultz: Great consumer brands shouldn't try to be cool; they should try to stay relevant. Look at two German companies, Mercedes and Adidas. These are great brands that are ubiquitous but have maintained their relevancy. The issue is understanding that there has been a seismic change in consumer behavior -- not only in coffee -- and that we have to be at the front end of that. We are very far ahead in social media tools, such as Facebook, and you can even pay with your mobile phone in many of our stores.

SPIEGEL: You've even started offering instant coffee.

Schultz: We did something that was unexpected. People thought it was a terrible thing to do, but it turned out to be absolutely the right thing. When Porsche went out and wanted to build a four-door sedan or an SUV, the Porsche purist said: "That's the end of Porsche." But what happened was that they expanded their customer base. That's exactly what we did with VIA, our instant coffee.

SPIEGEL: Wasn't it much more about being forced to react to the cheaper offerings of McDonald's? The burger chain has been a serious competitor for some time now.

Schultz: McDonald's actually did us a great favor. It raised a lot of awareness while simultaneously forcing us to focus on our strength: offering high-quality coffee in a special ambience. Although Starbucks is more expensive than McDonald's, it's there because of the experience and the quality.

SPIEGEL: Still, when it comes to the Germans, these arguments have been less convincing. While there are over 700 Starbucks stores in Britain and almost 900 in Japan, there are only just under 150 in Germany.

Schultz: We're significantly understored in Germany. We've got to get going.

SPIEGEL: What's more, unlike the Japanese, the Germans are even a nation of coffee-drinkers. What's gone wrong?

Schultz: Most US retail companies that have opened in Germany have not done well. Wal-Mart is a great example. It has taken us a while to crack the code and get it right. There are no apologies for that, but I'm quite pleased now. We've got the foundation right. Local customers understand what the Starbucks experience is about, and awareness of Starbucks is strong. You will see us accelerate our growth in Germany.

SPIEGEL: Most countries already have their own local coffee chains. Where do you really see such great growth opportunities?

Schultz: We've got about 900 stores in China now. But, ultimately, that figure will be in the thousands. It's not an easy market to move into, but we're having great success. It's our strongest market in terms of profitability at the unit level. Brazil and Vietnam are also very high on our list of places to expand -- and, of course, India.

SPIEGEL: The Indians aren't really known as coffee drinkers. The US wasn't really a nation of coffee drinkers either, though, before Starbucks came around. It was mostly terrible drip coffee from cheap beans. But, following Starbuck's success, you can now get espresso on almost every corner. Do you want to convert the entire world to coffee?

Schultz: It certainly took us a long time to educate customers, and success in the United States didn't come overnight. We didn't really advertise Starbucks, so the brand was built by the experience in our stores … (and) … the quality of the coffee. We've developed a taste profile through our proprietary way of roasting coffee. Over the years, that taste profile has been able to create a customer base of 60 to 70 million extremely loyal customers. That's a springboard for global opportunity.

'Financial Speculators Were Driving the Price of Coffee'

SPIEGEL: Still, a cynic could say that Starbucks is more in the business of selling milk than coffee. In most Starbucks drinks, espresso is merely a side issue.

Schultz: I think our customers around the world want to put milk in their coffee. That's why a tall latte is our most popular beverage. We're here to satisfy our customers. That's a strength of the company, not a negative.

SPIEGEL: There are studies saying that the milk in a latte costs about twice as much as the coffee. Is that right?

Schultz: It certainly wasn't the case this past year, when the price of coffee rose to $3 a pound.

SPIEGEL: Like all commodities, coffee has become more and more an object of speculation in recent years. Does its price still have anything to do with supply and demand?

Schultz: Over the past year, I've spoken to almost all of the people we buy coffee from in roughly 30 countries. Not one of them told me they had a supply problem -- but prices still kept going up. So that gave rise to my own theory: that this was a speculative environment in which financial gyrations and financial speculators were driving the price of coffee.

SPIEGEL: More and more hedge funds are apparently rushing into the coffee business.

Schultz: Yes, they have given up other speculative investments and strongly focused on commodity markets.

SPIEGEL: Does that mean that, even though coffee prices are significantly higher, the farmers aren't making any more money?

Schultz: In my view, the people who unfortunately made the money when prices were at $3 a pound were financial institutions, not farmers.

SPIEGEL: You have repeatedly stated that Starbucks puts a lot of emphasis on treating coffee farmers fairly. How do you ensure that producers get a fair share of the money being made in the business?

Schultz: Over the years, Starbucks has done more for coffee farmers than any other coffee company in the world. For example, we've built farmer-support centers in Costa Rica and Rwanda, where we help farmers with both cultivation techniques and business practices. And we've developed our own standards for farmers, which offer even greater transparency than the fair-trade system, for example. We also keep track of the flow of money and make sure that farmers are being rewarded.

SPIEGEL: What is your problem with the "fair trade" seal of approval, which aims to indicate better conditions for producers in the Third World?

Schultz: For us, the issue with fair trade is not about whether they're doing a good job, because they are. It's that we can't identify the quality of coffee we buy via the fair-trade system. We require the highest grade of Arabica coffee in the world. So, we have to do our own analysis and our own investigation to make sure that the farmer is reinvesting back into the soil and paying a fair wage to all the people picking the coffee. And we pay above the global market price.

SPIEGEL: You recently struck the word "coffee" from the Starbucks logo. At the same time, you want to move deeper into the grocery aisles. Is your medium-term plan to expand Starbucks into a global food company and to play in the league of companies like Nestlé?

Schultz: I think we have an enormous opportunity to do a lot of things in the food and beverage industry. In the next 12 to 18 months, we will be unveiling new products and entirely new categories. I can't tell you with specificity what it is, but we're going to build a major multibillion-dollar business in the grocery industry for Starbucks, both domestically and around the world. I think people are going to be quite surprised over the next few years at what Starbucks is capable of doing.

SPIEGEL: Mr. Schultz, we thank you for this interview.

Interview conducted by Thomas Schulz